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As filed with the Securities and Exchange Commission on November 12, 1996.
Registration No. 33-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
(Exact name of registrant as specified in its charter)
MARYLAND 6798 86-0611231
- ---------------------------- ------------------------- ------------------
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation Industrial Classification Identification No.)
or organization) Code Number)
5333 NORTH SEVENTH STREET, SUITE 219
PHOENIX, ARIZONA 85014
(602) 265-8541
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(Address, including zip code, and telephone number,
including area code, of registrant's principal
executive offices)
ALAN D. HAMBERLIN
CHAIRMAN OF THE BOARD OF DIRECTORS AND CHIEF EXECUTIVE OFFICER
5333 NORTH SEVENTH STREET, SUITE 219
PHOENIX, ARIZONA 85014
(602) 265-8541
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(Name, address, including zip code,
and telephone number, including area
code, of agent for service)
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COPIES TO:
ALAN J. BOGDANOW STEVEN D. PIDGEON
HUGHES & LUCE, L.L.P. SNELL & WILMER, L.L.P.
1717 MAIN STREET ONE ARIZONA CENTER
SUITE 2800 400 E. VAN BUREN
DALLAS, TEXAS 75201 PHOENIX, ARIZONA 85004-0001
(214) 939-5500 (602) 382-6000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after the Registration Statement becomes effective.
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If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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Proposed Proposed
Title of Maximum Maximum
Securities Amount Offering Aggregate Amount of
to be to be Price Per Offering Registration
Registered Registered Share (1) Price (1) Fee (2)
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<S> <C> <C> <C> <C>
Common Stock 4,700,000 $2.3125 $10,868,750.00 $3,293.56
($.01 par value)
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</TABLE>
(1) Calculated pursuant to Rule 457(c), based on the high and low prices
reported per share on the New York Stock Exchange as of November 6,
1996.
(2) $2,467.50 of the Registration Fee paid previously with filing of
preliminary proxy materials under cover of Schedule 14A on October 9
1996 and has been deducted from the Registration Fee pursuant to Rule
457(b).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
CROSS REFERENCE SHEET
Pursuant to Rule 404(a) and Item 501(b) of Regulation S-K.
This cross reference sheet indicates the location in the
Proxy/Statement Prospectus included in this Registration Statement of the
information called for by the Items of Part I of Form S-4.
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<CAPTION>
A. INFORMATION ABOUT THE TRANSACTION PROSPECTUS CAPTION OR LOCATION
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<S> <C> <C>
Item 1. Forepart of the Registration Statement and Forepart of the Registration Statement and Outside Front
Outside Front Cover Page of Prospectus Cover Page of the Prospectus
Item 2. Inside Front and Outside Back Cover Pages of the Inside Front and Outside Back Cover Pages of the
Prospectus Prospectus; Available Information
Item 3. Risk Factors, Ratio of Earnings to Fixed Charges, Summary; Risk Factors
and Other Information
Item 4. Terms of the Transaction The Merger and Related Transactions; Comparative Rights
of Stockholders of Homeplex and Monterey
Item 5. Pro Forma Financial Information Selected Financial Data - Unaudited Pro Forma Condensed
Combined Financial Data; Selected Financial Data -
Notes to Unaudited Pro Forma Condensed Combined
Financial Data; Selected Financial Data - Pro Forma
Capitalization
Item 6. Material Contacts with the Company Being Acquired Not Applicable
Item 7. Additional Information Required for Reoffering by Not Applicable
Persons and Parties Deemed to be Underwriters
Item 8. Interests of Named Experts and Counsel The Merger and Related Transactions - Opinion of
Financial Advisor to Homeplex; Legal Matters; Experts
Item 9. Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act Liabilities
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1
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<TABLE>
B. INFORMATION ABOUT THE REGISTRANT
--------------------------------
<S> <C> <C>
Item 10. Information with Respect to S-3 Not Applicable
Registrants
Item 11. Incorporation of Certain Information by Not Applicable
Reference
Item 12. Information with Respect to S-2 or S-3 Not Applicable
Registrants
Item 13. Incorporation of Certain Information by Not Applicable
Reference
Item 14. Information with Respect to Registrants Homeplex Business Description; Summary-Market Price Data
Other Than S-3 or S-2 Registrants for Homeplex Common Stock; Summary-Dividends and
Distributions; Selected Financial Data
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
--------------------------------------------
Item 15. Information with Respect to S-3 Not Applicable
Companies
Item 16. Information with Respect to S-2 or S-3 Not Applicable
Companies
Item 17. Information with Respect to Companies Monterey Business Description; Monterey Management;
Other Than S-2 or S-3 Companies Selected Financial Data
Item 18. Information if Proxies, Consents or The Annual Meeting; Election of Board of Directors;
Authorizations Are to be Solicited Homeplex Management; Monterey Management
Item 19. Information if Proxies, Consents or Not Applicable
Authorizations Are Not to be Solicited,
or in an Exchange Offer
</TABLE>
2
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<TABLE>
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ITEMS OF FORM S-11 REQUIRED ABOUT THE REGISTRANT PROSPECTUS CAPTION OR LOCATION
------------------------------------------------ ------------------------------
<S> <C> <C>
Item 12. Policy With Respect to Certain Homeplex Business Description
Activities
Item 13. Investment Policies of Registrant Homeplex Business Description
Item 14. Description of Real Estate Not Applicable
Item 15. Operating Data Not Applicable
Item 16. Tax Treatment of Registrant and Its The Merger and Related Transactions - Termination of
Security Holders REIT Status; The Merger and Related Transactions -
Certain Federal Income Tax Consequences
</TABLE>
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HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
5333 NORTH SEVENTH STREET, SUITE 219
PHOENIX, ARIZONA 85014
---------------------
November 12, 1996
Dear Stockholder:
You are cordially invited to attend the 1996 Annual Meeting (the "Annual
Meeting") of the stockholders of Homeplex Mortgage Investments Corporation
("Homeplex"), which will be held on December 18, 1996, at 8:00 a.m., local time,
at The Wigwam Resort Hotel, Litchfield Park, Arizona 85340. At this meeting, you
will be asked to consider and act upon the following proposals:
THE MERGER AND RELATED TRANSACTIONS
(1) To approve (a) the merger of each of Monterey Homes Arizona II, Inc.
and Monterey Homes Construction II, Inc. (collectively, the "Monterey Merging
Companies") with and into Homeplex, with Homeplex surviving and becoming the
parent corporation of the Monterey Merging Companies' subsidiaries (the
"Merger"), and (b) the transactions related to the Merger, including the
issuance of up to approximately 4.7 million shares of Homeplex's common stock,
$.01 par value ("Homeplex Common Stock"). The terms and conditions of the Merger
and the transactions related thereto are set forth in the Agreement and Plan of
Reorganization (the "Merger Agreement"), dated September 13, 1996 by and among
Homeplex, the Monterey Merging Companies and William W. Cleverly and Steven J.
Hilton, the two stockholders of the Monterey Merging Companies (collectively,
the "Monterey Stockholders").
As a result of the Merger, Homeplex will terminate its status as a real
estate investment trust and will be primarily engaged in the residential
single-family homebuilding business. The existing assets of Homeplex are to be
converted into cash over time and reinvested in homebuilding operations. The
existing directors (other than Alan D. Hamberlin) and officers of Homeplex will
resign and the two Monterey Stockholders will enter into employment agreements
to be the new Co-Chief Executive Officers of Homeplex, with Mr. Cleverly serving
as Chairman and Mr. Hilton serving as President, and will also enter into
related stock option agreements, pursuant to which each of the Monterey
Stockholders will be issued six-year options for 500,000 shares of Homeplex
Common Stock, and registration rights agreements with Homeplex.
As consideration for the Merger, the Monterey Stockholders will receive a
combination of (a) shares of Homeplex Common Stock, to be issued on the
effective date of the Merger, the amount of which shall be determined by the
fully diluted book value per share of Homeplex Common Stock on the effective
date of the Merger (the "Exchange Shares"), and (b) up to 800,000 shares of
Homeplex Common Stock to be issued after the effective date of the Merger if
Homeplex Common Stock achieves certain average trading price thresholds during a
5-year period following the Merger, provided that at the time of any issuance
such stockholder is employed by Homeplex (the "Contingent Shares"). Cash may be
paid in lieu of a limited number of shares of Homeplex Common Stock under
certain conditions. Approximately 16.5% of each of the Exchange Shares and the
Contingent Shares will be held in escrow for release or issuance upon the
exercise of warrants for common stock of the Monterey Merging Companies that
will be converted into warrants for Homeplex Common Stock on the effective date
of the Merger. Neither the trading price thresholds nor the employment
restrictions for the Contingent Shares will apply to shares allocable to such
warrants.
As a consequence of the Merger, the stockholders and warrantholders of the
Monterey Merging Companies will own approximately 29% of Homeplex Common Stock
outstanding immediately following the Merger, and approximately 33% if all
Contingent Shares are issued.
(2) To amend the Articles of Incorporation of Homeplex to (a) change
Homeplex's name to "Monterey Homes Corporation," (b) reclassify and change each
share of Homeplex Common Stock issued and outstanding into one-third of a share
of Homeplex Common Stock, (c) amend and make more strict the restrictions on the
transfer of Homeplex Common Stock to preserve Homeplex's federal income tax net
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operating loss carryforward, and (d) provide for a classified Board of Directors
with one class of directors (the "Class I Directors") being elected to a
two-year term and the other class of directors (the "Class II Directors") being
elected to a one-year term (the "Charter Amendment").
(3) To elect (a) a five-member classified Board of Directors consisting of
an existing director of Homeplex, the Monterey Stockholders and two other
persons nominated by the Monterey Stockholders (collectively, the "Nominees"),
to hold office upon the effectiveness of the Merger to the end of their
respective terms and until their successors are elected, and (b) a five-member
non-classified Board of Directors to hold office until the Merger is
consummated, or if for any reason the Merger is not consummated, to the next
annual meeting and until their successors are elected.
IN ORDER FOR THE MERGER TO BE CONSUMMATED, THE APPROVAL OF EACH OF THE MERGER
AND THE RELATED TRANSACTIONS AND THE CHARTER AMENDMENT IS REQUIRED, AS WELL AS
THE ELECTION OF THE NOMINEES AS THE CLASS I AND CLASS II DIRECTORS, AS
APPLICABLE, TO HOLD OFFICE UPON THE EFFECTIVENESS OF THE MERGER. SUCH ITEMS OF
BUSINESS WILL NOT BE DEEMED APPROVED UNLESS ALL ARE APPROVED.
OTHER PROPOSALS TO BE PRESENTED
(4) To approve the issuance of stock options covering 750,000 shares of
Homeplex Common Stock to Alan D. Hamberlin, a director and Chief Executive
Officer of Homeplex, pursuant to an existing employment agreement and related
stock option agreement between Alan D. Hamberlin and Homeplex (the "Hamberlin
Stock Options"). If the Hamberlin Stock Options are not approved at the Annual
Meeting, phantom stock rights covering 750,000 shares of Homeplex Common Stock
that were conditionally granted to Mr. Hamberlin will become effective (the
"Hamberlin PSRs"). The main economic difference is that upon exercise the
Hamberlin PSRs will require a cash payment to Mr. Hamberlin in an amount per
share equal to the excess of the fair market value of Homeplex Common Stock on
the date of exercise over $1.50, whereas the Hamberlin Stock Options will
require only the issuance of stock. In addition, if the Hamberlin PSRs become
effective, they will have a material adverse effect on the future earnings of
Homeplex if the trading price of Homeplex Common Stock remains substantially
above $1.50 per share because on the date of effectiveness, the excess of the
fair market value of Homeplex Common Stock over $1.50 will be required to be
charged to Homeplex's earnings, with additional future charges required if the
trading price continues to increase.
(5) To approve amendments to Homeplex's existing stock option plan and
related stock option agreements between Homeplex and certain senior executive
officers and directors of Homeplex to extend the exercise period after an
optionee ceases to be a director or employee of Homeplex from three months to
two years after cessation of employment or service as a director (the "Stock
Option Extension").
(6) To transact such other business that may properly come before the
Annual Meeting and any adjournments thereof.
A summary of the basic terms and conditions of the Merger and certain
financial and other information relating to each of Homeplex and the Monterey
Merging Companies is set forth in the accompanying Proxy Statement/Prospectus,
which you should read carefully.
ii
<PAGE> 7
IN ORDER THAT YOUR SHARES OF HOMEPLEX COMMON STOCK MAY BE REPRESENTED AT THE
ANNUAL MEETING, YOU ARE URGED TO PROMPTLY COMPLETE, SIGN, DATE AND RETURN THE
ACCOMPANYING PROXY IN THE ENCLOSED ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND
THE ANNUAL MEETING. You may, of course, attend the Annual Meeting and vote in
person even if you have returned a proxy.
Sincerely,
Alan D. Hamberlin, Chairman of the
Board and Chief Executive Officer
iii
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HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
5333 NORTH SEVENTH STREET, SUITE 219
PHOENIX, ARIZONA 85014
---------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To the Stockholders of Homeplex Mortgage Investments Corporation:
NOTICE IS HEREBY GIVEN that the 1996 Annual Meeting (the "Annual Meeting")
of the stockholders of Homeplex Mortgage Investments Corporation ("Homeplex")
will be held on December 18, 1996, at 8:00 a.m. local time, at The Wigwam Resort
Hotel, Litchfield Park, Arizona 85340 for the following purposes:
THE MERGER AND RELATED TRANSACTIONS
(1) To consider and act upon a proposal to approve (a) the merger of each
of Monterey Homes Arizona II, Inc. and Monterey Homes Construction II, Inc.
(collectively, the "Monterey Merging Companies") with and into Homeplex, with
Homeplex surviving and becoming the parent corporation of the Monterey Merging
Companies' subsidiaries (the "Merger"), and (b) the transactions related to the
Merger, including the issuance of up to approximately 4.7 million shares of
Homeplex's common stock, $.01 par value ("Homeplex Common Stock"). The terms and
conditions of the Merger and the transactions related thereto are set forth in
the Agreement and Plan of Reorganization (the "Merger Agreement"), dated
September 13, 1996 by and among Homeplex, the Monterey Merging Companies and
William W. Cleverly and Steven J. Hilton, the two stockholders of the Monterey
Merging Companies (collectively, the "Monterey Stockholders").
As a result of the Merger, Homeplex will terminate its status as a real
estate investment trust and will be primarily engaged in the residential
single-family homebuilding business. The existing assets of Homeplex are to be
converted into cash over time and reinvested in homebuilding operations. The
existing directors (other than Alan D. Hamberlin) and officers of Homeplex will
resign and the two Monterey Stockholders will enter into employment agreements
to be the new Co-Chief Executive Officers of Homeplex, with Mr. Cleverly serving
as Chairman and Mr. Hilton serving as President, and will also enter into
related stock option agreements, pursuant to which each of the Monterey
Stockholders will be issued six-year options for 500,000 shares of Homeplex
Common Stock, and registration rights agreements with Homeplex.
As consideration for the Merger, the Monterey Stockholders will receive a
combination of (a) shares of Homeplex Common Stock to be issued on the effective
date of the Merger, the amount of which shall be determined by the fully diluted
book value per share of Homeplex Common Stock on the effective date of the
Merger (the "Exchange Shares"), and (b) up to 800,000 shares of Homeplex Common
Stock to be issued after the effective date of the Merger if Homeplex Common
Stock achieves certain average trading price thresholds during a 5-year period
following the Merger, provided that at the time of any issuance such stockholder
is employed by Homeplex (the "Contingent Shares"). Cash may be paid in lieu of a
limited number of shares of Homeplex Common Stock under certain conditions.
Approximately 16.5% of the Exchange Shares and the Contingent Shares will be
held in escrow for release or issuance upon the exercise of warrants for common
stock of the Monterey Merging Companies that will be converted into warrants for
Homeplex Common Stock on the effective date of the Merger. Neither the trading
price thresholds nor the employment restrictions for the Contingent Shares will
apply to shares allocable to such warrants.
As a consequence of the Merger, the stockholders and warrantholders of the
Monterey Merging Companies will own approximately 29% of Homeplex Common Stock
outstanding immediately following the Merger, and approximately 33% if all
Contingent Shares are issued.
(2) To consider and act upon a proposal to amend the Articles of
Incorporation of Homeplex to (a) change Homeplex's name to "Monterey Homes
Corporation," (b) reclassify and change each share of Homeplex Common Stock
issued and outstanding into one-third of a share of Homeplex Common Stock,
i
<PAGE> 9
(c) amend and make more strict the restrictions on the transfer of Homeplex
Common Stock to preserve Homeplex's federal income tax net operating loss
carryforward, and (d) provide for a classified Board of Directors with one class
of directors being elected for a two-year term (the "Class I Directors") and the
other class of directors (the "Class II Directors") being elected for a one-year
term (the "Charter Amendment").
(3) To elect (a) a five-member classified Board of Directors consisting of
an existing director of Homeplex, the Monterey Stockholders and two other
persons nominated by the Monterey Stockholders (collectively, the "Nominees") to
hold office upon the effectiveness of the Merger to the end of their respective
terms and until their successors are elected, and (b) a five-member
non-classified Board of Directors to hold office until the Merger is
consummated, or if for any reason the Merger is not consummated, to the next
annual meeting and until their successors are elected.
IN ORDER FOR THE MERGER TO BE CONSUMMATED, THE APPROVAL OF EACH OF THE MERGER
AND THE RELATED TRANSACTIONS AND THE CHARTER AMENDMENT IS REQUIRED, AS WELL AS
THE ELECTION OF THE NOMINEES AS THE CLASS I AND CLASS II DIRECTORS, AS
APPLICABLE, TO HOLD OFFICE UPON THE EFFECTIVENESS OF THE MERGER. SUCH ITEMS OF
BUSINESS WILL NOT BE DEEMED APPROVED UNLESS ALL ARE APPROVED.
OTHER PROPOSALS TO BE PRESENTED
(4) To consider and act upon a proposal to approve the issuance of stock
options covering 750,000 shares of Homeplex Common Stock to Alan D. Hamberlin, a
director and Chief Executive Officer of Homeplex, pursuant to an existing
employment agreement and related stock option agreement between Alan D.
Hamberlin and Homeplex (the "Hamberlin Stock Options"). If the Hamberlin Stock
Options are not approved at the Annual Meeting, phantom stock rights covering
750,000 shares of Homeplex Common Stock that were conditionally granted to Mr.
Hamberlin will become effective (the "Hamberlin PSRs"). The main economic
difference is that upon exercise the Hamberlin PSRs will require a cash payment
to Mr. Hamberlin in an amount per share equal to the excess of the fair market
value of Homeplex Common Stock on the date of exercise over $1.50, whereas the
Hamberlin Stock Options will require only the issuance of stock. In addition, if
the Hamberlin PSRs become effective, they will have a material adverse effect on
the future earnings of Homeplex if the trading price of Homeplex Common Stock
remains substantially above $1.50 per share because on the date of
effectiveness, the excess of the fair market value of Homeplex Common Stock over
$1.50 will be required to be charged to Homeplex's earnings, with additional
future charges required if the trading price continues to increase.
(5) To consider and act upon a proposal to approve amendments to Homeplex's
existing stock option plan and related stock option agreements between Homeplex
and certain senior executive officers and directors of Homeplex to extend the
exercise period after an optionee ceases to be a director or employee of
Homeplex from three months to two years after cessation of employment or service
as a director (the "Stock Option Extension").
(6) To transact such other business that may properly come before the
Annual Meeting and any adjournments thereof.
The foregoing items of business are more fully described in the Proxy
Statement/Prospectus accompanying this Notice.
AFTER CAREFUL CONSIDERATION OF THE TERMS AND CONDITIONS OF THE MERGER AND
RELATED TRANSACTIONS, THE CHARTER AMENDMENT, THE HAMBERLIN STOCK OPTIONS AND THE
STOCK OPTION EXTENSION, THE BOARD OF DIRECTORS HAS DETERMINED THAT SUCH
PROPOSALS ARE IN THE BEST INTERESTS OF HOMEPLEX AND ITS STOCKHOLDERS. THE BOARD
OF DIRECTORS HAS UNANIMOUSLY APPROVED EACH OF THE MERGER AND THE RELATED
TRANSACTIONS, THE CHARTER AMENDMENT, THE HAMBERLIN STOCK OPTIONS AND THE STOCK
OPTION EXTENSION AND UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" EACH OF
THE ABOVE PROPOSALS.
ii
<PAGE> 10
As of November 6, 1996, there were 9,716,517 shares of Homeplex Common
Stock issued and outstanding. The presence in person or by proxy of the holders
of a majority of the outstanding shares of Homeplex Common Stock is necessary to
constitute a quorum at the Annual Meeting. If a quorum is present in person or
by proxy, (i) the affirmative vote by the holders of at least a majority of the
outstanding shares of Homeplex Common Stock is required to approve the Merger
and related transactions and the Charter Amendment, (ii) a plurality of votes
cast is required to elect each director, and (iii) the affirmative vote of a
majority of the total votes cast at the Annual Meeting is required to approve
the Hamberlin Stock Options and the Stock Option Extension.
Only stockholders of record as of the close of business on November 6, 1996
will be entitled to notice of and to vote at the Annual Meeting and any
adjournment thereof.
By order of the Board of Directors,
Jay R. Hoffman, President, Secretary
and Treasurer
Phoenix, Arizona
November 12, 1996
YOU ARE URGED TO READ THE ATTACHED PROXY STATEMENT/PROSPECTUS, WHICH
CONTAINS INFORMATION RELEVANT TO THE ACTIONS TO BE TAKEN AT THE ANNUAL MEETING.
IN ORDER TO ASSURE THE PRESENCE OF A QUORUM, WHETHER OR NOT YOU EXPECT TO ATTEND
THE ANNUAL MEETING IN PERSON, EACH STOCKHOLDER IS URGED TO COMPLETE, SIGN AND
RETURN THE ENCLOSED PROXY CARD IN THE ENVELOPE PROVIDED, WHICH REQUIRES NO
POSTAGE IF MAILED IN THE UNITED STATES. A STOCKHOLDER OF HOMEPLEX WHO EXECUTES
AND RETURNS A PROXY HAS THE POWER TO REVOKE IT AT ANY TIME BEFORE IT IS VOTED BY
PROVIDING WRITTEN NOTICE OF REVOCATION TO THE SECRETARY OF HOMEPLEX, BY
SUBMITTING A SUBSEQUENT PROXY OR BY VOTING IN PERSON AT THE ANNUAL MEETING. THE
GIVING OF A PROXY DOES NOT AFFECT A STOCKHOLDER'S RIGHT TO ATTEND AND VOTE IN
PERSON AT THE ANNUAL MEETING. HOWEVER, A STOCKHOLDER'S PRESENCE AT THE ANNUAL
MEETING WITHOUT FURTHER ACTION WILL NOT REVOKE THE STOCKHOLDER'S PROXY.
iii
<PAGE> 11
PROXY STATEMENT/PROSPECTUS
GENERAL INFORMATION OF
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION FOR
1996 ANNUAL MEETING OF STOCKHOLDERS
This Proxy Statement/Prospectus is furnished in connection with the
solicitation of proxies by the Board of Directors of Homeplex Mortgage
Investments Corporation, a Maryland corporation ("Homeplex"), for use at the
1996 Annual Meeting of Stockholders of Homeplex (the "Annual Meeting") to be
held on December 18, 1996, at The Wigwam Resort Hotel, Litchfield Park, Arizona
85340, at 8:00 a.m. local time, or any adjournments or postponements thereof.
At the Annual Meeting, Homeplex stockholders will consider and vote upon a
proposal to approve (a) the merger of Monterey Homes Arizona II, Inc., an
Arizona corporation ("MHA-II"), and Monterey Homes Construction II, Inc., an
Arizona corporation ("MHC-II") (MHA-II and MHC-II are collectively referred to
as the "Monterey Merging Companies," and the Monterey Merging Companies and
their subsidiaries are collectively referred to herein as "Monterey"), with and
into Homeplex, with Homeplex surviving and becoming the parent corporation of
the Monterey Merging Companies' subsidiaries (the "Merger"), and (ii) the
transactions related to the Merger, including the issuance of up to
approximately 4,700,000 shares of Homeplex's common stock, $.01 par value
("Homeplex Common Stock"). The terms and conditions of the Merger and the
transactions related thereto are set forth in the Agreement and Plan of
Reorganization (the "Merger Agreement") among Homeplex, the Monterey Merging
Companies and William W. Cleverly and Steven J. Hilton, the two stockholders of
the Monterey Merging Companies (collectively, the "Monterey Stockholders").
As a result of the Merger, Homeplex will terminate its status as a real
estate investment trust (a "REIT") and will be primarily engaged in the
residential single-family homebuilding business. The existing assets of Homeplex
are to be converted into cash over time and reinvested in homebuilding
operations. The existing directors (other than Alan D. Hamberlin) and officers
of Homeplex will resign and the two Monterey Stockholders will enter into
employment agreements pursuant to which Mr. Cleverly will serve as Co-Chief
Executive Officer and Chairman and Mr. Hilton will serve as Co-Chief Executive
Officer and as President, and will also enter into related stock option
agreements, pursuant to which each of the Monterey Stockholders will be issued
six-year options for 500,000 shares of Homeplex Common Stock, and registration
rights agreements with Homeplex.
As consideration for the Merger, the Monterey Stockholders will receive a
combination of (i) shares of Homeplex's common stock, $.01 par value per share
("Homeplex Common Stock") to be issued on the effective date of the Merger, the
amount of which shall be determined by the fully diluted book value per share of
Homeplex Common Stock on the effective date of the Merger (the "Exchange
Shares"), and (ii) up to 800,000 contingent shares of Homeplex Common Stock to
be issued if the Homeplex Common Stock achieves certain average trading prices
during a five-year period following the Merger, provided that at the time of any
issuance such stockholder is employed by Homeplex (the "Contingent Shares").
Approximately 16.5% of each of the Exchange Shares and the Contingent Shares
will be held in escrow for release or issuance upon the exercise of warrants for
common stock of the Monterey Merging Companies that will be converted into
warrants for Homeplex Common Stock on the effective date of the Merger. Neither
the trading price thresholds nor the employment restrictions for the Contingent
Shares will apply to shares allocable to such warrants. Cash may be paid in lieu
of a limited number of shares of Homeplex Common Stock under certain
circumstances. See "The Merger and Related Transactions."
On May 31, 1996, the day prior to the first public announcement with respect
to the Merger, the closing sale price of Homeplex Common Stock on the New York
Stock Exchange (the "NYSE") was $1 7/8 per share. On November 6, 1996, the
closing sale price of Homeplex Common Stock on the NYSE was $2 3/8 per share. As
a consequence of the Merger, the stockholders and warrantholders of the Monterey
Merging Companies will own approximately 29% of Homeplex Common Stock
outstanding immediately following the Merger and 33% if all Contingent Shares
are issued. Subject to stockholder approvals, the closing of the Merger will
occur promptly after the satisfaction of the conditions precedent contained in
the Merger Agreement, but in no event earlier than December 31, 1996.
This Proxy Statement/Prospectus also constitutes Homeplex's 1995 Annual
Report to Stockholders.
This Proxy Statement/Prospectus also constitutes the prospectus of Homeplex
that is part of the Registration Statement on Form S-4 of Homeplex filed with
the Securities and Exchange Commission with respect to the issuance of up to
approximately 4.7 million shares of Homeplex Common Stock to be issued in
connection with the Merger.
SEE "RISK FACTORS" BEGINNING ON PAGE 23 OF THIS PROXY STATEMENT/PROSPECTUS
FOR A DISCUSSION OF CERTAIN MATTERS WHICH SHOULD BE CONSIDERED BY THE
STOCKHOLDERS OF HOMEPLEX WITH RESPECT TO THE MERGER.
All information regarding Homeplex in this Proxy Statement/Prospectus has
been supplied by Homeplex and all information regarding Monterey in this Proxy
Statement/Prospectus has been supplied by Monterey.
This Proxy Statement/Prospectus and the accompanying form of proxy are first
being mailed to stockholders of Homeplex on or about November 12, 1996.
NEITHER THIS TRANSACTION NOR THE SECURITIES OF HOMEPLEX TO BE ISSUED IN
CONNECTION WITH THE MERGER HAVE BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE
CONTRARY IS A CRIMINAL
OFFENSE.
---------------------
The date of this Proxy Statement/Prospectus is November 12, 1996.
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<PAGE> 12
AVAILABLE INFORMATION
Homeplex is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information filed by
Homeplex with the Commission can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Regional Offices of the
Commission located at Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and 7 World Trade Center, 13th Floor, New York,
New York 10048. Copies of such material can also be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. In addition, the Commission maintains a Web Site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The address
of such Web Site is "http://www.sec.gov." Homeplex Common Stock is listed on the
NYSE. Reports and other information concerning Homeplex can also be inspected at
the offices of the NYSE, 30 Broad Street, New York, New York 10005.
Homeplex has filed with the Commission a Registration Statement on Form S-4
covering the shares of Homeplex Common Stock to be issued in connection with the
Merger and the related transactions (the "Registration Statement"). This Proxy
Statement/Prospectus, which constitutes a part of the Registration Statement,
does not contain all of the information set forth in the Registration Statement,
certain items of which are contained in schedules and exhibits to the
Registration Statement as permitted by the rules and regulations of the
Commission. For further information, reference is made to the Registration
Statement, including the schedules and exhibits filed as a part thereof or
incorporated by reference therein. Statements contained herein concerning the
provisions of documents are necessarily summaries of such documents, and each
such statement is qualified in its entirety by reference to the copy of the
applicable document filed as an exhibit hereto or as otherwise filed with the
Commission. The Registration Statement and the exhibits and schedules thereto
may be inspected, without charge, and copies thereof may be obtained at
prescribed rates, at the offices of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549.
FORWARD-LOOKING STATEMENTS
This Proxy Statement/Prospectus contains forward looking statements.
Additional written or oral forward looking statements may be made by Homeplex
from time to time in filings with the Commission or otherwise. Such forward
looking statements are within the meaning of that term in Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of
the Exchange Act. Such statements may include, but not be limited to,
projections of revenues, income, or loss, capital expenditures, plans for future
operations, financing needs or plans, and plans relating to products or services
of Homeplex, as well as assumptions relating to the foregoing. The words
"believe," "expect," "anticipate," "estimate," "project," and similar
expressions identify forward looking statements, which speak only as of the date
the statement was made. Forward looking statements are inherently subject to
risks and uncertainties, some of which cannot be predicted or quantified. Future
events and actual results could differ materially from those set forth in,
contemplated by, or underlying the forward looking statements. Statements in
this Proxy Statement/ Prospectus, including those contained in the section
entitled "Risk Factors" and in the section entitled "Selected Financial Data,"
describe factors, among others, that could contribute to or cause such
differences.
---------------------
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, THE SECURITIES OFFERED BY THIS
PROXY STATEMENT/PROSPECTUS, OR A SOLICITATION OF A PROXY FROM ANY PERSON, IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER, SOLICITATION OF AN
OFFER OR PROXY SOLICITATION. NEITHER THE DELIVERY OF THIS PROXY
STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF THE SECURITIES MADE UNDER THIS
PROXY STATEMENT/PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF HOMEPLEX OR MONTEREY AT ANY TIME
SUBSEQUENT TO THE DATE OF THIS PROXY STATEMENT/PROSPECTUS.
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<PAGE> 13
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
PROXY STATEMENT/PROSPECTUS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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<S> <C>
GENERAL INFORMATION OF HOMEPLEX MORTGAGE INVESTMENTS
CORPORATION FOR 1996 ANNUAL MEETING OF STOCKHOLDERS...............................
AVAILABLE INFORMATION...............................................................
FORWARD-LOOKING STATEMENTS..........................................................
SUMMARY.............................................................................
The Companies.....................................................................
The Annual Meeting................................................................
The Merger and Related Transactions...............................................
Other Proposals to be Presented...................................................
Selected Historical Financial Data................................................
Selected Unaudited Pro Forma Condensed Combined Financial Data....................
Comparative Per Share Data -- Historical and Pro Forma............................
Market Price Data for Homeplex Common Stock.......................................
Dividends and Distributions.......................................................
Board of Directors' Recommendation................................................
RISK FACTORS........................................................................
Risk Factors of the Merger........................................................
Risk Factors of Monterey..........................................................
Risk Factors of Homeplex..........................................................
THE ANNUAL MEETING..................................................................
General...........................................................................
Proposals to be Considered at the Annual Meeting..................................
Record Date; Voting at the Meeting; Vote Required.................................
Revocability of Proxies...........................................................
Solicitation of Proxies...........................................................
Objecting Stockholders' Rights....................................................
THE MERGER AND RELATED TRANSACTIONS.................................................
Background of the Merger..........................................................
Reasons for the Merger............................................................
Board of Directors' Recommendation for the Merger.................................
Opinion of Financial Advisor to Homeplex..........................................
Description of the Merger.........................................................
Merger Consideration..............................................................
Distributions.....................................................................
Effective Date....................................................................
Conversion and Exchange of Stock Certificates.....................................
Charter Amendment.................................................................
NOL Carryforward..................................................................
Termination of REIT Status........................................................
Senior Subordinated Notes.........................................................
Monterey Credit Facilities........................................................
Operations and Executive Officers of Homeplex After the Merger; Future Stock
Options........................................................................
Registration Rights and Listing...................................................
Merger Agreement..................................................................
Monterey Stockholder Agreements...................................................
Governmental and Regulatory Approvals.............................................
</TABLE>
iii
<PAGE> 14
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Accounting Treatment..............................................................
Certain Federal Income Tax Consequences...........................................
ELECTION OF BOARD OF DIRECTORS......................................................
Overview..........................................................................
Nominees for the Board of Directors...............................................
1995 Meetings of the Board of Directors...........................................
Committees of the Board of Directors..............................................
Compensation of Directors.........................................................
Board of Directors' Report on Executive Compensation..............................
Compensation Committee Interlocks and Insider Participation.......................
Performance Graph.................................................................
SELECTED FINANCIAL DATA.............................................................
Unaudited Pro Forma Condensed Combined Financial Data.............................
Pro Forma Capitalization..........................................................
Homeplex Historical Consolidated Financial Data...................................
Homeplex Management's Discussion and Analysis of Financial Condition and Results
of Operations..................................................................
Monterey Historical Combined Financial Data.......................................
Monterey Management's Discussion and Analysis of Financial Condition and Results
of Operations..................................................................
HOMEPLEX BUSINESS DESCRIPTION.......................................................
Overview..........................................................................
Real Estate Loans.................................................................
Mortgage Assets...................................................................
Other Policies....................................................................
Capital Resources.................................................................
HOMEPLEX MANAGEMENT.................................................................
Executive Officers................................................................
Executive Compensation............................................................
Hamberlin Agreements and Other Employment Agreements..............................
Stock Option Plan.................................................................
Retirement Account................................................................
Principal Stockholders............................................................
Certain Relationships and Related Transactions....................................
MONTEREY BUSINESS DESCRIPTION.......................................................
Overview..........................................................................
Industry..........................................................................
Business Strategy.................................................................
Markets and Products..............................................................
Land Acquisition and Development..................................................
Construction......................................................................
Marketing and Sales...............................................................
Backlog...........................................................................
Customer Financing................................................................
Customer Relations and Quality Control............................................
Competition and Market Factors....................................................
Government Regulation and Environmental Matters...................................
Bonds and Other Obligations.......................................................
Employees and Subcontractors......................................................
Properties........................................................................
Litigation........................................................................
</TABLE>
iv
<PAGE> 15
<TABLE>
<CAPTION>
PAGE
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<S> <C>
MONTEREY MANAGEMENT.................................................................
Directors and Executive Officers..................................................
Executive Compensation............................................................
Compensation and Director Fees....................................................
Principal Stockholders............................................................
Certain Relationships and Related Transactions....................................
COMPARATIVE RIGHTS OF STOCKHOLDERS OF HOMEPLEX AND MONTEREY.........................
AFFILIATES' RESTRICTION ON SALE OF HOMEPLEX COMMON STOCK............................
LEGAL MATTERS.......................................................................
EXPERTS.............................................................................
INDEPENDENT AUDITORS................................................................
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.............................
STOCKHOLDER PROPOSALS FOR 1997 ANNUAL MEETING.......................................
INDEX TO FINANCIAL STATEMENTS.......................................................
APPENDICES:
Appendix A -- Agreement and Plan of Reorganization
Appendix B -- Form of Articles of Merger, including the Charter Amendment
Appendix C -- Form of Monterey Stockholder Agreements
Appendix D -- Hamberlin Agreements
Appendix E -- Fairness Opinion of Financial Advisor to Homeplex
</TABLE>
v
<PAGE> 16
SUMMARY
The following summary of certain information contained elsewhere in this
Proxy Statement/Prospectus is qualified in its entirety by, and should be read
in conjunction with, the more detailed information appearing elsewhere in this
Proxy Statement/Prospectus and the documents incorporated herein by reference
and the Appendices attached hereto. The information contained in this Proxy
Statement/Prospectus with respect to Homeplex and its affiliates has been
supplied by Homeplex, and the information with respect to Monterey and its
affiliates has been supplied by Monterey. Certain capitalized terms which are
used but not defined in this Summary are defined elsewhere in this Proxy
Statement/Prospectus.
The share and per share data regarding Homeplex Common Stock in this Proxy
Statement/Prospectus has not been restated to give effect to the proposed
one-for-three reverse stock split of Homeplex Common Stock.
THE COMPANIES
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION. Homeplex Mortgage Investments
Corporation, a Maryland corporation ("Homeplex"), is engaged in the business of
making short-term and intermediate-term mortgage loans on real property.
Homeplex also owns mortgage assets consisting of (i) mortgage instruments,
including residential mortgage loans and mortgage certificates representing
interests in pools of residential mortgage loans, and (ii) mortgage interests
representing the right to receive the net cash flows on mortgage instruments.
Homeplex has elected to be taxed as a real estate investment trust (a "REIT"),
but by effecting the Merger will terminate its status as a REIT. The principal
office of Homeplex is located at 5333 North 7th Street, Suite 219, Phoenix,
Arizona 85014 and its telephone number is (602) 265-8541. See "Homeplex Business
Description."
MONTEREY. Monterey Homes Construction II, an Arizona corporation
("MHC-II"), is engaged in the business of purchasing improved lots and
purchasing and improving raw land on which it builds single-family, move-up, and
semi-custom luxury homes in Scottsdale, Arizona and Tucson, Arizona. MHC-II
sells the completed homes to Monterey Homes Arizona II, Inc., an Arizona
corporation ("MHA-II"), and MHA-II markets and sells the homes to retail buyers.
MHC-II and MHA-II are collectively referred to as the "Monterey Merging
Companies." The Monterey Merging Companies have elected to be taxed as
Subchapter S-corporations, but by effecting the Merger will terminate their
S-corporation status.
Prior to the Merger, MHC-II will form a wholly-owned subsidiary, Monterey
Homes Construction I, Inc., an Arizona corporation ("MHC-I"), into which it will
contribute all of its assets, liabilities and obligations, and MHA-II will form
a wholly-owned subsidiary, Monterey Homes Arizona I, Inc., an Arizona
corporation ("MHA-I"), into which it will contribute all of its assets,
liabilities and obligations. The Monterey Merging Companies, MHC-I and MHA-I are
collectively and individually referred to as "Monterey." The principal executive
office of Monterey is located at 6613 North Scottsdale Road, Suite 200,
Scottsdale, Arizona 85250, and its telephone number is (602) 998-8700. See
"Monterey Business Description."
THE ANNUAL MEETING
The 1996 Annual Meeting of Stockholders of Homeplex (the "Annual Meeting")
will be held on December 18, 1996 at The Wigwam Resort Hotel, Litchfield Park,
Arizona 85340, commencing at 8:00 a.m., local time, for the purpose of
considering and acting upon the following proposals.
THE MERGER AND RELATED TRANSACTIONS.
(1) To approve (a) the merger of the Monterey Merging Companies with and
into Homeplex, with Homeplex surviving and becoming the parent corporation of
MHC-I and MHA-I (the "Merger"), and (b) the transactions related to the Merger,
including the issuance of up to approximately 4.7 million shares of Homeplex's
common stock, $.01 par value per share ("Homeplex Common Stock"), to William J.
Cleverly and Steven J. Hilton, the two stockholders of the Monterey Merging
Companies (collectively, the "Monterey
1
<PAGE> 17
Stockholders"). The terms and conditions of the Merger and the transactions
related thereto are set forth in the Agreement and Plan of Reorganization (the
"Merger Agreement"), dated September 13, 1996 among Homeplex, the Monterey
Merging Companies and the Monterey Stockholders.
(2) To approve an amendment to Homeplex's Articles of Incorporation to,
among other things, (a) change Homeplex's name to "Monterey Homes Corporation,"
(b) reclassify and change each share of Homeplex Common Stock issued and
outstanding into one-third of a share of Homeplex Common Stock, (c) amend and
make more strict the restrictions on the transfer of Homeplex Common Stock to
preserve Homeplex's net operating loss carryforward and (d) provide for a
classified Board of Directors, with one class being elected for a two-year term
(the "Class I Directors"), and the other class of directors (the "Class II
Directors") being elected for a one-year term (the "Charter Amendment").
(3) To elect (a) a five-member classified Board of Directors consisting of
an existing director of Homeplex, the Monterey Stockholders and two other
persons nominated by the Monterey Stockholders (collectively, the "Nominees") to
hold office upon the effectiveness of the Merger to the next annual meeting and
until their successors are elected, and (b) a five-member non-classified Board
of Directors to hold office until the Merger is consummated or if for any reason
the Merger is not consummated, to the next annual meeting and until their
successors are elected.
IN ORDER FOR THE MERGER TO BE CONSUMMATED, THE APPROVAL OF EACH OF THE MERGER
AND THE TRANSACTIONS RELATED THERETO AND THE CHARTER AMENDMENT ARE REQUIRED, AS
WELL AS THE ELECTION OF THE NOMINEES TO THE CLASSIFIED BOARD OF DIRECTORS. SUCH
ITEMS OF BUSINESS WILL NOT BE DEEMED APPROVED UNLESS ALL ARE APPROVED.
OTHER PROPOSALS TO BE PRESENTED.
(4) To approve the issuance of stock options covering 750,000 shares of
Homeplex Common Stock to Alan D. Hamberlin, a director and the Chief Executive
Officer of Homeplex, pursuant to an existing employment agreement and related
stock option agreement between Homeplex and Alan D. Hamberlin (the "Hamberlin
Stock Options"). If the Hamberlin Stock Options are not approved at the Annual
Meeting, phantom stock rights covering 750,000 shares of Homeplex Common Stock
conditionally granted to Mr. Hamberlin will become effective (the "Hamberlin
PSRs"). The main economic difference is that upon exercise the Hamberlin PSRs
will require a cash payment to Mr. Hamberlin in an amount per share equal to the
excess of the fair market value of Homeplex Common Stock on the date of exercise
over $1.50, whereas the Hamberlin Stock Options will require only the issuance
of stock. In addition, if the Hamberlin PSRs become effective, they will have a
material adverse effect on the future earnings of Homeplex if the trading price
of Homeplex Common Stock remains substantially above $1.50 because on the date
of effectiveness, the excess of the fair market value of Homeplex Common Stock
over $1.50 will be required to be charged to Homeplex's earnings, with
additional future charges required if the trading price continues to increase.
(5) To approve amendments to Homeplex's existing stock option plan and
related stock option agreements between Homeplex and certain senior executive
officers and directors of Homeplex to extend the exercise period after an
optionee ceases to be a director or employee of Homeplex from three months to
two years after cessation of employment or service as a director (the "Stock
Option Extension").
(6) To transact such other business that may properly come before the
Annual Meeting and any adjournments thereof.
Only holders of record of Homeplex Common Stock at the close of business on
November 6, 1996 will be entitled to vote at the Annual Meeting. As of November
6, 1996, there were 9,716,517 shares of Homeplex Common Stock issued and
outstanding, all of which are entitled to vote.
The presence in person or by proxy of the holders of a majority of
outstanding shares of Homeplex Common Stock is necessary to constitute a quorum
at the Annual Meeting. If a quorum is present in person or by proxy, (i) the
affirmative vote of the holders of at least a majority of the outstanding shares
of Homeplex Common Stock is required in order to approve the Merger and the
transactions related thereto and the
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<PAGE> 18
Charter Amendment, (ii) a plurality of the votes cast is required to elect each
director, and (iii) the affirmative vote of a majority of the total votes cast
at the Annual Meeting is required to approve the Hamberlin Stock Options and the
Stock Option Extension. See "The Annual Meeting."
THE MERGER AND RELATED TRANSACTIONS
GENERAL. On September 13, 1996, the Monterey Merging Companies, the
Monterey Stockholders and Homeplex entered into the Merger Agreement pursuant to
which the parties set forth the terms and conditions of the Merger. Upon
consummation of the Merger, Homeplex will be primarily engaged in the
residential single-family homebuilding business and the existing assets of
Homeplex are to be converted into cash over time and reinvested in homebuilding
operations. A copy of the Merger Agreement is attached hereto as Appendix A. See
"The Merger and Related Transactions -- The Merger Agreement."
MERGER CONSIDERATION. In the event the proposed one-for-three reverse stock
split is effected, all per share calculations used to calculate the Merger
Consideration (as hereinafter defined) shall be proportionately adjusted, as
nearly as practicable.
Exchange Shares. Pursuant to the Merger Agreement, each of the Monterey
Stockholders will receive as merger consideration, a number of shares of
Homeplex Common Stock (the "Exchange Shares") equal to (i) $2.5 million, which
is the anticipated pro forma book value of Monterey on the effective date of the
Merger after giving effect to certain adjustments contemplated in the Merger
Agreement, multiplied by (ii) a factor of 3.0, and divided by (iii) the fully
diluted book value per share of Homeplex Common Stock on the effective date of
the Merger. Cash may be paid in lieu of a limited number of shares of Homeplex
Common Stock to the extent necessary to preserve Homeplex's federal income tax
net operating loss carryforward. Although the Exchange Shares will be issued in
the name of the Monterey Stockholders, approximately 16.5% of the Exchange
Shares will be held in escrow by Homeplex for issuance to holders of outstanding
warrants to purchase 400,000 shares of common stock of the Monterey Merging
Companies (the "Warrantholders"), which warrants will be converted on the
effective date of the Merger into warrants to purchase Homeplex Common Stock
(the "Homeplex Warrants"), with an exercise price expected to range from
approximately $1.30 to $1.70 per share. The exercise price paid upon exercise of
any Homeplex Warrants will be paid to the Monterey Stockholders, and upon
expiration of the unexercised Homeplex Warrants, any Exchange Shares remaining
in escrow will be released to the Monterey Stockholders. See "The Merger and
Related Transactions -- Merger Consideration."
Contingent Shares. In addition to the Exchange Shares, Homeplex has agreed
to issue up to 800,000 shares of contingent Homeplex Common Stock (the
"Contingent Shares") to the Monterey Stockholders if certain Homeplex Common
Stock average trading price thresholds are reached during the five-year period
following the effective date of the Merger, provided that at the time of any
issuance, such Monterey Stockholder is employed by Homeplex. The Contingent
Shares will be issued as follows: (i) if the closing price of the Homeplex
Common Stock (the "Homeplex Stock Price") on the New York Stock Exchange (the
"NYSE") averages $1.75 or more for twenty consecutive trading days, 134,828
Contingent Shares will be issued, but only after the first anniversary date of
the Merger, (ii) if the Homeplex Stock Price averages $2.50 or more for twenty
consecutive trading days, an additional 266,666 Contingent Shares will be
issued, but only after the second anniversary date of the Merger, and (iii) if
the Homeplex Stock Price averages $3.50 or more for twenty consecutive trading
days, the remaining 266,666 Contingent Shares will be issued, but only after the
third anniversary date of the Merger. Approximately 16.5% of the Contingent
Shares, which is 131,840 Contingent Shares, will be issued to the Warrantholders
upon exercise of the Homeplex Warrants without regard to the trading price
targets or employment requirements. The exercise price paid upon the exercise of
any Homeplex Warrants will be paid to the Monterey Stockholders, and upon
expiration of the unexercised Homeplex Warrants, any of the remaining 131,840
Contingent Shares will be issued to the Monterey Stockholders. The Exchange
Shares and the Contingent Shares are collectively referred to as the "Merger
Consideration." See "The Merger and Related Transactions -- Merger
Consideration."
Indemnification Fund. Homeplex will retain, as an indemnification fund, a
portion of the Exchange Shares with a value of $500,000 as security for the
indemnification obligations in favor of Homeplex provided
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<PAGE> 19
under the Merger Agreement. Cash can be deposited with Homeplex at any time by
the Monterey Stockholders to replace all or any portion of the Exchange Shares
in the indemnification fund. Subject to certain restrictions, any amounts
remaining in the indemnification fund will be released to the Monterey
Stockholders on the second anniversary of the effective date of the Merger. See
"The Merger and Related Transactions -- Merger Consideration" and "The Merger
and Related Transactions -- Merger Agreement -- Indemnification Fund."
DISTRIBUTIONS. Prior to the execution of the Merger Agreement, Monterey
declared and made distributions to the Monterey Stockholders in accordance with
the S-corporation rules of the Internal Revenue Code of 1986, as amended (the
"Code") in an amount equal to the Monterey Stockholders' estimated income tax
liability associated with the Monterey Merging Companies S-corporation tax
status for the 1996 calendar year (the "Tax Distribution"). In addition,
Monterey declared and made distributions to the Monterey Stockholders designed
to reduce the book value of Monterey as of the effective date of the Merger to
$2.5 million (the "Retained Earnings Distribution"). The Retained Earnings
Distribution and the Tax Distribution aggregated approximately $9.5 million and
are collectively referred to as the "Distributions." See "The Merger and Related
Transactions -- Distributions."
MONTEREY STOCKHOLDER AGREEMENTS. In connection with the Merger, each of the
Monterey Stockholders will enter into employment agreements pursuant to which
Mr. Cleverly will serve as Co-Chief Executive Officer and Chairman and Mr.
Hilton will serve as Co-Chief Executive Officer and President (collectively, the
"Employment Agreements"), each with a term expiring on December 31, 2001 and
providing for an initial base salary of $200,000 per year (increasing annually
by 5% of the prior year's annual base salary). Under the Employment Agreements,
Messrs. Cleverly and Hilton will each earn an annual bonus of up to $200,000
based on a percentage of the annual pre-tax consolidated net income of Homeplex.
Each of Mr. Cleverly and Mr. Hilton will also enter into stock option agreements
and registration rights agreements with Homeplex (collectively with the
Employment Agreements, the "Monterey Stockholder Agreements") pursuant to which
they each will be granted six-year options to purchase 500,000 shares of
Homeplex Common Stock at an exercise price of $1.75 per share, and will be
entitled to demand registration rights and incidental registration rights for
all of their shares of Homeplex Common Stock. See "The Merger and Related
Transactions -- Monterey Stockholder Agreements."
TERMINATION OF REIT STATUS. If the Merger is consummated on December 31,
1996, Homeplex's election to be a REIT will terminate retroactively effective
for the taxable year beginning January 1, 1996. If the Merger is consummated
after December 31, 1996, Homeplex will revoke its election to be a REIT
effective for the taxable year beginning January 1, 1997. Consequently, during
that taxable year Homeplex will be taxed as a regular domestic C-corporation,
which is not eligible for tax benefits available to REITs. Homeplex's assets and
cash available for distribution to stockholders will therefore be reduced to the
extent necessary to pay its resulting tax liability, if any. See "The Merger and
Related Transactions -- Termination of REIT Status."
NOL CARRYFORWARD. Homeplex has a federal income tax net operating loss
carryforward of approximately $57 million (the "NOL Carryforward"). It is
anticipated that future income taxes paid by Homeplex will be minimized and will
consist primarily of state income taxes and the federal alternative minimum tax.
See "Selected Financial Data -- Unaudited Pro Forma Condensed Combined Financial
Data." This tax loss may be carried forward, with certain restrictions, for up
to 14 years to offset future taxable income. Homeplex believes that the NOL
Carryforward will be available to the combined entity resulting from the Merger
without application of the annual limitations under Section 382 of the Code,
although the NOL Carryforward may not be available to offset gains from
post-merger sales of certain appreciated assets of Monterey under Section 384 of
the Code. See "The Merger and Related Transactions -- NOL Carryforward."
SENIOR SUBORDINATED NOTES. Prior to the Merger, the liability for the 13%
Senior Subordinated Notes due 2001 in the original principal amount of $8
million (the "Notes") was transferred to MHC-II by Monterey Management, Inc., an
Arizona corporation that merged with and into MHC-II prior to the execution of
the Merger Agreement ("MMI"). Prior to the Merger, MHC-II will transfer its
obligations under the Notes to MHC-I. Upon effectuation of the Merger, Homeplex
will become a guarantor on the Notes, and will be
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<PAGE> 20
subject to certain covenants. MHC-I will be the primary obligor on the Notes and
under the Indenture governing the Notes (the "Indenture"). Monterey Homes
Corporation, an Arizona corporation that merged with and into MHA-II prior to
the execution of the Merger Agreement ("MHC"), will transfer its obligations as
a guarantor of the Notes to MHA-I, who will continue to be a guarantor on the
Notes. See "The Merger and Related Transactions -- Senior Subordinated Notes."
MONTEREY CREDIT FACILITIES. Monterey has historically obtained a
significant portion of its working capital through bank credit facilities
secured by substantially all of its real estate under development. At June 30,
1996, Monterey had available $46.1 million of short-term, secured revolving
construction loan credit facilities, of which $12.6 million was outstanding. In
addition, at June 30, 1996, Monterey had outstanding $11.4 million of secured
non-revolving acquisition and development loans which mature at various times
from May 1997 to December 1999. The interest rates under these credit facilities
range from prime (which was 8.25% at June 30, 1996) plus 0.50% to prime plus
1.0%.
During August 1996, Monterey entered into an agreement with one of its
principal lenders, to borrow up to $7.5 million on an unsecured basis. The loan
is payable within one year of its origination with interest at prime plus 0.50%.
The proceeds of this loan were used in part to fund the Distributions to the
Monterey Stockholders.
Prior to the effective date of the Merger, Monterey expects to refinance
and consolidate substantially all of the above outstanding loans into one
revolving construction, acquisition, development and working capital credit
facility. It is anticipated that the new credit facility would provide a
commitment of approximately $45 million and encumber substantially all of
Monterey's real estate under development. The credit facility would have an
initial term of two years, bear interest at a range of prime plus 0.25% to prime
plus 0.45% and contain various financial covenants. Monterey has received a
non-binding terms summary from two of its existing primary lenders to provide
this new $45 million credit facility. See "The Merger and Related
Transactions -- Monterey Credit Facilities."
FRACTIONAL SHARES. No fractional shares of Homeplex Common Stock will be
issued in connection with the Merger. The total number of shares of Homeplex
Common Stock that the Monterey Stockholders shall have the right to receive
pursuant to the Merger Agreement will be rounded up to the nearest whole share
of Homeplex Common Stock. See "The Merger and Related Transactions -- Conversion
and Exchange of Stock Certificates."
EFFECTIVE DATE OF THE MERGER. The Merger will become effective upon the
filing of the Articles of Merger, which includes the Charter Amendment, with the
Secretary of State of the State of Maryland and the Corporation Commission of
the State of Arizona (the "Effective Date"). The form of the Articles of Merger
is attached hereto as Appendix B (the "Articles of Merger"). Assuming that the
requisite stockholder approval of the Merger is obtained, it is anticipated that
the Effective Date will occur at the earliest possible date following the
satisfaction or waiver of all conditions precedent which is the last business
day of a calendar month; provided, however, that in no event shall the Effective
Date be prior to December 31, 1996 or, without the consent of the parties
thereto, later than March 31, 1997. See "The Merger and Related Transactions --
Effective Date."
FEDERAL INCOME TAX CONSIDERATIONS. Homeplex and Monterey will receive the
opinion of Homeplex's counsel to the effect that (i) the Merger will qualify as
a reorganization under Section 368(a) of the Code, (ii) there has not been an
"ownership change" of Homeplex within the meaning of Section 382 of the Code
prior to the Effective Date, and (iii) the Merger will not cause an "ownership
change" of Homeplex within the meaning of Section 382 of the Code to occur on
the Effective Date. Assuming the Merger qualifies as a reorganization under
Section 368(a) of the Code, no gain or loss will be recognized by Homeplex or
Monterey in connection with the Merger. See "The Merger and Related
Transactions -- Certain Federal Income Tax Considerations."
ACCOUNTING TREATMENT. The Merger will be accounted for as an acquisition of
the Monterey Merging Companies by Homeplex, and recorded by Homeplex as a
purchase in accordance with generally accepted
5
<PAGE> 21
accounting principles. See "The Merger and Related Transactions -- Accounting
Treatment" and "Selected Financial Data -- Unaudited Pro Forma Condensed
Combined Financial Data."
DIRECTOR AND OFFICER RESIGNATIONS AND ELECTIONS. Consummation of the Merger
is subject to the condition that all current directors (other than Alan D.
Hamberlin) and officers of Homeplex shall have resigned and William W. Cleverly
shall have been elected to the offices of Chairman and Co-Chief Executive
Officer of Homeplex and Steven J. Hilton shall have been elected to the offices
of President and Co-Chief Executive Officer of Homeplex. It is contemplated that
following the Merger, the Board of Directors will consist of Alan D. Hamberlin,
William W. Cleverly, Steven J. Hilton, Robert G. Sarver and C. Timothy White.
See "The Merger and Related Transactions -- Operations and Executive Officers of
Homeplex After the Merger; Future Stock Options" and "Election of Board of
Directors."
CONDITIONS TO MERGER. The obligations of Homeplex and the Monterey Merging
Companies to consummate the Merger are subject to the satisfaction of certain
customary conditions and other conditions, including, without limitation, that
(i) MHC-II shall have formed MHC-I and shall have contributed all of its assets,
liabilities and obligations to MHC-I, (ii) MHA-II shall have formed MHA-I and
shall have contributed all of its assets, liabilities and obligations to MHA-I,
(iii) shares of Homeplex Common Stock to be issued in connection with the Merger
shall have been authorized for listing on the NYSE, subject to notice of
issuance, and (iv) the effectiveness of the Registration Statement of which this
Proxy Statement/Prospectus is a part. See "The Merger and Related
Transactions -- Merger Agreement -- Conditions to the Obligations of Homeplex"
and "The Merger and Related Transactions -- Merger Agreement -- Conditions to
the Obligations of Monterey and the Monterey Stockholders."
RIGHTS OF OBJECTING STOCKHOLDERS. Maryland law does not require that
holders of Homeplex Common Stock who object to the Merger and who vote against
or abstain from voting in favor of the Merger be afforded any appraisal rights
or the right to receive cash for their shares of Homeplex Common Stock. Homeplex
does not intend to make available any such rights to its respective
stockholders. See "The Annual Meeting -- Objecting Stockholders' Rights."
TERMINATION AND MODIFICATION OF THE MERGER AGREEMENT. The Merger Agreement
may be terminated on or before the Effective Date under certain customary
circumstances and other circumstances including, without limitation, by either
Homeplex or Monterey and the Monterey Stockholders if the Effective Date has not
occurred on or prior to March 31, 1997, or such later date as shall have been
agreed to by the parties to the Merger Agreement. See "The Merger and Related
Transactions -- Merger Agreement -- Waivers, Modification and Termination."
The Merger Agreement may be modified at any time in any respect by the
mutual consent of all of the parties thereto. Any such modification may be
approved for Homeplex by its Board of Directors without further stockholder
approval and for the Monterey Merging Companies by their respective Board of
Directors and the Monterey Stockholders; provided, however, the value or the
method of calculating the Merger Consideration may not be increased or
materially altered without the consent of the holders of a majority of the
outstanding shares of Homeplex Common Stock. See "The Merger and Related
Transactions -- Merger Agreement -- Waivers, Modification and Termination of the
Merger Agreement."
TERMINATION FEE UPON COMPETING TRANSACTION. In the event that a party to
the Merger Agreement terminates the Merger as a result of any other party's
willful breach or willful failure to perform under the Merger Agreement, the
breaching party will reimburse the non-breaching party for all fees and expenses
incurred by the non-breaching party in connection with the Merger. If a party
terminates the Merger Agreement (other than as a result of the other party's
willful breach or failure to perform, or if the Effective Date has not occurred
prior to March 31, 1997) and then enters into an agreement allowing (i) any
merger, consolidation, share exchange, business combination or similar
transaction of Homeplex or Monterey, (ii) any sale, lease, exchange, mortgage,
pledge, transfer or other disposition of 20% or more of the assets of Homeplex
or Monterey, (iii) any person to acquire beneficial ownership of, or the
formation of any group which would beneficially own or have the right to acquire
beneficial ownership of 20% or more of the outstanding shares of capital stock
of Homeplex or Monterey, or (iv) any tender offer or exchange offer for 20% or
more of the outstanding shares of capital stock of Monterey or Homeplex, or the
filing of a registration statement under
6
<PAGE> 22
the Securities Act of 1933, as amended (the "Securities Act") in connection
therewith (each, a "Competing Transaction"), within one year after termination
of the Merger Agreement, then the terminating party will pay to the other
parties a fee in cash equal to 2% of the aggregate value of the Competing
Transaction. See "The Merger and Related Transactions -- Merger
Agreement -- Fees and Expenses."
NO SHOP AGREEMENT. Each of Homeplex and Monterey have agreed that unless
and until the Merger Agreement is terminated, it will not (a) initiate or
solicit, directly or indirectly, any inquiries, or the making of any proposal or
engage in any negotiations with respect to a Competing Transaction, (b) provide
to any other person (or have discussions relating to) any information or data
relating to Homeplex or Monterey for the purpose of seeking or encouraging a
Competing Transaction, or (c) enter into any agreement with any other party with
respect to a Competing Transaction. See "The Merger and Related
Transactions -- Merger Agreement -- Covenants of All Parties."
COMPARATIVE RIGHTS OF STOCKHOLDERS OF HOMEPLEX AND MONTEREY. The rights of
the Monterey Merging Companies are currently governed by Arizona law and by
their respective Articles of Incorporation and Bylaws. Upon the effectiveness of
the Merger, the Monterey Stockholders will become stockholders of Homeplex and
their rights as Homeplex stockholders will be governed by Maryland law and by
Homeplex's Articles of Incorporation and Bylaws. See "Comparative Rights of
Stockholders of Homeplex and Monterey."
FAIRNESS OPINIONS. The Board of Directors has received an opinion from
Rauscher Pierce Refsnes, Inc., financial advisor to Homeplex ("RPR"), to the
effect that the Merger Consideration to be paid by Homeplex to the Monterey
Stockholders pursuant to the Merger Agreement is fair to the stockholders of
Homeplex from a financial point of view. The full text of the written opinion of
RPR is attached to this Proxy Statement/Prospectus as Appendix E. See "The
Merger and Related Transactions -- Opinion of Financial Advisor to Homeplex."
CHARTER AMENDMENT. A condition to the Merger is the amendment of Homeplex's
Articles of Incorporation, which will, among other things, (i) change Homeplex's
name to "Monterey Homes Corporation," (ii) effect a one-for-three reverse stock
split of Homeplex's Common Stock, (iii) amend and make more strict the
restrictions on the transfer of Homeplex Common Stock to preserve the NOL
Carryforward, and (iv) provide for a classified Board of Directors, with one
class being elected for a two-year term (the "Class I Directors"), and the other
class being elected for a one-year term (the "Class II Directors") (the "Charter
Amendment"). The Charter Amendment does not change the terms of the Homeplex
Common Stock. The shares of Homeplex Common Stock after giving effect to the
one-for-three reverse stock split will have the same voting rights, the same
rights to dividends and distribution and will be identical in all other respects
to the shares of Homeplex Common Stock now authorized. No fractional interests
will be issued, and no fractional share interest will entitle the holder thereof
to vote or to exercise any rights of a stockholder. All fractional shares for
one-half share or more shall be increased to the next higher whole number of
shares and all fractional shares of less than one-half share shall be decreased
to the next lower number of whole shares, respectively. See "The Merger and
Related Transactions -- Charter Amendment" and "The Merger and Related
Transactions -- NOL Carryforward."
RISK FACTORS. The stockholders of Homeplex are urged to review the matters
set forth under "Risk Factors" beginning on Page 23 of this Proxy
Statement/Prospectus.
OTHER PROPOSALS TO BE PRESENTED
HAMBERLIN AGREEMENTS. Alan D. Hamberlin and Homeplex are parties to an
Amended and Restated Employment Agreement, dated December 21, 1995 (as amended,
the "Hamberlin Employment Agreement"), pursuant to which Mr. Hamberlin shall be
employed as the Chief Executive Officer of Homeplex for a three year term. In
connection with the Hamberlin Employment Agreement, Homeplex and Mr. Hamberlin
entered into a stock option agreement, whereby Homeplex granted Mr. Hamberlin
stock options covering 750,000 shares of Homeplex Common Stock (the "Hamberlin
Stock Options"), subject to stockholder approval. Simultaneously with the grant
of the Hamberlin Stock Options, Homeplex conditionally granted Mr. Hamberlin
phantom stock rights covering 750,000 shares of Homeplex Common Stock (the
"Hamberlin
7
<PAGE> 23
PSRs"), which will be issued to Mr. Hamberlin if the Hamberlin Stock Options are
not approved at the Annual Meeting. The main economic difference is that upon
exercise the Hamberlin PSRs will require a cash payment to Mr. Hamberlin equal
to the excess of the fair market value of Homeplex Common Stock on the date of
exercise over $1.50, whereas the Hamberlin Stock Options will require only the
issuance of stock. In addition, if the Hamberlin PSRs become effective, the
Hamberlin PSRs will have a material adverse effect on the future earnings of
Homeplex if the trading price of Homeplex Common Stock remains substantially
above $1.50 because on the date of effectiveness, the excess of the fair market
value of Homeplex Common Stock over $1.50 will be required to be charged to
Homeplex's earnings, with additional future charges required if the trading
price continues to increase. See "Selected Financial Data -- Unaudited Pro Forma
Condensed Combined Financial Data" and "Homeplex Management -- Hamberlin
Agreements and Other Employment Agreements."
STOCK OPTION EXTENSION. Homeplex and certain of its senior executive
officers and directors are parties to stock option agreements (collectively, the
"Existing Stock Option Agreements") pursuant to which such officers and
directors have been issued stock options to purchase up to 437,500 shares of
Homeplex Common Stock under Homeplex's existing stock option plan (the "Existing
Stock Option Plan"). The Existing Stock Option Plan and Existing Stock Option
Agreements provide for an exercise period after an optionee ceases to be a
director or employee of Homeplex of three months after cessation of employment
or service as a director. To facilitate the Merger, Homeplex's current officers
and directors (other than Alan D. Hamberlin) will resign, and in consideration
thereof and in light of their past service to Homeplex, the stockholders are
being asked to approve the Stock Option Extension at the Annual Meeting to
extend such exercise period from three months to two years. See "Homeplex
Management -- Stock Option Plan."
8
<PAGE> 24
SELECTED HISTORICAL FINANCIAL DATA
The following selected historical consolidated financial data of Homeplex
and the historical combined financial data of Monterey have been derived from
their respective historical financial statements, and should be read in
conjunction with such financial statements and notes thereto included elsewhere
in this Proxy Statement/Prospectus. The Homeplex unaudited historical
consolidated financial statements and the Monterey unaudited historical combined
financial statements as of and for the six months ended June 30, 1995 and 1996,
have been prepared on the same basis as the historical financial data derived
from audited financial statements, and, in the opinion of their respective
management, contain all adjustments, consisting only of normal recurring
accruals, necessary for the fair presentation of the results of operations for
such periods. See "Selected Financial Data."
HOMEPLEX HISTORICAL CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
------- -------- -------- ------- ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Income (loss) from mortgage assets................ $15,507 $(14,068) $(21,814) $(1,203) $3,564 $2,181 $1,270
Interest expense.................................. 4,535 2,750 2,274 1,383 868 478 238
Other expense..................................... 2,945 2,315 1,822 1,938 1,599 905 651
Income (loss) before extraordinary loss/effect of
accounting change............................... 8,027 (19,133) (25,910) (4,524) 1,097 798 381
Cumulative effect of accounting change(1)......... -- -- (6,078) -- -- -- --
Extraordinary loss(2)............................. -- -- -- -- -- -- (149)
------- -------- -------- ------- ------ ------ ------
Net income (loss)................................. $ 8,027 $(19,133) $(31,988) $(4,524) $1,097 $ 798 $ 232
======= ======== ======== ======= ====== ====== ======
Income (loss) per share before effect of
accounting change/extraordinary loss............ $ .81 $ (1.93) $ (2.66) $ (.47) $ .11 $ .08 $ .04
Cumulative effect of accounting change per
share........................................... -- -- (.63) -- -- -- --
Extraordinary loss per share...................... -- -- -- -- -- -- (.02)
------- -------- -------- ------- ------ ------ ------
Net income (loss) per share....................... $ .81 $ (1.93) $ (3.29) $ (.47) $ .11 $ .08 $ .02
======= ======== ======== ======= ====== ====== ======
Cash dividends per share(3)....................... $ 1.70 $ .40 $ .03 $ .02 $ .03 $ -- $ --
======= ======== ======== ======= ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------- AT JUNE 30, 1996
1991 1992 1993 1994 1995 ----------------
-------- ------- ------- ------- ------- (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Real estate loans.............................. $ -- $ -- $ 320 $ 9,260 $ 4,048 $ 3,852
Residual interests............................. 112,988 66,768 17,735 7,654 5,457 4,625
Total assets................................... 121,502 87,063 43,882 31,150 27,816 19,752
Long-term debt................................. 16,450 31,000 19,926 11,783 7,819 --
Total liabilities.............................. 43,462 32,357 21,505 13,508 9,368 1,072
Stockholders' equity........................... 78,040 54,706 22,377 17,642 18,448 18,680
</TABLE>
- ---------------
(1) Reflects the cumulative effect of adoption of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities."
(2) Reflects extraordinary loss from early extinguishment of long-term debt.
(3) For any taxable year in which Homeplex qualifies and elects to be treated
as a REIT under the Code, Homeplex will not be subject to federal income
tax on that portion of its taxable income that is distributed to
stockholders in or with respect to that year. Regardless of such
distributions, however, Homeplex may be subject to tax on certain types of
income.
9
<PAGE> 25
MONTEREY COMBINED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
----------- ------- ------- ------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING STATEMENT DATA:
Total Revenues............................... $20,365 $35,111 $40,543 $60,941 $71,491 $26,444 $32,417
Cost of sales................................ 17,128 29,544 34,664 50,655 60,332 23,050 27,738
Selling, general and administrative
expense.................................... 2,528 3,383 3,267 4,123 4,899 2,205 2,737
------- ------- ------- ------- ------- ------- -------
Operating income............................. 709 2,184 2,612 6,163 6,260 1,189 1,942
Other income (expense)....................... (40) 32 (92) 102 141 113 28
------- ------- ------- ------- ------- ------- -------
Net earnings................................. $ 669 $ 2,216 $ 2,520 $ 6,265 $ 6,401 $ 1,302 $ 1,970
======= ======= ======= ======= ======= ======= =======
Net earnings per share(1).................... $ .33 $ 1.09 $ 1.24 $ 3.09 $ 3.15 $ .64 $ .97
======= ======= ======= ======= ======= ======= =======
Cash dividends per share(2).................. $ -- $ .32 $ .78 $ 1.23 $ 2.07 $ 1.57 $ 1.55
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
----------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA: (UNAUDITED)
Unit sales contracts (net of
cancellations)............................. 108 151 167 243 241 119 133
Units closed................................. 71 133 142 201 239 93 125
Units in backlog at end of period............ 57 75 100 142 144 168 152
Aggregate sales value of homes in backlog.... $16,227 $19,970 $30,826 $43,981 $37,891 $49,368 $45,985
Average sales price per home closed.......... $ 287 $ 264 $ 285 $ 299 $ 284 $ 297 $ 302
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------ AT JUNE 30,
1991 1992 1993 1994 1995 1996
-------- -------- -------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Real estate under development................ $7,168 $9,553 $13,736 $17,917 $33,929 $43,773
Total assets................................. 8,958 12,366 19,227 28,820 42,654 48,450
Notes payable................................ 3,221 3,463 7,632 12,255 24,316 32,075
Stockholders' equity(2)...................... 630 2,193 3,121 6,898 9,108 7,943
</TABLE>
- ---------------
(1) Numbers exclude the effect of outstanding warrants to purchase 400,000
shares of common stock of Monterey. Accordingly, for purposes of computing
earnings per share, management utilized 2,027,776 weighted average shares
outstanding in each period presented. After giving pro forma effect to such
warrants as if they had been exercisable, net income per share at June 30,
1995 and 1996 would have been $.54 and $.81, respectively. Due to Monterey's
status as an S-corporation for federal income tax purposes, Monterey is not
subject to federal income tax, rather the Monterey Stockholders are taxed
directly on the net income of Monterey.
(2) The historical combined financial data set forth in the preceding tables do
not reflect the Distributions, totaling approximately $9.5 million made by
Monterey prior to entering into the Merger Agreement, but subsequent to June
30, 1996. See "Selected Financial Data -- Unaudited Pro Forma Condensed
Combined Financial Data" and "The Merger and Related
Transactions -- Distributions."
10
<PAGE> 26
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The Unaudited Pro Forma Condensed Combined Income Statement Data set forth
below presents the results of operations of the combined entity, assuming the
Merger occurred on January 1, 1995, for the twelve months ended December 31,
1995 and the six months ended June 30, 1996. The Unaudited Pro Forma Condensed
Combined Balance Sheet Data set forth below presents the financial position of
the combined entity assuming the Merger occurred on June 30, 1996. The Unaudited
Pro Forma Condensed Combined Financial Data assumes the Monterey Stockholders
received the Distributions prior to the Merger. Adjustments necessary to reflect
these assumptions and to restate historical combined balance sheets and results
of operations are presented in the Pro Forma Adjustments columns, which are
further described in the Notes to Selected Unaudited Pro Forma Condensed
Combined Financial Data.
The historical financial information for Homeplex is derived from the
audited consolidated financial statements of Homeplex as of and for the year
ended December 31, 1995, and the unaudited consolidated financial statements of
Homeplex as of and for the six months ended June 30, 1996. The historical
financial information for Monterey is derived from the audited combined
financial statements of Monterey as of and for the year ended December 31, 1995,
and the unaudited combined financial statements of Monterey as of and for the
six months ended June 30, 1996.
The following information does not purport to present the financial
position or results of operations of Homeplex and Monterey had the Merger, the
Distributions and the other events assumed therein occurred on the dates
specified, nor is it necessarily indicative of the results of operations of
Homeplex and Monterey as they may be in the future or as they may have been had
the Merger and such other events been consummated on the dates shown. The
Selected Unaudited Pro Forma Condensed Combined Financial Data is based on
certain assumptions and adjustments described in the related Notes to Selected
Unaudited Pro Forma Condensed Combined Financial Data and should be read in
conjunction with the Merger Agreement, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for each of Homeplex and
Monterey, and the audited and unaudited historical financial statements and
notes thereto of Homeplex and Monterey included elsewhere in this Proxy
Statement/Prospectus.
11
<PAGE> 27
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MONTEREY
--------------------------------------- PRO
AS HOMEPLEX PRO FORMA FORMA
HISTORICAL ADJUSTMENTS(2) ADJUSTED HISTORICAL COMBINED ADJUSTMENTS(2) COMBINED
---------- -------------- -------- -------- -------- -------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Real estate under development...... $ 43,773 $ -- $ 43,773 $ -- $ 43,773 $ -- $ 43,773
Real estate loans and other
receivables...................... 820 -- 820 3,852 4,672 -- 4,672
Residual interests................. -- -- -- 4,625 4,625 -- 4,625
Cash and cash equivalents.......... 1,613 (516)(b) 1,097 10,853 11,950 (780)(b) 11,170
Option deposits.................... 972 -- 972 -- 972 -- 972
Other assets....................... 1,272 -- 1,272 422 1,694 (750)(c) 944
Deferred tax asset................. -- -- -- -- -- 6,783(c) 6,783
Goodwill........................... -- -- -- -- -- 1,686(c) 1,686
--------- -------- -------- -------- -------- -------- --------
Total Assets................. $ 48,450 $ (516) $ 47,934 $ 19,752 $ 67,686 $ 6,939 $ 74,625
========= ======== ======== ======== ======== ======== ========
LIABILITIES & STOCKHOLDERS' EQUITY:
Accounts payable and accruals...... $ 3,452 $ -- $ 3,452 $ 1,072 $ 4,524 $ -- $ 4,524
Home sale deposits................. 4,980 -- 4,980 -- 4,980 -- 4,980
Notes payable...................... 32,075 5,443(a) 37,518 -- 37,518 -- 37,518
--------- -------- -------- -------- -------- -------- --------
Total Liabilities.................. 40,507 5,443 45,950 1,072 47,022 -- 47,022
--------- -------- -------- -------- -------- -------- --------
Common stock....................... 5 -- 5 99 104 (5)(e) 138
39(d)
Additional paid-in capital......... 8 -- 8 84,046 84,054 (8)(e) 92,930
8,884(d)
Retained earnings (accumulated
deficit)......................... 7,930 (5,443)(a) 1,971 (65,055) (63,084) (1,971)(e) (65,055)
(516)(b)
Treasury stock..................... -- -- -- (410) (410) -- (410)
--------- -------- -------- -------- -------- -------- --------
Total Stockholders'
Equity.................... 7,943 $ (5,959) 1,984 18,680 20,664 6,939 27,603
--------- -------- -------- -------- -------- -------- --------
Total Liabilities and
Stockholders' Equity...... $ 48,450 $ (516) $ 47,934 $ 19,752 $ 67,686 $ 6,939 $ 74,625
========= ======== ======== ======== ======== ======== ========
Pro forma net book value
per share........................ $ 2.00
========
Pro forma common shares
outstanding...................... 13,777,000
==========
</TABLE>
- ------------------------------------------------------------------------
See accompanying "Notes to Unaudited Pro Forma Condensed Combined Financial
Data."
12
<PAGE> 28
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
-------------------- PRO FORMA PRO FORMA
MONTEREY HOMEPLEX COMBINED ADJUSTMENTS(3) COMBINED
-------- --------- -------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Home and land sales..................... $71,491 $ -- $71,491 $ -- $ 71,491
Cost of home and land sales............. 60,333 -- 60,333 225(f) 60,558
------- --------- ------- ----- ----------
Gross Margin............................ 11,158 -- 11,158 (225) 10,933
Selling, general and administrative
expenses.............................. 4,898 1,599 6,497 250(g) 6,382
(648)(h)
281(i)
(113)(j)
115(k)
------- --------- ------- ----- ----------
Operating income (loss)................. 6,260 (1,599) 4,661 (110) 4,551
------- --------- ------- ----- ----------
Other income (expense):
Interest income on real estate
loans.............................. -- 1,618 1,618 -- 1,618
Income from residual interests........ -- 1,283 1,283 -- 1,283
Interest expense...................... -- (868) (868 ) -- (868)
Miscellaneous income, net............. 141 663 804 -- 804
------- --------- ------- ----- ----------
Total other income
(expense)................... 141 2,696 2,837 -- 2,837
------- --------- ------- ----- ----------
Income before income taxes.............. 6,401 1,097 7,498 (110) 7,388
Income tax expense...................... -- -- -- 813(l) 813
------- --------- ------- ------ ----------
Net income.............................. $ 6,401 $ 1,097 $ 7,498 $ (923) $ 6,575
======= ========= ======= ====== ==========
Net income per share:
Primary............................... $ .11 $ .47
========= ==========
Fully-diluted......................... $ .11 $ .45
========= ==========
Weighted average common shares
outstanding -- primary................ 9,737,302 14,000,000
========= ==========
Weighted average common shares
outstanding -- fully diluted.......... 9,737,302 14,668,000
========= ==========
</TABLE>
- ------------------------------------------------------------------------
See accompanying "Notes to Unaudited Pro Forma Condensed Combined Financial
Data."
13
<PAGE> 29
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
-------------------- PRO FORMA PRO FORMA
MONTEREY HOMEPLEX COMBINED ADJUSTMENTS(3) COMBINED
-------- -------- -------- -------------- ---------
<S> <C> <C> <C> <C> <C>
Home and land sales...................... $ 32,417 $ -- $ 32,417 $ -- $32,417
Cost of home and land sales.............. 27,738 -- 27,738 225 (f) 27,963
-------- ------ -------- ------ -------
Gross Margin............................. 4,679 -- 4,679 (225) 4,454
Selling, general and administrative
expenses............................... 2,737 651 3,388 105 (g) 3,401
(157)(h)
64 (i)
(56)(j)
57 (k)
-------- ------ -------- ------ -------
Operating income (loss).................. 1,942 (651) 1,291 (238) 1,053
-------- ------ -------- ------ -------
Other income (expense):
Interest income on real estate
loans............................... -- 366 366 -- 366
Income from residual interests......... -- 525 525 -- 525
Interest expense....................... -- (238) (238) -- (238)
Miscellaneous income, net.............. 27 379 406 -- 406
-------- ------ -------- ------ -------
Total other income
(expense).................... 27 1,032 1,059 -- 1,059
-------- ------ -------- ------ -------
Income before extraordinary loss and
income taxes........................... 1,969 381 2,350 (238) 2,112
Extraordinary loss from early
extinguishment of debt................. -- (149) (149) 149 (m) --
-------- ------ -------- ------ -------
Income before income taxes............... 1,969 232 2,201 (89) 2,112
Income tax expense....................... -- -- -- 232 (l) 232
-------- ------ -------- ------ -------
Net income............................... $ 1,969 $ 232 $ 2,201 $ (321) $ 1,880
======== ====== ======== ====== =======
Net income per share:
Primary
Before extraordinary item................ $ 0.04 $ 0.13
Extraordinary item....................... (0.02) --
------ -------
Total.......................... $ 0.02 $ 0.13
====== =======
Fully Diluted
Before extraordinary item................ $ 0.04 $ 0.13
Extraordinary item....................... (0.02) --
------ -------
Total.......................... $ 0.02 $ 0.13
====== =======
Weighted average common shares
outstanding -- primary................. 9,885,624 13,950,000
========= ==========
Weighted average common shares
outstanding -- fully diluted........... 9,980,051 14,981,000
========= ==========
</TABLE>
- ------------------------------------------------------------------------
See accompanying "Notes to Unaudited Pro Forma Condensed Combined Financial
Data."
14
<PAGE> 30
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
1. Overview. The Unaudited Pro Forma Condensed Combined Income Statements
are presented as if the combination of Monterey and Homeplex occurred on January
1, 1995. The Unaudited Pro Forma Condensed Combined Balance Sheet is presented
assuming the combination occurred on June 30, 1996.
The combination is expected to be recorded as a purchase in accordance with
generally accepted accounting principles and, accordingly, the assets and
liabilities of the acquired entity (Monterey) are presented at their estimated
fair values as of that date. See "The Merger and Related Transactions."
The Merger Agreement provides that the Monterey Stockholders and the
Warrantholders will receive a number of Exchange Shares equal to the pro forma
book value of Monterey on the Effective Date multiplied by a factor of 3.0 and
divided by the fully diluted book value (giving effect to outstanding stock
options) per share of Homeplex Common Stock on the Effective Date. The Merger
Agreement requires Monterey to make the Distributions so that the ending book
value of Monterey immediately prior to the Merger equals $2.5 million, as
adjusted for the exclusion of transaction costs incurred by Monterey. Assuming
an Effective Date of June 30, 1996, the pro forma financial information reflects
a calculation that results in Homeplex issuing approximately 3.9 million shares
of Exchange Shares to the Monterey Stockholder's (83.5% or approximately 3.3
million shares) and the Warrantholders (16.5% or approximately 600,000 shares)
in exchange for the outstanding shares and warrants of Monterey. The Merger
Agreement requires the Merger to occur on or about December 31, 1996.
Accordingly, the number of shares issued will vary based on Homeplex's fully
diluted book value at the Effective Date. See "The Merger and Related
Transactions -- Merger Consideration."
In addition, Homeplex will issue up to 800,000 Contingent Shares, subject
to the trading price thresholds and employment restrictions. Approximately
131,840 Contingent Shares will be reserved on the Effective Date for issuance
upon the exercise of the Homeplex Warrants. The remaining 668,160 shares of
Contingent Stock will be issued to the Monterey Stockholders if certain Homeplex
Common Stock price targets are reached for twenty consecutive days at any time
during the five years following the Effective Date, provided that at the time of
any such issuance to a Monterey Stockholder, such Monterey Stockholder is still
employed with Homeplex. If the stock price does not reach such thresholds within
five years following the date of the Merger, such Contingent Stock will not be
issued. See "The Merger and Related Transactions -- Merger Consideration."
In addition, pursuant to the Employment Agreements, options to purchase one
million shares of Homeplex Common Stock will be granted to the Monterey
Stockholders at an exercise price of $1.75, which options will vest over the
three years following the Merger and expire at the end of the sixth year
following the Merger. The value of the options are considered compensation
expense for the combined entity which will be recognized over the three-year
vesting period. See "The Merger and Related Transactions -- Monterey Stockholder
Agreements."
The Merger Agreement provides that the Monterey Stockholders will receive
an amount that approximates the Distributions to reduce the adjusted book value
of Monterey to $2.5 million. Assuming an Effective Date of June 30, 1996, the
Distributions reflected in the pro forma financial information have been
calculated at approximately $5.4 million. The estimated Distributions amounted
to approximately $9.5 million due to the additional earnings Monterey is
expected to produce subsequent to June 30, 1996 but prior to the Effective Date.
See "The Merger and Related Transactions -- Distributions."
By effecting the Merger, Homeplex will cause a change in its tax status
from a REIT to a C-corporation and Monterey will terminate its Subchapter S tax
status. See "The Merger and Related Transactions -- Termination of REIT Status."
By utilizing the NOL Carryforward, it is anticipated that the income taxes
paid by the combined entity will consist primarily of state income taxes (since
utilization of the Homeplex state net operating loss may be significantly
limited) and the federal alternative minimum tax. Any federal income tax expense
generated by amortization of the deferred tax asset recognized for book purposes
is assumed to be offset by a decrease in the
15
<PAGE> 31
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA -- (CONTINUED)
reserve against the deferred tax asset and, accordingly, will have no net income
statement impact. See "The Merger and Related Transactions -- NOL Carryforward."
Management anticipates that no dividends will be declared or paid on the
common stock subsequent to the Merger and, accordingly, no pro forma dividend
information has been presented in the Unaudited Pro Forma Condensed Combined
Financial Data.
The Unaudited Pro Forma Condensed Combined Financial Data does not give
effect to the proposed one-for-three stock split described elsewhere in this
Proxy Statement/Prospectus.
The following adjustments have been made to arrive at the Unaudited Pro
Forma Condensed Combined Financial Data.
2. Pro Forma Condensed Combined Balance Sheet Adjustments at June 30, 1996.
(a) The Merger Agreement calls for Monterey to make the Tax
Distribution and Retained Earnings Distribution so that the ending book
value of Monterey immediately prior to the Merger equals $2.5 million, as
adjusted. The Distributions were made from available cash and proceeds from
borrowings of Monterey. As a result, the Distributions have been presented
along side the historical balance sheet of Monterey rather than as a pro
forma adjustment contemplated in the Merger. The estimated Distributions
amounted to approximately $9.5 million due to the additional earnings
Monterey is expected to produce subsequent to June 30, 1996, but prior to
the Effective Date.
(b) To record the payment of certain Merger costs and related expenses
assumed to be incurred prior to and concurrent with the Effective Date of
the Merger estimated at $1,596,000. Of the $1,596,000, approximately
$1,080,000 will be paid by Homeplex, of which $780,000 is attributable to
the Merger and has been capitalized and included as a component of the
purchase price. The remaining $300,000 incurred by Homeplex will be
expensed.
Additionally, approximately $516,000 of costs incurred by Monterey is
attributable to the Merger and to the cost of obtaining waivers from the
holders of the Notes for prior defaults. Because this amount was expensed
prior to the Tax Distribution and Retained Earnings Distribution, it has
been presented along side the historical balance sheet of Monterey rather
than as a pro forma adjustment contemplated in the Merger. However, in
accordance with the Merger Agreement, this amount has been excluded for
purposes of computing the Tax Distribution and Retained Earnings
Distribution to arrive at the $2.5 million ending adjusted net book value
of Monterey.
(c) Utilizing an estimated stock price of $2.21 per share of Homeplex
Common Stock, which approximates the average stock for five days before and
after the public announcement of the Merger, the purchase price is
estimated as follows:
<TABLE>
<S> <C>
Consideration Paid:
Estimated fair value of Homeplex common stock.................. $8,923,000
Estimated transaction costs.................................... 780,000
----------
Total consideration............................................ $9,703,000
----------
Estimated fair value of net assets of Monterey................. $1,234,000
Estimated value of deferred tax asset.......................... 6,783,000
----------
Estimated fair value of net assets acquired.................... $8,017,000
----------
Excess of purchase price over fair value of net assets
acquired.................................................... $1,686,000
==========
</TABLE>
Assuming the Merger occurred on June 30, 1996, the excess of purchase
price over the fair value of net assets acquired is attributable to
goodwill, which is to be amortized over 20 years. The allocation of the
purchase price among the assets and liabilities of Monterey results
primarily in the write-off of certain deferred financing costs totaling
$750,000 assumed to have no future value to the combined entity. In
16
<PAGE> 32
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA -- (CONTINUED)
addition, the transaction results in the recording of the deferred tax
asset relating to the benefit of operating loss carryforwards, net of
applicable valuation reserves and deferred tax assets relating to the write
off of the deferred financing costs.
The allocation of purchase cost in the pro forma financial statements
is based on available information. Management does not currently believe
that any adjustments to the final allocation of purchase price will have a
material effect on the Unaudited Pro Forma Condensed Combined Financial
Data.
(d) To record the effects of the issuance of Homeplex Common Stock to
the Monterey Stockholders and Warrantholders and additional paid-in capital
resulting from the Merger.
(e) To reclassify the remaining equity accounts of Monterey into
Homeplex's equity accounts, while giving effect to the legal entity
remaining subsequent to the Merger.
3. Pro Forma Condensed Combined Income Statements Adjustments for the Year Ended
December 31, 1995 and the Six Month Period Ended June 30, 1996.
(f) To record the amortization of additional capitalized interest
incurred in connection with the issuance of notes payable used to fund the
Tax Distribution and the Retained Earnings Distribution.
(g) To adjust for the estimated compensation expense expected to be
incurred as specified in the Employment Agreements with Messrs. Cleverly
and Hilton, net of previous compensation expense no longer recognized by
Monterey for these officers. This amount also includes an adjustment to
reflect additional compensation expense for the bonuses to be paid to
Messrs. Cleverly and Hilton for meeting certain net income levels as
specified in the Employment Agreements. The annual bonus amount for each
Monterey Stockholder is equal to the lesser of $200,000 or 4% of pre-tax
income.
(h) To eliminate compensation expense recorded by Homeplex for
employees terminated in connection with the Merger.
(i) To record compensation expense incurred in connection with the
issuance of options to purchase one million shares of Homeplex Common Stock
which will be issued to the Monterey Stockholders on the Effective Date,
and all of which are assumed to vest. The compensation expense for the
vested options is being recognized over the three year graded vesting
period. The compensation expense for such options was based on an estimated
stock price of $2.21 per share assumed on the date of grant. The actual
amount of compensation expense may vary based on the fair value of Homeplex
Common Stock on the date of grant of the options.
(j) To eliminate the amortization of deferred financing costs which
will be written off in connection with the Merger.
(k) To record the amortization of goodwill, which is being amortized
over 20 years.
(l) To record the amount of income taxes relating to the alternative
minimum tax and state income taxes, which has been estimated at 11% of
income before income taxes.
(m) To eliminate the effects of the extraordinary item due to its
nonrecurring nature.
4. Non-recurring Items. Due to the non-recurring nature of certain items
relating to the Merger which will affect the first year of operations following
the Effective Date, such items have been excluded from the Pro Forma Condensed
Combined Income Statement for the Year Ended December 31, 1995.
The first item excluded from the pro forma financial statements relates to
the estimated termination costs for Homeplex employees amounting to
approximately $300,000 expected to be incurred immediately following the Merger.
17
<PAGE> 33
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA -- (CONTINUED)
Additionally, no effect has been given in the Pro Forma Condensed Combined
Income Statement to the potential compensation expense that would be recorded if
the 668,160 of Contingent Shares are subsequently earned and issued to the
Monterey Stockholders. Assuming the stock prices are reached in accordance with
the vesting periods previously described, and the Monterey Stockholders remain
employed by the combined entity in such periods, compensation expense relating
to such shares would amount to approximately $236,000, $667,000 and $933,000,
respectively, for the three years following the Effective Date. The actual
amount of compensation expense pertaining to the Contingent Shares may vary
based on the Homeplex Common Stock price on the date the Contingent Shares
become issuable.
For purposes of computing earnings per share information, the Contingent
Shares have been excluded from "weighted average common shares
outstanding -- primary" and included in "weighted average common shares
outstanding -- fully diluted" in the accompanying Pro Forma Condensed Combined
Income Statements.
18
<PAGE> 34
COMPARATIVE PER SHARE DATA -- HISTORICAL AND PRO FORMA
Set forth below are the net income and book value per share data, on a
fully diluted basis, of Homeplex on a historical basis and a pro forma basis and
of Monterey on a historical basis and an equivalent pro forma basis. The data
set forth below does not give effect to the one-for-three reverse stock split to
be effected pursuant to the Charter Amendment.
The Homeplex pro forma data was derived by combining historical
consolidated financial information of Homeplex and historical combined financial
information of Monterey, giving effect to the Merger under the purchase method
of accounting for business combinations.
The Monterey pro forma net income from continuing operations for the six
months ended June 30, 1996 is derived by multiplying the ratio of pro forma
shares to be owned by the Monterey Stockholders to total pro forma shares at
June 30, 1996. This calculation produces the pro forma net income allocable to
the Monterey Stockholders which is then divided by the weighted average common
stock outstanding for the six months ended June 30, 1996. The pro forma net
income for the year ended December 31, 1995 is calculated in the same manner
using the balances as of the date.
The Monterey equivalent pro forma book value per share at June 30, 1996, is
derived by multiplying the ratio of pro forma shares to be owned by the Monterey
Stockholders to the total pro forma shares at June 30, 1996, by the pro forma
book value per share at June 30, 1996. This calculation produces the pro forma
book value allocable to the Monterey Stockholders after the pro forma
distribution. In order to produce book values comparable to the historical book
values, the result is added to the pro forma distribution to arrive at the book
value prior to the distribution, which is then divided by the weighted average
common stock outstanding for the six months ended June 30, 1996. The Monterey
equivalent pro forma book value at December 31, 1995 is derived by subtracting
the equivalent pro forma per share net income from continuing operations for the
six months ended June 30, 1996 and adding the actual per share distributions for
the six months ended June 30, 1996 to the June 30, 1996 equivalent pro forma
book value per share.
The information set forth below should be read in conjunction with the
respective audited and unaudited financial statements and related notes of
Homeplex and Monterey included elsewhere in this Proxy Statement/Prospectus and
the unaudited pro forma financial information and notes thereto included
elsewhere in this Proxy Statement/Prospectus.
HOMEPLEX
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1995 1996
------------ ----------
<S> <C> <C>
HISTORICAL PER SHARE DATA:
Net income from continuing operations............................. $ .11 $ .02
Book value........................................................ 1.89 1.92
PRO FORMA PER SHARE DATA:
Net income from continuing operations............................. $ .45 $ .13
Book value........................................................ 1.98 2.00
</TABLE>
MONTEREY
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1995 1996
------------ ----------
<S> <C> <C>
HISTORICAL PER SHARE DATA:
Net income from continuing operations............................. $ 3.15 $ .97
Book value........................................................ 4.49 3.92
EQUIVALENT PRO FORMA PER SHARE DATA:
Net income from continuing operations............................. $ .99 $ .27
Book value........................................................ 7.82 6.54
</TABLE>
19
<PAGE> 35
MARKET PRICE DATA FOR HOMEPLEX COMMON STOCK
Homeplex Common Stock is listed under the trading symbol "HPX" on the NYSE.
The following table sets forth for the periods indicated the high and low
closing sales prices per share of Homeplex Common Stock as reported by the NYSE.
The stock prices reflect stock splits retroactively, but do not, however,
reflect the one-for-three reverse stock split to be effected pursuant to the
Charter Amendment.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996
First Quarter.......................................................... $ 2 $ 1 3/8
Second Quarter......................................................... 2 7/8 1 5/8
Third Quarter.......................................................... 2 3/4 2
Fourth Quarter (through November 6, 1996).............................. 2 5/8 2 3/8
YEAR ENDED DECEMBER 31, 1995
First Quarter.......................................................... $ 1 3/4 $ 1
Second Quarter......................................................... 2 1/8 1 1/4
Third Quarter.......................................................... 2 1/8 1 1/2
Fourth Quarter......................................................... 1 7/8 1 3/8
YEAR ENDED DECEMBER 31, 1994
First Quarter.......................................................... $ 1 1/2 $ 1
Second Quarter......................................................... 1 1/2 1
Third Quarter.......................................................... 1 1/2 1
Fourth Quarter......................................................... 1 3/8 1
</TABLE>
On May 31, 1996, the last trading day prior to the first public
announcement with respect to the Merger, the closing sales price per share of
Homeplex Common Stock as reported on the NYSE was $1 7/8. On November 6, 1996,
Homeplex had outstanding 9,716,517 shares of Homeplex Common Stock which were
held by approximately 700 stockholders of record. Based on information available
to Homeplex, Homeplex believes that there are approximately 6,000 beneficial
owners of Homeplex Common Stock.
Monterey is privately owned by the Monterey Stockholders, and, therefore,
no market value information is available with respect to Monterey Common Stock.
Following the Merger, it is anticipated that the Homeplex Common Stock will
be traded on the NYSE under the trading symbol "MTH."
20
<PAGE> 36
DIVIDENDS AND DISTRIBUTIONS
Cash dividends per share paid by Homeplex were $1.70 in 1991, $.40 in 1992,
$.03 in 1993, $.02 in 1994, $.03 in 1995 and $0 during the six months ended June
30, 1996, representing distributions of taxable income arising out of Homeplex's
status as a REIT.
Cash dividends per share paid by Monterey were $0 in 1991, $.32 in 1992,
$.78 in 1993, $1.23 in 1994, $2.07 in 1995, $1.57 during the six months ended
June 30, 1995 and $1.55 during the six months ended June 30, 1996, representing
primarily distributions made to the stockholders to pay income taxes arising out
of Monterey's status as an S-corporation. In addition, the Distributions made to
the Monterey Stockholders prior to the execution of the Merger Agreement were
$9.5 million. The Retained Earnings Distribution was based on an estimation of
the earnings and income of Monterey through the remainder of calendar year 1996
to the assumed Effective Date. Thus, at the time that the Retained Earnings
Distribution was made, Monterey's stockholders' equity was reduced below $2.5
million, it being anticipated that Monterey's earnings through the remainder of
1996 would bring the actual amount of stockholders' equity, as adjusted, back up
to $2.5 million at year end when the Merger is contemplated to occur. Monterey
financed the Distributions from working capital and proceeds from a $7.5 million
unsecured credit facility. See "The Merger and Related Transactions -- Merger
Consideration" and "The Merger and Related Transactions -- Monterey Credit
Facilities."
The Notes and the Indenture contain certain covenants that restrict the
payment of dividends if the financial condition, results of operation and
capital requirements of Homeplex fail to meet certain specified levels. In
addition, if the Merger is consummated the Nominees have indicated that Homeplex
will not pay any permitted cash dividends for the foreseeable future. Instead,
the Nominees intend to retain earnings to finance the growth of Homeplex's
business. The future payment of cash dividends, if any, will depend upon the
financial condition, results of operations and capital requirements of Homeplex,
as well as other factors deemed relevant by the Nominees. See "Risk
Factors -- Risk Factors of the Merger -- No Dividends" and "The Merger and
Related Transactions -- Senior Subordinated Notes."
21
<PAGE> 37
BOARD OF DIRECTORS' RECOMMENDATION
PROPOSAL 1. To consider and act upon a proposal to approve the Merger and
related transactions, including the issuance of up to 4.7 million
shares of Homeplex Common Stock and the Monterey Stockholder
Agreements. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
THE STOCKHOLDERS OF HOMEPLEX VOTE FOR THE MERGER AND THE RELATED
TRANSACTIONS.
PROPOSAL 2. To consider and act upon a proposal to approve the Charter
Amendment, which will amend the Articles of Incorporation of
Homeplex to (a) change Homeplex's name to "Monterey Homes
Corporation," (b) reclassify and change each share of Homeplex
Common Stock issued and outstanding into one-third of a share of
Homeplex Common Stock, (c) amend and make more strict the
restrictions on the transfer of Homeplex Common Stock to preserve
the NOL Carryforward, and (d) provide for a classified Board of
Directors consisting of the Class I and Class II Directors. THE
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS
OF HOMEPLEX VOTE FOR APPROVAL OF THE CHARTER AMENDMENT.
PROPOSAL 3. To elect (a) a five-member classified Board of Directors
consisting of the Nominees to hold office upon the consummation
of the Merger to the end of their respective terms and until
their successors are elected, and (b) a five-member
non-classified Board of Directors to hold office until the Merger
is consummated, or if for any reason the Merger is not
consummated, to the next annual meeting and until their
successors are elected. THE BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT THE STOCKHOLDERS OF HOMEPLEX VOTE FOR THE
NOMINEES DESCRIBED ELSEWHERE IN THIS PROXY STATEMENT/PROSPECTUS.
APPROVAL OF EACH OF THE MERGER AND RELATED TRANSACTIONS AND THE
CHARTER AMENDMENT AND THE ELECTION OF ALL OF THE NOMINEES TO THE
CLASSIFIED BOARD OF DIRECTORS TO HOLD OFFICE UPON THE
EFFECTIVENESS OF THE MERGER ARE REQUIRED IN ORDER FOR THE MERGER
TO BE CONSUMMATED. SUCH ITEMS OF BUSINESS WILL NOT BE DEEMED
APPROVED UNLESS ALL ARE APPROVED.
PROPOSAL 4. To consider and act upon a proposal to approve the issuance of the
Hamberlin Stock Options to Alan D. Hamberlin in lieu of the
Hamberlin PSRs. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT THE STOCKHOLDERS OF HOMEPLEX VOTE FOR APPROVAL OF THE
ISSUANCE OF THE HAMBERLIN STOCK OPTIONS.
PROPOSAL 5. To consider and act upon a proposal to approve the Stock Option
Extension. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE
STOCKHOLDERS OF HOMEPLEX VOTE FOR APPROVAL OF THE STOCK OPTION
EXTENSION.
As of November 6, 1996, there were 9,716,517 Shares of Homeplex Common
Stock issued and outstanding. The presence in person or by proxy of the holders
of a majority of the outstanding shares of Homeplex Common Stock is necessary to
constitute a quorum at the Annual Meeting. If a quorum is present in person or
by proxy, the affirmative vote by the holders of at least a majority of the
outstanding shares of Homeplex Common Stock is required to approve the Charter
Amendment, and the affirmative vote of a majority of the total votes cast at the
Annual Meeting is required to elect each director and approve the Hamberlin
Stock Options and the Stock Option Extension.
Only stockholders of record as of the close of business on November 6, 1996
will be entitled to notice of the Annual Meeting and to vote at the Annual
Meeting and any adjournment thereof. For a more complete discussion of the
Recommendation of the Board of Directors, see "The Annual Meeting."
22
<PAGE> 38
RISK FACTORS
In addition to the other information set forth in this Proxy
Statement/Prospectus, the following factors should be considered by the Homeplex
stockholders before voting on the proposals herein. See "Forward-Looking
Statements."
RISK FACTORS OF THE MERGER
DEPENDENCE ON HOMEBUILDING INDUSTRY AND MONTEREY MANAGEMENT. After the
Merger, Homeplex's assets will be redeployed to support the growth of Monterey.
Homeplex will be dependent on the future of the homebuilding industry and the
ability of Monterey's management to successfully operate the combined entity.
See "Risk Factors -- Risk Factors of Monterey."
CHANGE OF CONTROL OF HOMEPLEX. As a result of the Merger, Messrs. Cleverly
and Hilton will become the largest stockholders of Homeplex with the possibility
of additionally acquiring 800,000 Contingent Shares and 1.0 million shares of
Homeplex Common Stock pursuant to stock options. Messrs. Cleverly and Hilton
will receive five-year employment agreements and will also succeed Homeplex's
directors and management in directing the business and operations of the
combined entity. Neither Mr. Cleverly nor Mr. Hilton has had any experience
managing a public company. In order to preserve the NOL Carryforward, transfer
restrictions on the Homeplex Common Stock will be amended pursuant to the
Charter Amendment to generally preclude (i) any person from transferring such
shares if the effect thereof would be to make any person or group an owner of
4.9% or more of the outstanding shares of Homeplex Common Stock, or (ii) an
increase in the ownership position of any person or group that already owns 4.9%
or more of such outstanding shares. As a result of the foregoing factors,
Messrs. Cleverly and Hilton should have working control of Homeplex for the
foreseeable future. One or more of the foregoing factors could impede or make
less likely a future change of control of Homeplex.
LOSS OF HOMEPLEX NOL CARRYFORWARD. Homeplex believes that the NOL
Carryforward will be available to it after the Merger without application of the
annual limitations under Section 382 of the Code. However, if (i) the tax laws
change, (ii) any person or group becomes an owner of 5.0% or more of the
outstanding shares of Homeplex Common Stock prior to the Merger, (iii) an
"ownership change" under Section 382 of the Code occurs, or (iv) any other
assumptions prove untrue, the use of the NOL Carryforward could be subject to an
annual limitation or other restriction on its utilization, which would have a
materially adverse impact on the benefits contemplated from the Merger.
Additionally, pursuant to Section 384 of the Code, Homeplex may not be permitted
to use the NOL Carryforward to offset taxable income resulting from sales of
assets owned by Monterey at the time of the Merger to the extent that the fair
market value of such assets at the time of the Merger exceeded their tax basis.
There is no assurance that the combined entity will have sufficient earnings
after the Merger to fully utilize the NOL Carryforward.
POSSIBLE VOLATILITY OF STOCK PRICE; SHARES ELIGIBLE FOR FUTURE SALE. Upon
consummation of the Merger, the trading price for Homeplex Common Stock may be
highly volatile. The factors described below in the sections entitled "Risk
Factors of Monterey" and "Risk Factors of Homeplex" will contribute to
fluctuations in the combined entities quarterly revenue and net income and may
have a significant impact on the trading price of Homeplex Common Stock
following the Merger.
As a result of the Merger, the Monterey Stockholders will own or have the
rights to acquire up to approximately 5.7 million shares of Homeplex Common
Stock. Immediately after the Effective Date, the Monterey Stockholders will own
over 3.0 million shares of Homeplex Common Stock, all of which will either be
freely transferable without registration under the Securities Act or subject to
demand and incidental registration rights in favor of the Monterey Stockholders.
The Homeplex Common Stock to be issued pursuant to the Merger and the
transactions related thereto can be registered for resale under the Securities
Act. Substantial sales by either Mr. Cleverly or Mr. Hilton of Homeplex Common
Stock after the Merger could depress the trading price of Homeplex Common Stock.
NO DIVIDENDS. The Notes and the Indenture contain certain covenants that
restrict the payment of dividends if the financial condition, results of
operation and capital requirements of Homeplex fail to meet
23
<PAGE> 39
certain specified levels. In addition, if the Merger is consummated, the
Nominees have indicated that Homeplex will not pay any cash dividends for the
foreseeable future. Instead, the Nominees intend to retain earnings to finance
the growth of Homeplex's business. The future payment of cash dividends, if any,
will depend upon the financial condition, results of operations and capital
requirements of Homeplex, as well as other factors deemed relevant by the
Nominees.
ANTICIPATED CHARGES. Homeplex anticipates that certain nonrecurring costs
will be charged to the operations of Homeplex during the quarter ending December
31, 1996 or March 31, 1997. If the Merger is consummated, Homeplex anticipates
that it will expense transaction costs of approximately $300,000 associated with
the Merger, consisting of certain change of control and severance payments. If
the Merger is not consummated, Homeplex anticipates that it will expense costs
of approximately $600,000, consisting of fees for investment bankers, attorneys,
accountants and other related charges.
In addition, if the Hamberlin Stock Options are not approved by the
stockholders of Homeplex at the Annual Meeting and the Hamberlin PSRs become
effective, Homeplex will be required to incur a charge to operations during the
quarter ending December 31, 1996 in an amount equal to 750,000 multiplied by the
difference between the market value of the Homeplex Common Stock on the date the
Hamberlin PSRs become effective and $1.50. See "The Annual Meeting -- Other
Proposals -- Proposal Four -- Hamberlin Stock Options."
PURCHASE ACCOUNTING ASSET STEP-UP. Purchase accounting requires the excess
of the purchase price paid by an acquiring company over the net book value of
the acquired company to be allocated to the assets and liabilities of the
acquired company based on their fair market value. As a result of the Merger,
goodwill will be incurred in the approximate amount of $1,686,000 which will be
amortized on a straight line basis over 20 years and will adversely affect the
net income of Homeplex. In addition, the actual goodwill to be incurred on the
Effective Date may differ from the pro forma amount due to changes in the
composition of Monterey's assets and liabilities prior to the Effective Date.
See "Selected Financial Data -- Unaudited Pro Forma Condensed Financial Data."
INCREASED LEVERAGE. As of the date of this Proxy Statement/Prospectus,
Homeplex does not have any debt. As a result of the Merger, Homeplex will incur
substantial debt in the approximate amount of $37.5 million while its
stockholders' equity will increase to approximately $27.6 million. See "Selected
Financial Data -- Unaudited Pro Forma Condensed Combined Financial Data."
Although no assurances can be given that Homeplex will be able to obtain any
additional financing, Homeplex believes that it will be able to obtain such
additional financing from its lenders. See "The Merger and Related
Transactions -- Monterey Credit Facilities" and "Selected Financial
Data -- Monterey Management's Division and Analysis of Financial Condition of
Results of Operations."
BENEFITS OF MERGER MAY NOT BE REALIZED. There can be no assurances that the
expected benefits of the Merger related to the combined entity as described
under "The Merger and Related Transactions -- Reasons for the Merger" and "The
Merger and Related Transactions -- Board of Directors' Recommendation of the
Merger" will be achieved.
RISK FACTORS OF MONTEREY
HOMEBUILDING INDUSTRY FACTORS. The homebuilding industry is cyclical and is
significantly affected by changes in national and local economic and other
conditions, such as employment levels, availability of financing, interest
rates, consumer confidence and housing demand. Although Monterey believes that
its customers (particularly purchasers of luxury homes) are somewhat less price
sensitive than generally is the case for other homebuilders, such uncertainties
could adversely affect the performance of Monterey. In addition, homebuilders
are subject to various risks, many of which are outside the control of the
homebuilders, including delays in construction schedules, cost overruns, changes
in government regulation, increases in real estate taxes and other local
government fees, and availability and cost of land, materials, and labor.
Although the principal raw materials used in the homebuilding industry generally
are available from a variety of sources,
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such materials are subject to periodic price fluctuations. There can be no
assurance that the occurrence of any of the foregoing will not have a material
adverse effect on Monterey.
The homebuilding industry is also subject to the potential for significant
variability and fluctuations in real estate values, as evidenced by the changes
in real estate values in recent years in Arizona. Although Monterey believes
that its projects are currently reflected on Monterey's balance sheets at
appropriate values, no assurances can be given that write-downs of some or all
of Monterey's projects will not occur if market conditions deteriorate, or that
such write-downs will not be material in amount.
FLUCTUATIONS IN OPERATING RESULTS. Monterey historically has experienced,
and in the future expects to continue to experience, variability in home sales
and net earnings on a quarterly basis. Factors expected to contribute to this
variability include, among others (i) the timing of home closings and land
sales, (ii) Monterey's ability to continue to acquire additional land or options
to acquire additional land on acceptable terms, (iii) the condition of the real
estate market and the general economy in Arizona and in other areas into which
Monterey may expand its operations, (iv) the cyclical nature of the homebuilding
industry and changes in prevailing interest rates and the availability of
mortgage financing, (v) costs or shortages of materials and labor, and (vi)
delays in construction schedules due to strikes, adverse weather conditions,
acts of God or the availability of subcontractors or governmental restrictions.
As a result of such variability, Monterey's historical financial performance may
not be a meaningful indicator of future results.
EXPANSION INTO TUCSON MARKET. Monterey began operations in the Tucson,
Arizona area in April 1996. Such operations are in the early start-up stage and
there is no assurance that such operations will be successful. Since their
inception in June 1995, MHC-II and MHA-II have incurred aggregate losses of
approximately $404,000 through June 30, 1996, due to the incurrence of start up
costs.
INTEREST RATES AND MORTGAGE FINANCING. Monterey believes that its customers
(particularly purchasers of luxury homes) have been somewhat less sensitive to
interest rates than many homebuyers. However, many purchasers of Monterey homes
finance their acquisition through third-party lenders providing mortgage
financing. In general, housing demand is adversely affected by increases in
interest rates and housing costs and the unavailability of mortgage financing.
If mortgage interest rates increase and the ability of prospective buyers to
finance home purchases is consequently adversely affected, Monterey's home
sales, gross margins, and net income may be adversely impacted and such adverse
impact may be material. In any event, Monterey's homebuilding activities are
dependent upon the availability and costs of mortgage financing for buyers of
homes owned by potential customers so those customers ("move-up buyers") can
sell their homes and purchase a home from Monterey. Any limitations or
restrictions on the availability of such financing could adversely affect
Monterey's home sales. Furthermore, changes in federal income tax laws may
affect demand for new homes. From time to time, proposals have been publicly
discussed to limit mortgage interest deductions and to eliminate or limit
tax-free rollover treatment provided under current law where the proceeds of the
sale of a principal residence are reinvested in a new principal residence.
Enactment of such proposals may have an adverse effect on the homebuilding
industry in general, and on demand for Monterey's products in particular. No
prediction can be made whether any such proposals will be enacted and, if
enacted, the particular form such laws would take.
COMPETITION. The homebuilding industry is highly competitive and
fragmented. Homebuilders compete for desirable properties, financing, raw
materials, and skilled labor. Monterey competes for residential home sales with
other developers and individual resales of existing homes. Monterey's
competitors include large homebuilding companies, some of which have greater
financial resources than Monterey, and smaller homebuilders, who may have lower
costs than Monterey. Competition is expected to continue and become more intense
and there may be new entrants in the markets in which Monterey currently
operates. Further, Monterey will face a variety of competitors in other new
markets it may enter in the future.
LACK OF GEOGRAPHIC, LIMITED PRODUCT DIVERSIFICATION. Monterey's operations
are presently localized in the metropolitan Phoenix, Arizona area, particularly
in the upscale city of Scottsdale. Monterey began operations in Tucson, Arizona
in April 1996. Monterey currently operates in two primary market segments: the
semi-custom, luxury market and the move-up buyer market. Failure to be
geographically or economically diversified could have a material adverse impact
on Monterey if the homebuilding market in Arizona should
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decline, because there would not be a balancing opportunity in a healthier
market in other geographic regions or market segments. In this regard, although
housing permits in the Phoenix metropolitan area were at record levels during
the first six months of 1996, recent reports show a slowing in housing demand.
Housing permits in the Tucson metropolitan area have remained relatively flat
from 1995 to 1996. In addition, Monterey's limited product line could have an
adverse impact on Monterey compared to homebuilders who might have a variety of
homes in different price ranges such that the results in one product line could
offset changes in another.
ADDITIONAL FINANCING; LIMITATIONS. The homebuilding industry is capital
intensive and requires significant up-front expenditures to acquire land and
begin development. Accordingly, Monterey incurs substantial indebtedness to
finance its homebuilding activities. At June 30, 1996, Monterey's liabilities
totaled approximately $40,507,000. Monterey may be required to seek additional
capital in the form of equity or debt financing from a variety of potential
sources, including bank financing and/or securities offerings. In addition,
lenders are increasingly requiring developers to invest significant amounts of
equity in a project both in connection with origination of new loans as well as
the extension of existing loans. If Monterey is not successful in obtaining
sufficient capital to fund its planned capital and other expenditures, new
projects planned or begun may be delayed or abandoned. Any such delay or
abandonment could result in a reduction in home sales and may adversely affect
Monterey's future results of operations. There can be no assurance that
additional debt or equity financing will be available in the future or on terms
acceptable to Monterey.
In addition, the amount and types of indebtedness that Monterey can incur
is limited by the terms and conditions of its current indebtedness generally,
and the indenture relating to the Notes in particular (the "Indenture"). The
Indenture contains numerous operating and financial maintenance covenants and
there can be no assurance that Monterey and/or Homeplex after the Merger will be
able to maintain compliance with the financial and other covenants contained in
the Indenture. Failure to comply with such covenants would result in a default
under the Indenture, and resulting cross defaults under Monterey's other
indebtedness, and could result in acceleration of all such indebtedness. Any
such acceleration would have a material adverse affect on Monterey.
GOVERNMENT REGULATIONS; ENVIRONMENTAL CONSIDERATIONS. Monterey is subject
to local, state, and federal statutes and rules regulating certain developmental
matters, as well as building and site design. In addition, Monterey is subject
to various fees and charges of governmental authorities designed to defray the
cost of providing certain governmental services and improvements. Monterey may
be subject to additional costs and delays or may be precluded entirely from
building projects because of "no growth" or "slow growth" initiatives, building
permit allocation ordinances, building moratoriums, or similar government
regulations that could be imposed in the future due to health, safety, welfare,
or environmental concerns. Monterey must also obtain certain licenses, permits,
and approvals from certain government agencies to engage in certain of its
activities, the granting or receipt of which are beyond Monterey's control.
Monterey and its competitors are subject to a variety of local, state, and
federal statutes, ordinances, rules, and regulations concerning the protection
of health and the environment. Environmental laws or permit restrictions may
result in project delays, may cause Monterey to incur substantial compliance and
other costs, and may also prohibit or severely restrict development in certain
environmentally sensitive regions or areas. In addition, environmental
regulations can have an adverse impact on the availability and price of certain
raw materials such as lumber.
PLANNED EXPANSION. Monterey may in the future expand into other areas of
the Southwestern and Western United States. To date, Monterey has had no
operating experience in areas other than its current markets. Operations in new
locations may result in certain operating inefficiencies and higher costs.
Further, Monterey may experience problems with certain matters in new markets
which it has not historically had, such as zoning matters, environmental
matters, other regulations, and higher costs. There can be no assurance that
Monterey can expand into new markets on a profitable basis or that it can
successfully manage its expansion in such new markets, if any.
FUTURE ACQUISITIONS. Monterey may acquire other homebuilding companies to
expand its operations. There is no assurance that Monterey will identify
acquisition candidates that would result in successful
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combinations or that any such acquisitions will be consummated on acceptable
terms. The magnitude, timing and nature of any future acquisitions will depend
on a number of factors, including suitable acquisition candidates, the
negotiation of acceptable terms, Monterey's financial capabilities, and general
economic and business conditions. Any future acquisitions by Monterey may result
in potentially dilutive issuances of equity securities, the incurrence of
additional debt and amortization of expenses related to goodwill and intangible
assets that could adversely affect Monterey's profitability. In addition,
acquisitions involve numerous risks, including difficulties in the assimilation
of operations of the acquired company, the diversion of management's attention
from other business concerns, risks of entering markets in which Monterey has
had no or only limited direct experience and the potential loss of key employees
of the acquired company.
DEPENDENCE ON KEY PERSONNEL. Monterey's success is largely dependent on the
continuing services of certain key persons, including William W. Cleverly and
Steven J. Hilton. It is contemplated that Homeplex will enter into the Monterey
Stockholder Agreements with Mr. Cleverly and Mr. Hilton in connection with the
Merger. However, it is impossible to predict with certainty Homeplex's or
Monterey's ability to retain the services of those persons or to obtain new
personnel required to continue the planned development of Monterey. Monterey
currently has no employment agreements with any of its employees nor "key man"
life insurance with respect to such persons. A loss by Monterey of the services
of Messrs. Cleverly or Hilton, or certain other key persons, could have a
material adverse effect on Monterey.
DEPENDENCE UPON SUBCONTRACTORS. Monterey conducts its business only as a
general contractor in connection with the design, development, and construction
of its communities. Virtually all architectural and construction work is
performed by subcontractors of Monterey. As a consequence, Monterey is dependent
upon the continued availability and satisfactory performance by unaffiliated
third-party subcontractors in designing and building its homes. There is no
assurance that there will be sufficient availability of such subcontractors to
Monterey, and the lack of availability of subcontractors could have a material
adverse effect on Monterey.
RISK FACTORS OF HOMEPLEX
REAL ESTATE LOAN CONSIDERATIONS. As of November 6, 1996, Homeplex's real
estate loan portfolio consisted of one real estate loan with an outstanding
balance of $1,338,000.
Real Estate Market Conditions. Homeplex's real estate loan activities
subject Homeplex to the risks generally incident to the ownership of and
investment in real estate because of the impact of such risks on the ability of
its borrowers' to repay their real estate loans and the ability of Homeplex to
resell, refinance or dispose of property following a foreclosure for an amount
at least equal to its loan. These risks include general and local economic
conditions; the investment climate for real estate investments; the demand for
and supply of competing properties; local market conditions and city
characteristics; unanticipated holding costs; the availability and cost of
necessary utilities and services; real estate tax rates and other operating
expenses; governmental rules and fiscal policies, including rent, wage and price
controls; zoning and other land use regulations; environmental controls; acts of
God (which may result in uninsured losses); the treatment for federal and state
income tax purposes of income derived from real estate, the levels of interest
rates; the availability and cost of financing in connection with the purchase,
sale or refinancing of properties; and other factors beyond the control of
Homeplex. In recent years, the presence of hazardous substances or toxic waste
has adversely affected real estate values in various areas of the country and
resulted in the imposition of costs and damages to real estate owners and
lenders. In addition, certain expenses related to properties, such as property
taxes and insurance, tend to increase over time. These and other factors could
result in an increase in Homeplex's cost of holding any real estate it acquires
as a result of a foreclosure or adversely affect the terms and conditions upon
which Homeplex may sell or refinance any properties held by it. In addition, all
real estate loans, including Homeplex's real estate loans, are subject to loss
resulting from the priority of real estate tax liens, mechanic's liens and
materialmen's liens. Therefore, the success of Homeplex will depend in part upon
events beyond its control.
Competition. Homeplex may encounter significant competition in making or
acquiring real estate loans from banks, insurance companies, savings and loan
associations, mortgage bankers, pension funds, real estate
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investment trusts, investment partnerships, investment bankers and other
investors that have been or may be formed with objectives similar to those of
Homeplex. An increase in the availability of mortgage funds may increase
competition for making and acquiring real estate loans and may reduce the yields
available thereon.
Lack of Geographic Diversification. Through June 30, 1996, Homeplex has
made real estate loans on real estate located only in Arizona. As a result of
this geographic concentration, unfavorable economic conditions in Arizona could
increase the likelihood of defaults of Homeplex's real estate loans and affect
Homeplex's ability to protect the principal of and interest on such loans
following foreclosures upon the real properties securing such loans.
Concentration of Loan Amounts. Homeplex can be expected to make real estate
loans to a relatively small number of borrowers as a result of the amount of its
funds available for lending activities. Therefore, Homeplex may be subject to
increased risk to the extent that a single borrower defaults with respect to a
loan constituting a significant percentage of Homeplex's total real estate loan
portfolio.
Loans Secured by Unimproved Properties. Real estate loans generally are
secured by deeds of trust, mortgages or other similar instruments on unimproved
real property. A real estate loan secured by unimproved real property involves a
particularly high degree of risk since such property generally does not generate
income other than as the result of a sale or refinancing, and the borrower's
loan payments generally will be Homeplex's only source of cash flow on the
property until a sale or refinancing. Accordingly, Homeplex will be subject to a
greater risk of loss in the event of delinquency or default by a borrower on a
real estate loan secured by a deed of trust, mortgage or similar instrument on
unimproved real property than if such real estate loan were secured by a deed of
trust, mortgage or similar instrument on improved real property.
Balloon Payments. Homeplex makes or acquires real estate loans that do not
provide for the payment of all or any part of principal prior to maturity,
including its currently outstanding real estate loan. The ability of a borrower
to repay the outstanding principal amount of such a real estate loan at maturity
will depend primarily upon the borrower's ability to obtain, by refinancing,
sale or other disposition of the property or otherwise, sufficient funds to pay
the outstanding principal balance at a time when such funds may be difficult to
obtain, with the result that the borrower may default on its obligation to repay
the amount of the real estate loan in accordance with the terms of the deed of
trust, mortgage or other security instrument. In addition, a substantial
reduction in the value of the property securing a real estate loan could
precipitate or otherwise result in the borrower's default. Any such default
could result in a loss to Homeplex of all or part of the principal of or
interest on such a real estate loan.
Development and Construction Loans. The development and interim
construction loans which Homeplex may make generally are expected to generate
higher rates of return than other types of real estate loans, but generally will
entail greater risks. Such a loan will be subject to substantial risk because
the ability of the borrower to complete or dispose of the project being
developed or constructed on the underlying real estate and repay the loan may be
affected by various factors including adverse changes in general economic
conditions, interest rates, the availability of permanent mortgage funds, local
conditions, such as excessive building resulting in an excess supply of real
estate, a decrease in employment reducing the demand for real estate in the
area, and the borrower's ability to control costs and to conform to plans,
specifications and time schedules, which will depend upon the borrower's
management and financial capabilities and which may also be affected by strikes,
adverse weather and other conditions beyond the borrower's control. Such
contingencies and adverse factors could deplete the borrower's borrowed funds
and working capital and could result in substantial deficiencies precluding
compliance with specified conditions of commitments for permanent mortgage funds
relied on as a primary source of repayment of the loan. In addition, in some
jurisdictions, construction and development lenders, such as Homeplex, in
certain circumstances, may be liable for defective construction. The possibility
of such liability may be increased if, in addition to its loan, Homeplex is
deemed to have an equity position in the developer or contractor or in the
property being developed or improved. This, however, is not likely to be the
case since Homeplex does not plan to make construction and development loans to
affiliates.
Sufficiency of Collateral. Many of Homeplex's real estate loans are made on
a nonrecourse basis. In such a case, Homeplex relies for its security solely on
the value of the underlying real property and does not have
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any right to make any claims for repayment personally against the borrower.
Other real estate loans may be full recourse loans, may be secured by personal
guarantees or may be secured by one or more items of real or personal property
in addition to the property constituting the primary security for the real
estate loan. Nevertheless, the property constituting the primary security for a
real estate loan in most cases will be the primary source for repayment of the
loan upon maturity or in the event of a default. The ability of the borrower to
pay the outstanding balance of a real estate loan (particularly a non-amortizing
real estate loan) on maturity will depend primarily upon the borrower's ability
to obtain sufficient funds by refinancing, sale or other disposition of the
property.
The risk of a real estate loan increases as the ratio of the amount of the
loan to the value of the property securing such loan increases because the real
property will possess less protective equity in the event of a default by the
borrower. The principal amount of each real estate loan, when added to the
aggregate amount of any senior indebtedness outstanding on the property,
generally will not exceed 95% of Homeplex's assessment of the value of the
property at the time the loan is made or acquired. Homeplex will make an
assessment of the loan-to-value ratio prior to making a real estate loan. In
making its assessment of the value of the real estate to secure a real estate
loan, Homeplex will review any available appraisals of the property by qualified
appraisers, the purchase price of the property, recent sales of comparable
properties, and other factors. Homeplex generally will rely on its own
assessment of the value of a property rather than requiring a current appraisal.
Although appraisals are estimates of value which should not be relied upon as
measures of true worth or realizable value, neither Homeplex nor any of its
officers are qualified real estate appraisers and the absence of an independent
appraisal removes an independent estimate of value. There can be no assurance
that Homeplex's estimated values will be comparable or bear any relation to the
actual market value of a property or the amount that could be realized upon the
refinancing, sale or other disposition of the property. As a result, the amount
realized in connection with the refinancing, sale or other disposition of the
property by the buyer in the ordinary course of business by Homeplex or at or
following a foreclosure sale may not equal the then outstanding balance of the
related real estate loan.
Interest Ceilings Under Usury Statutes. Interest on real estate loans may
be subject to state usury laws imposing maximum interest charges and possible
penalties for violation, including restitution of excess interest and
unenforceability of the debt. Uncertainty may exist in determining what
constitutes interest, including, among other things, the treatment of loan
commitment fees or other fees payable by the borrower under a real estate loan.
Homeplex does not intend to make real estate loans with terms that may violate
applicable state usury provisions. Nevertheless, uncertainties in determining
the legality of rates of interest and other borrowing charges under some
statutes may result in inadvertent violations.
Effect of Interest Rate Fluctuations; Length of Maturity and Prepayment
Provisions. Homeplex's real estate loans generally are fixed-rate debt
instruments of specified maturities, including Homeplex's currently outstanding
real estate loan. The economic value of an investment in Homeplex's shares may
fluctuate to the extent that market rates of interest for similar real estate
loans of similar maturities exceed or fall below Homeplex's anticipated rate of
return on investment on its real estate loans.
Enforceability of Loan Documents. Homeplex has attempted to determine that
the instruments relating to each real estate loan and the underlying real
property are legal, valid, binding and enforceable. However, there can be no
assurance of such enforceability in all instances, and the unenforceability of
any such instruments could result in a complete or partial loss of the principal
of or interest on a real estate loan. Homeplex will have the power to waive
certain fees and penalties in connection with a default or late payments with
respect to a real estate loan should Homeplex be advised that provisions
governing such fees and penalties may not be enforceable.
MORTGAGE ASSET CONSIDERATIONS. As of November 6, 1996, Homeplex's portfolio
of mortgage assets had a balance of approximately $4,100,000. The results of
Homeplex's operations depend, among other things, on the level of net cash flows
generated by Homeplex's mortgage assets. Homeplex's net cash flows vary
primarily as a result of changes in mortgage prepayment rates, short-term
interest rates, reinvestment income and borrowing costs, all of which involve
various risks and uncertainties. Prepayment rates, interest rates, reinvestment
income and borrowing costs depend upon the nature and terms of the mortgage
assets, the
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geographic location of the properties securing the mortgage loans included in or
underlying the mortgage assets, conditions in financial markets, the fiscal and
monetary policies of the United States Government and the Board of Governors of
the Federal Reserve System, international economic and financial conditions,
competition and other factors, none of which can be predicted with any
certainty.
The rates of return to Homeplex on its mortgage assets will be based upon
the levels of prepayments on the mortgage loans included in or underlying such
mortgage instruments, the rates of interest or pass-through rates on such
mortgage securities that bear variable interest or pass-through rates, and rates
of reinvestment income and expenses with respect to such mortgage securities.
Prepayment Risks. Mortgage prepayment rates vary from time to time and may
cause declines in the amount and duration of Homeplex's net cash flows.
Prepayments of fixed-rate mortgage loans included in or underlying mortgage
instruments generally increase when then current mortgage interest rates fall
below the interest rates on the fixed-rate mortgage loans included in or
underlying such mortgage instruments. Conversely, prepayments of such mortgage
loans generally decrease when then current mortgage interest rates exceed the
interest rates on the mortgage loans included in or underlying such mortgage
instruments. Prepayment experience also may be affected by the geographic
location of the mortgage loan included in or underlying mortgage instruments,
the types (whether fixed or adjustable rate) and assumability of such mortgage
loans, conditions in the mortgage loan, housing and financial markets, and
general economic conditions.
In general, without regard to the interest or pass-through rates payable on
classes of a series of mortgage securities, prepayments on mortgage instruments
bearing a net interest rate higher than or equal to the highest interest rate on
the series of mortgage securities secured by or representing interests in such
mortgage instruments ("Premium Mortgage Instruments") will have a negative
impact on the net cash flows of Homeplex because such principal payments
eliminate or reduce the principal balance of the Premium Mortgage Instruments
upon which premium interest was earned.
Net cash flows on mortgage instruments securing or underlying a series of
mortgage securities also tend to decline over the life of such mortgage
securities because the classes of such mortgage securities with earlier stated
maturities or final payment dates tend to have lower interest rates. In
addition, because an important component of the net cash flows on mortgage
instruments securing or underlying a series of mortgage securities derives from
the spread between the weighted average interest rate on such mortgage
instruments and the weighted average interest or pass-through rate on the
outstanding amount of such mortgage securities, a given volume of prepayments
concentrated during the early life of a series of mortgage securities reduces
the weighted average lives of the earlier maturing classes of such mortgage
securities bearing lower interest or pass-through rates. Thus, an early
concentration of prepayments generally has a greater negative impact on the net
cash flows of Homeplex than the same volume of prepayments at a later date.
Mortgage prepayments also shorten the life of the mortgage instruments
securing or underlying mortgage securities, thereby generally reducing overall
net cash flows.
No assurance can be given as to the actual prepayment rate of mortgage loan
included in or underlying the mortgage instruments in which Homeplex has an
interest.
Interest Rate Fluctuation Risks. Changes in interest rates affect the
performance of Homeplex and its mortgage assets. A portion of the mortgage
securities secured by Homeplex's mortgage instruments and a portion of the
mortgage securities with respect to which Homeplex holds mortgage interests bear
variable interest or pass-through rates based on short-term interest rates
(primarily LIBOR). As of June 30, 1996, $33,012,000 of the $319,015,000 of
Homeplex's proportionate share of outstanding mortgage securities associated
with Homeplex's mortgage assets consisted of variable interest rate mortgage
securities. Consequently, changes in short-term interest rates significantly
influence Homeplex's net cash flows.
Increases in short-term interest rates increase the interest cost on
variable rate mortgage securities and, thus, tend to decrease Homeplex's net
cash flows. Conversely, decreases in short-term interest rates decrease the
interest cost on the variable rate mortgage securities and, thus, tend to
increase Homeplex's net cash flows. As stated above, increases in mortgage
interest rates generally tend to increase Homeplex's net cash flows by
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reducing mortgage prepayments, and decreases in mortgage interest rates
generally tend to decrease Homeplex's net cash flows by increasing mortgage
prepayments. Therefore, the negative impact on Homeplex's net cash flows of an
increase in short-term interest rates generally will be offset in whole or in
part by a corresponding decrease in mortgage interest rates. However, although
short-term interest rates and mortgage interest rates normally change in the
same direction and therefore generally offset each other as described above,
they may not change proportionally or may even change in opposite directions
during a given period of time with the result that the adverse effect from an
increase in short-term interest rates may not be offset to a significant extent
by a favorable effect on prepayment experience and visa versa. Thus, the net
effect of changes in short-term and mortgage interest rates may vary
significantly between periods resulting in significant fluctuations in net cash
flows.
Changes in interest rates also affect Homeplex's reinvestment income.
Changes in interest rates after Homeplex acquires mortgage assets can result in
a reduction in the value of such mortgage assets and could result in losses in
the event of a sale.
Homeplex from time to time utilizes hedging techniques to mitigate against
fluctuations in market interest rates. However, no hedging strategy can
completely insulate Homeplex from such risks, and certain of the federal income
tax requirements that Homeplex has been required to satisfy to qualify as a REIT
have severely limited Homeplex's ability to hedge. Even hedging strategies
permitted by the federal income tax laws could result in hedging income which,
if excessive, could result in Homeplex's disqualification as a REIT for failing
to satisfy certain REIT income tests. In addition, hedging involves transaction
costs, and such costs increase dramatically as the period covered by the hedging
protection increases. Therefore, Homeplex may be prevented from effectively
hedging its investments.
No assurances can be given as to the amount or timing of changes in
interest rates or their effect on Homeplex's mortgage assets or income
therefrom.
Inability to Predict Effects of Market Risks. Because none of the above
factors including changes in prepayment rates, interest rates, reinvestment
income, expenses and borrowing costs are susceptible to accurate projection, the
net cash flows generated by Homeplex's mortgage assets cannot be predicted.
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THE ANNUAL MEETING
GENERAL
The Annual Meeting will be held at 8:00 a.m. local time on December 18,
1996 at The Wigwam Resort Hotel, Litchfield Park, Arizona 85340.
PROPOSALS TO BE CONSIDERED AT THE ANNUAL MEETING
THE MERGER AND RELATED TRANSACTIONS
Proposal One -- The Merger and Related Transactions.
At the Annual Meeting, the stockholders will be asked to consider and act
upon a proposal to approve the Merger and the related transactions pursuant to
which, among other things, (a) each of the Monterey Merging Companies will merge
with and into Homeplex, with Homeplex surviving and becoming the parent
corporation of MHC-I and MHA-I, (b) Homeplex will issue up to approximately 4.7
million shares of Homeplex Common Stock to the Monterey Stockholders, and (c)
the Monterey Stockholders will enter into the Monterey Stockholder Agreements
with Homeplex.
As a result of the Merger, Homeplex will be primarily engaged in the
residential single-family homebuilding business and the existing assets of
Homeplex are to be converted into cash over time and reinvested in homebuilding
operations. The existing directors (other than Alan D. Hamberlin) and officers
of Homeplex will resign and pursuant to the Monterey Stockholder Agreements, (a)
the Monterey Stockholders will be the new Co-Chief Executive Officers of
Homeplex, with Mr. Cleverly serving as Chairman and Mr. Hilton serving as
President, (b) each of the Monterey Stockholders will be issued six-year options
for 500,000 shares of Homeplex Common Stock, and (c) the Monterey Stockholders
will be entitled to demand and incidental registration rights.
The Monterey Stockholders will receive a combination of (a) the Exchange
Shares, and (b) up to 800,000 Contingent Shares to be issued if the Homeplex
Common Stock achieves certain average trading price thresholds during a
five-year period following the Merger, provided that such Monterey Stockholder
is employed by Homeplex at the time of issuance. Approximately 16.5% of the
Exchange Shares will be held in escrow and approximately 16.5% of the Contingent
Shares will be reserved for release or issuance upon the exercise of the
Homeplex Warrants. The Contingent Shares will be issued to the Warrantholders
without regard to any trading price or employment contingencies. Cash may be
paid in lieu of a limited number of Exchange Shares, subject to substantial
restrictions. As a consequence of the Merger, the Monterey Stockholders and the
Warrantholders will own approximately 29% of Homeplex Common Stock outstanding
immediately following the Merger, and approximately 33% if all Contingent Shares
are issued. See "The Merger and Related Transactions -- Merger Consideration."
Since its inception, Homeplex has elected to be taxed as a REIT under the
Code. Accordingly, Homeplex generally is not subject to tax on its income to the
extent it distributes its earnings to stockholders and maintains its
qualification as a REIT. After the Merger, Homeplex will revoke its election to
be a REIT either because it will no longer be able to satisfy REIT tests with
respect to the nature of its income, assets, share ownership and the amount of
its distributions, among other things, or because it will be subject to a
penalty tax if it does satisfy such tests. See "The Merger and Related
Transactions -- Termination of REIT Status."
THE BOARD OF DIRECTORS RECOMMENDS THAT HOMEPLEX STOCKHOLDERS VOTE FOR
APPROVAL OF THE MERGER AND RELATED TRANSACTIONS.
Proposal Two -- Charter Amendment.
At the Annual Meeting, the stockholders will be asked to approve the
Charter Amendment which will amend Homeplex's Articles of Incorporation to (a)
change the name of Homeplex to "Monterey Homes Corporation," (b) reclassify and
change each share of Homeplex Common Stock issued and outstanding into
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one-third of a share of Homeplex Common Stock, (c) amend and make more strict
the restrictions on the transfer of Homeplex Common Stock to preserve the NOL
Carryforward, and (d) provide for a classified Board of Directors consisting of
the Class I and Class II Directors. See "The Merger and Related
Transactions -- Charter Amendment."
THE BOARD OF DIRECTORS RECOMMENDS THAT HOMEPLEX STOCKHOLDERS VOTE FOR THE
CHARTER AMENDMENT.
Proposal Three -- Election of Directors.
At the Annual Meeting, the stockholders will be asked to elect (a) the
Nominees to a five-member classified Board of Directors to serve upon
consummation of the Merger, to hold office until the end of their respective
terms and until their successors are elected, and (b) a five-member
non-classified Board of Directors to serve until the Merger is consummated, or
if the Merger does not close for any reason, to serve until the next annual
meeting and until their successors are elected. The term of the current Board of
Directors will expire at the Annual Meeting. The election of directors will be
decided by a plurality vote of the votes cast.
Pursuant to the authority granted in Homeplex's Articles of Incorporation
and Bylaws, the Board of Directors has determined that five directors be elected
to serve on each Board of Directors. The Board of Directors has nominated for
election as directors the persons identified at "Election of Board of
Directors -- Nominees for the Board of Directors." If for any reason any Nominee
ceases to serve as a director of Homeplex at any time prior to the first
anniversary of the Effective Date, the vacancy will be filled by a person
selected by the remaining Nominees then serving as directors; provided, however,
if either Monterey Stockholder ceases to serve, the vacancy will be filled by a
person selected by the remaining Monterey Stockholder. If, by reason of death or
other unexpected occurrence, any one or more of the nominees should for any
reason become unavailable for election, the persons named as proxies in the
accompanying form of proxy may vote for the election of such substitute
nominees, and for such term or terms, as the Board of Directors may propose.
THE BOARD OF DIRECTORS RECOMMENDS THAT HOMEPLEX STOCKHOLDERS VOTE FOR EACH
OF THE NOMINEES FOR THE BOARD OF DIRECTORS.
IN ORDER FOR THE MERGER TO BE CONSUMMATED, THE APPROVAL OF THE MERGER AND
RELATED TRANSACTIONS AND THE CHARTER AMENDMENT IS REQUIRED, AS WELL AS THE
ELECTION OF ALL OF THE NOMINEES TO THE CLASSIFIED BOARD OF DIRECTORS TO HOLD
OFFICE UPON THE EFFECTIVENESS OF THE MERGER. SUCH ITEMS OF BUSINESS WILL NOT BE
DEEMED APPROVED UNLESS ALL ARE APPROVED.
OTHER PROPOSALS TO BE PRESENTED
Proposal Four -- Hamberlin Stock Options.
At the Annual Meeting, the stockholders will be asked to approve the
Hamberlin Stock Options which were granted to Alan D. Hamberlin (subject to
stockholder approval) in connection with the Hamberlin Employment Agreement. If
approved, options covering 500,000 shares will be exercisable. If the Hamberlin
Stock Options are not approved at the Annual Meeting, the Hamberlin Stock
Options will terminate and the Hamberlin PSRs conditionally granted to Mr.
Hamberlin simultaneously with the Hamberlin Stock Options will become effective,
which entitles Mr. Hamberlin to a cash payment in an amount per share equal to
the excess of the fair market value of Homeplex Common Stock on the date of
exercise over $1.50. The main economic difference to Homeplex is that upon
exercise the Hamberlin PSRs will require a cash payment to Mr. Hamberlin in an
amount per share equal to the excess of the fair market value of Homeplex Common
Stock on the date of exercise over $1.50, whereas the Hamberlin Stock Options
will require only the issuance of stock. In addition, if the Hamberlin PSRs
become effective, they will have a material adverse effect on the quarterly
earnings of Homeplex if the trading price of Homeplex Common Stock remains
substantially above $1.50 because on the date of effectiveness, the excess of
the fair market value of Homeplex Common Stock
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over $1.50 will be required to be charged to Homeplex's earnings, with
additional future charges required if the trading price continues to increase.
See "Selected Financial Data -- Unaudited Pro Forma Condensed Combined Financial
Data."
THE BOARD OF DIRECTORS RECOMMENDS THAT HOMEPLEX STOCKHOLDERS VOTE FOR THE
HAMBERLIN STOCK OPTIONS.
Proposal Five -- Stock Option Extension.
At the Annual Meeting, the stockholders will be asked to approve the Stock
Option Extension. The Board of Directors believes that although the members of
the Board of Directors and the officers of Homeplex will resign to facilitate
the Merger, the Board of Directors believes that it is fair to extend the
exercise period in light of their past service to Homeplex. Under the existing
stock option plan, the Stock Option Extension requires stockholder approval. See
"Homeplex Management -- Stock Option Plan."
THE BOARD OF DIRECTORS RECOMMENDS THAT HOMEPLEX STOCKHOLDERS VOTE FOR THE
STOCK OPTION EXTENSION.
RECORD DATE; VOTING AT THE MEETING; VOTE REQUIRED
Only holders of record of Homeplex Common Stock on November 6, 1996 (the
"Record Date") are entitled to notice of, and to vote at the Annual Meeting. On
the Record Date, Homeplex had outstanding 9,716,517 shares of Homeplex Common
Stock which were held by approximately 700 stockholders of record. Based on
information available to Homeplex, Homeplex believes that there are
approximately 6,000 beneficial owners of Homeplex Common Stock.
Each holder of Homeplex Common Stock will be entitled to one vote, in
person or by proxy, for each share standing in his or her name on the books of
Homeplex on the Record Date on any matter submitted to a vote of the Homeplex
stockholders. The presence, in person or by proxy, of holders of a majority of
the shares entitled to vote constitutes a quorum for action at the Annual
Meeting.
Except for Proposals One and Two, which requires the affirmative vote of a
majority of the Homeplex Common Stock outstanding, and Proposal Five, which
requires each director nominee to receive a plurality of votes cast, approval of
each of the other proposals requires the affirmative vote of the holders of at
least a majority of the shares of Homeplex Common Stock present, in person or by
proxy, at the Annual Meeting, provided a quorum is present at the Annual
Meeting. Abstentions and broker nonvotes are counted for purposes of determining
the presence or absence of a quorum for transaction of business. Abstentions are
counted in tabulations of the votes cast on proposals presented to stockholders
to determine total number of votes cast. Abstentions are counted as votes
against the Merger and the Charter Agreement; provided, however, they are not
counted as votes for or against any other proposal. Broker nonvotes are not
counted as votes cast for purposes of determining whether a proposal has been
approved.
REVOCABILITY OF PROXIES
A Proxy for use at the Annual Meeting is enclosed with this Proxy
Statement/Prospectus. A Homeplex stockholder executing and returning a Proxy may
revoke it at any time before the vote is taken by filing with the Secretary of
Homeplex at 5333 North Seventh Street, Suite 219, Phoenix, Arizona 85014, a
written revocation of the Proxy or a duly executed Proxy bearing a later date
than the Proxy being revoked, or such stockholder may revoke the Proxy in person
at the Annual Meeting at any time before the vote is taken by electing to vote
at such meeting. All shares represented by a properly executed Proxy, unless
such Proxy previously has been revoked, will be voted in accordance with the
directions on such Proxy. If no directions are given to the contrary on such
Proxy, the shares of Homeplex Common Stock represented by such Proxy will be
voted FOR approval of all proposals addressed at the Annual Meeting. It is not
anticipated that any matters will be presented at the Annual Meeting other than
as set forth in the notice of the Annual Meeting. If,
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however, other matters are properly presented at the Annual Meeting, the Proxy
will be voted in accordance with the best judgment and discretion of the Proxy
holders.
SOLICITATION OF PROXIES
The expense of preparing, printing and mailing this Proxy
Statement/Prospectus and the material used in this solicitation of Proxies will
be borne by Homeplex. It is contemplated that Homeplex Proxies will be solicited
through the mail, but officers, directors and employees of Homeplex may solicit
Proxies personally for the Annual Meeting. Homeplex will reimburse banks,
brokerage houses and other custodians, nominees and fiduciaries for their
reasonable expenses in forwarding these proxy materials to the principals.
Homeplex has engaged D.F. King & Co. to represent it in connection with the
solicitation of proxies at a cost of approximately $15,000 plus expenses. In
addition, Homeplex may pay for and utilize the services of individuals or
companies employed by Homeplex in connection with the solicitation of Proxies
for its meeting if the Board of Directors determines that this is advisable.
OBJECTING STOCKHOLDERS' RIGHTS
Maryland law does not require that the holders of Homeplex Common Stock be
afforded any appraisal rights or the right to receive cash for their shares of
Homeplex Common Stock in connection with, or as a result of, the matters to be
acted upon at the Annual Meeting. Homeplex does not intend to make available any
such rights to its respective stockholders.
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THE MERGER AND RELATED TRANSACTIONS
BACKGROUND OF THE MERGER
For the first five years after Homeplex was formed in 1988, it primarily
invested in residual interests in collateralized mortgage obligations. In late
1993, after incurring substantial losses on its portfolio of residual interests
as a result of adverse trends in interest rates, Homeplex changed its focus to
originating first lien real estate loans, primarily higher risk land and interim
multi-family construction loans than those being made by traditional real estate
lenders. At the same time as Homeplex was starting up and expanding its real
estate lending operations, the Board of Directors also authorized management to
explore acquisition opportunities or other alternatives which might allow
Homeplex and its shareholders to best utilize Homeplex's highly liquid capital
base, NOL Carryforward and public listing. During the second half of 1994,
Homeplex engaged in extensive discussions and negotiations with respect to the
acquisition of American Southwest Financial Corporation ("American Southwest"),
which was primarily engaged in bond administration and other service businesses
related to the collateralized mortgage obligation industry. On November 28,
1994, Homeplex announced that it was in negotiations to acquire American
Southwest. In connection with the American Southwest negotiations, the Board of
Directors retained Rauscher Pierce Refsnes, Inc. ("RPR") to advise them as to
the financial fairness of any potential transaction with American Southwest and
retained Hughes & Luce, L.L.P. ("H&L") as legal counsel. In January 1995,
negotiations with American Southwest slowed due to certain tax consequences to
American Southwest stockholders and on February 10, 1995, Homeplex announced
that those negotiations were terminated.
In March 1995, Mr. Hamberlin advised the Board of Directors that he
believed Homeplex should adopt a strategic plan to acquire one or more operating
companies, which might include one or more homebuilding operations, and the
Board of Directors authorized management to pursue that strategy. In March and
June 1995, Homeplex management pursued and engaged in discussions and
preliminary negotiations with several homebuilders in Arizona and Southern
Nevada. In July 1995, Homeplex entered into an engagement agreement with Michael
P. Kahn & Associates, Ltd. to identify and contact prospective acquisition
candidates in the homebuilding business. Approximately 30 homebuilders were
contacted over the next several months, including Monterey, and by September
1995 the Board of Directors had narrowed its focus to five possible candidates,
including Monterey. Management had preliminary discussions with several
candidates during the second half of 1995 and early 1996. In April 1996,
representatives of Homeplex and Monterey exchanged financial information and
preliminary proposals for a transaction. In early May 1996, Homeplex management
advised the Board of Directors as to the status of discussions with Monterey and
the terms of a potential acquisition transaction and Homeplex again retained RPR
and H&L as financial and legal advisors, respectively. In those discussions,
Homeplex management proposed that the consideration for Monterey should be based
primarily on book value and that the Monterey Stockholders should have
additional equity incentives in the form of stock options covering shares of
Homeplex Common Stock with an exercise price of $1.75, which was in excess of
then current trading prices for Homeplex Common Stock. At a telephone Board of
Directors meeting on May 8, 1996, the Board of Directors authorized management
and its legal advisors to prepare and submit a letter of intent to Monterey for
the proposed acquisition. Homeplex and Monterey proceeded to negotiate and sign
a letter of intent in late May 1996, and in early June 1996, Homeplex announced
that it had entered into a letter of intent with respect to the acquisition of
Monterey providing for the acquisition of Monterey for (i) approximately 3.6
million shares of Homeplex Common Stock (assuming Monterey would have a closing
book value of $2,275,000), (ii) the issuance of five-year stock options to
acquire 1.2 million shares of Homeplex Common Stock at $1.75 per share, and
(iii) six-year stock options to acquire an additional 1 million shares of $1.75
per share.
During June, July and August 1996, representatives of Homeplex and Monterey
exchanged drafts of the definitive agreements relating to the Merger. At
meetings held on July 1, 1996 and August 12, 1996, representatives of Homeplex
and Monterey and their legal advisors negotiated the principal terms of the
definitive agreements. In those negotiations, the parties agreed to provide for
the issuance of the 800,000 Contingent Shares in lieu of the 1.2 million stock
options. In addition, the parties agreed that since the letter of intent had
assumed a closing around September 30, 1996 and the draft definitive agreements
now assumed a closing around December 31, 1996, Monterey would have a closing
book value of $2.5 million rather than
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$2,275,000 and Homeplex would be issuing approximately 3.9 million shares in the
Merger (plus the 800,000 Contingent Shares).
During August 1996, Monterey solicited the consents of the holders of the
Notes and the Warrantholders and arranged its bank financing in connection with
the Distributions and the Merger.
On September 5, 1996, the Board of Directors met to consider the Merger and
the related agreements. At such meeting, the Board of Directors reviewed the
Merger, the Merger Agreement, the Charter Amendment and the Monterey Stockholder
Agreements with Homeplex's management and financial and legal advisors. RPR made
a presentation at such meeting, including an overview of the Merger, a summary
of the material financial terms and summaries of the operating performance and
financial condition of Homeplex and Monterey. After reviewing the matters
covered in such presentation and after considering the matters set forth below
under "Board of Directors' Recommendation for the Merger" and "Opinion of
Financial Advisor to Homeplex," the Board of Directors unanimously approved the
Merger and the related transactions, authorized management to finalize the
definitive agreements and determined to submit the Merger and the related
transactions for the approval of the Homeplex stockholders. In mid-September
1996, representatives of Homeplex and Monterey finalized the terms of the
definitive agreements with respect to the Merger.
The Merger Agreement was signed on September 13, 1996.
REASONS FOR THE MERGER
Homeplex is pursuing the Merger to redeploy its assets in the homebuilding
industry through the acquisition of an established homebuilder with experienced
management. The Merger represents the result of Homeplex's two-year strategy of
acquiring an operating company. The Monterey Stockholders are pursuing the
Merger to (i) afford Monterey access to existing cash balances of Homeplex, (ii)
enhance the liquidity of the stock of Monterey, (iii) facilitate Monterey's
access to the capital markets, and (iv) make available to it the NOL
Carryforward.
BOARD OF DIRECTORS' RECOMMENDATION FOR THE MERGER
The Board of Directors has unanimously determined that the terms of the
Merger Agreement, and the Merger and related transactions are fair to, and in
the best interests of, Homeplex and its stockholders. In reaching its
conclusion, the Board of Directors considered, among other things: (i) the
judgment, advice and analyses of its management, (ii) the judgment and advice
of, and the analyses prepared by RPR, (iii) the financial condition, results of
operations and cash flows of Homeplex and Monterey, both on an historical and a
prospective basis, (iv) its evaluation of the outlook and prospects for Homeplex
as a real estate lender and the strategic opportunities in the homebuilding
industry in Arizona, (v) the experience and reputation of the management of
Monterey, (vi) its experience over the past two years in seeking operating
companies to acquire, (vii) the express terms and conditions of the Merger
Agreement and the Monterey Stockholder Agreements, (viii) historical market
prices and trading information with respect to Homeplex Common Stock, and (ix)
that a liquidation of Homeplex could involve significant risks and delays, would
likely result in per share proceeds below the trading price of Homeplex Common
Stock and would not allow the stockholders of Homeplex to have the opportunity
to receive any benefit from the future value of the NOL Carryforward or the
public listing of Homeplex. The Board of Directors also considered that since
the announcement of the letter of intent in June 1996 to the execution of the
Merger Agreement in September 1996, no alternative offers or proposals were
received. Finally, the Board of Directors noted that any fees payable under the
conditions set forth under "'The Merger and Related Transactions -- Merger
Agreement -- Fees and Expenses" should not unreasonably deter any competing
transaction.
The foregoing discussion of the information and factors considered and
given weight by the Board of Directors is not intended to be exhaustive. In view
of the variety of factors considered in connection with its evaluation of the
Merger, the Board of Directors did not find it practicable to and did not
quantify or otherwise assign relative weights to the specific factors considered
in reaching its determination. In addition, individual members of the Board of
Directors may have given different weights to different factors.
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All members of the Board of Directors were present at the meeting held on
September 5, 1996, and they unanimously approved the Merger and the related
transactions and recommended that the holders of Homeplex Common Stock vote FOR
adoption and approval of the Merger and related transactions.
OPINION OF FINANCIAL ADVISOR TO HOMEPLEX
In its role as financial advisor to Homeplex, RPR was asked by Homeplex to
render its opinion to the Board of Directors as to the fairness from a financial
point of view to its stockholders of the consideration to be paid by Homeplex to
the Monterey Stockholders pursuant to the Merger Agreement.
Homeplex selected RPR on the basis of RPR's general reputation as a
nationally recognized investment banking firm with experience in evaluation of
businesses and their securities in connection with mergers and other business
combinations, and with experience in providing service to REITs in particular.
As part of RPR's investment banking business, RPR is continually engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements, and valuations for estate, corporate
and other purposes.
On October 4, 1996, RPR issued to the Board of Directors its written
opinion confirming its prior oral advice rendered at the Board of Directors
Meeting held on September 5, 1996 that the consideration to be paid by Homeplex
to the Monterey Stockholders pursuant to the Merger Agreement is fair to the
Homeplex stockholders from a financial point of view. On November 6, 1996, RPR
issued its written opinion (the "RPR Opinion") reaffirming its October 4, 1996
opinion.
A COPY OF THE RPR OPINION IS ATTACHED HERETO AS APPENDIX E. STOCKHOLDERS
ARE URGED TO READ THE OPINION IN ITS ENTIRETY FOR ASSUMPTIONS MADE, PROCEDURES
FOLLOWED, OTHER MATTERS CONSIDERED AND LIMITS OF THE REVIEW OF RPR. THE SUMMARY
OF THE OPINION OF RPR SET FORTH IN THIS PROXY STATEMENT/PROSPECTUS IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION. THE RPR OPINION
WAS PREPARED FOR THE BOARD OF DIRECTORS AND IS DIRECTED ONLY TO THE FAIRNESS AS
OF OCTOBER 4, 1996, FROM A FINANCIAL POINT OF VIEW, OF THE MERGER CONSIDERATION
TO BE PAID BY HOMEPLEX TO THE MONTEREY STOCKHOLDERS PURSUANT TO THE MERGER
AGREEMENT AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW
TO VOTE AT THE ANNUAL MEETING.
The RPR Opinion does not constitute an opinion as to the price at which
Homeplex Common Stock will actually trade at any time. No restrictions or
limitations were imposed by the Board of Directors upon RPR with respect to the
investigations made or the procedures followed by RPR in rendering its opinion.
In arriving at its opinion, RPR (i) reviewed the Merger Agreement (and the
related exhibits) and the final draft of this Proxy Statement/Prospectus; (ii)
reviewed the Annual Reports to Stockholders for the four years ended December
31, 1994, Annual Reports on Form 10-K for the five years ended December 31, 1995
and interim Reports to Stockholders and Quarterly Reports on Form 10-Q for the
six months ended June 30, 1995 and 1996 of Homeplex; (iii) reviewed the audited
financial statements for the three years ended December 31, 1995 and the
unaudited interim financial statements for the six months ended June 30, 1995
and 1996 of Monterey; (iv) discussed with certain members of senior management
of Monterey the past and current business operations, financial condition and
future prospects of Monterey; (v) reviewed certain internal financial analyses
and forecasts of Homeplex and Monterey prepared by respective managements; (vi)
reviewed historical market prices and trading volumes for Homeplex Common Stock;
(vii) visited certain of Monterey's properties; (viii) compared certain
financial information for Monterey with similar information for certain other
companies the securities of which are publicly traded; and (ix) reviewed
selected financial terms of certain recent business combinations. RPR also
considered such other information as it deemed appropriate under the
circumstances.
In connection with its review and the presentation of its written opinion,
RPR relied upon and assumed the accuracy and completeness of the financial and
other information publicly available or furnished to RPR
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by Homeplex and Monterey or their representatives. RPR did not independently
verify the accuracy or completeness of such information. RPR did not make or
obtain any independent evaluations or appraisals of any of the properties,
assets or facilities of Homeplex or Monterey. With respect to Monterey's
financial projections, RPR assumed that they were reasonably prepared on a basis
reflecting the best currently available estimates and judgments of Monterey's
management as to the future financial performance of Monterey, and RPR did not
express an opinion with respect to such forecasts or the assumptions on which
they were based.
The following is a summary of the analyses that RPR utilized in arriving at
its opinion as to the fairness of the consideration to be paid to the Monterey
Stockholders pursuant to the Merger Agreement from a financial point of view to
the stockholders of Homeplex, and that RPR discussed with the Board of Directors
at its September 5, 1996 meeting.
For purposes of its opinion as to the fairness of the consideration to be
paid to the Monterey Stockholders by Homeplex in connection with Merger from a
financial point of view, RPR employed four principal valuation methodologies:
(i) a publicly traded comparable company analysis; (ii) a discounted cash flow
analysis; (iii) a relative contribution analysis; and (iv) a merger and
acquisition transaction analysis. RPR drew no specific conclusion from any one
of these valuation methodologies, but subjectively factored its observations
from each analysis into its qualitative assessment of the relevant facts and
circumstances. The methodologies used by RPR as described to the Board of
Directors at its September 5, 1996 meeting, are prescribed below.
PUBLICLY TRADED COMPARABLE COMPANY ANALYSIS. RPR reviewed the financial,
operating and market performance of the following group of 18 homebuilding
companies with that of Monterey: Beazer Homes USA, Inc., Borror Corporation, C.
Brewer Homes, Inc., Continental Homes Holding Corp., Crossman Communities, Inc.,
D.R. Horton, Inc., Inco Homes Corporation, Lennar Corporation, M.D.C. Holdings,
Inc., Oriole Homes Corp., The Presley Companies, The Rottlund Company, Inc., M/I
Schottenstein, Inc., Schuler Homes, Inc., Sundance Homes, Inc., Toll Brothers,
Inc., Washington Homes, Inc., and Zaring Homes, Inc. The publicly traded
comparable company group (the "Comparable Group") was selected from a broader
universe of homebuilding companies which consisted of approximately twenty-six
such homebuilding companies. RPR examined certain publicly available information
for the Comparable Group, including, but not limited to, latest twelve months
("LTM") revenues, earnings before interest and taxes ("EBIT"), pretax income,
net income, earnings per share, market capitalization (the market value of a
company's common stock), net debt (total debt less cash and marketable
securities) and the market value of capitalization (market capitalization plus
net debt and preferred stock). RPR also examined and compared various market
data, including (i) various trading multiples such as market value of
capitalization to revenues and EBIT; (ii) market value of common stock to pretax
income; and (iii) stock price per share to earnings per share and book value per
share.
RPR estimated the Merger Consideration would consist of approximately
3,947,000 Exchange Shares and 800,000 Contingent Shares for a total of
approximately 4,747,000 shares of Homeplex Common Stock on the Effective Date.
Based on the total possible shares of Homeplex Common Stock to be issued in
connection with the Merger (Exchange Shares and Contingent Shares) the total
Merger Consideration was estimated at $8.9 million, which equals 4,747,000
shares times $1 7/8 per share, the closing sale price of Homeplex Common Stock
on the day prior to the first public announcement with respect to the Merger.
The Comparable Group's market value of capitalization to LTM revenues
multiples ranged from 0.3x to 5.2x (with a median of 0.7x) and was 0.6x for
Monterey based on the estimated Merger Consideration. The Comparable Group's
market value of capitalization to LTM EBIT multiples ranged from 6.0x to 12.0x
(with a median of 6.9x) and was 5.8x for Monterey based on the estimated Merger
Consideration. The Comparable Group's market value of common stock to LTM pretax
income multiples ranged from 3.3x to 8.0x (with a median of 5.5x) and was 1.6x
for Monterey based on the estimated Merger Consideration. The Comparable Group's
stock price per share to LTM earnings per share multiples ranged from 6.5x to
12.2x (with a median of 8.1x) and was 2.7x for Monterey based on the estimated
Merger Consideration. The Comparable Group's stock price per share to book value
per share multiples ranged from 0.4x to 2.4x (with a median of 1.0x) and
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was 3.6x for Monterey based on the estimated Merger Consideration and after
adjusting Monterey's book value to $2.5 million as a result of the
Distributions.
DISCOUNTED CASH FLOW ANALYSIS. Using a discounted cash flow analysis, RPR
estimated the present value of the future cash flows that the combined companies
could be expected to produce over a five-year period from 1996 through 2000
under various assumptions and in accordance with Homeplex's management
projections over the five-year period ended 2000 and Monterey's management
projections for 1996 and 1997 and based on certain assumptions thereafter. RPR
determined the value for the combined company's common stock by adding (i) the
present value (using discount rates ranging from 10.0% to 13.0%) of the
five-year unleveraged free cash flows of the combined companies and (ii) the
present value of the combined company's year 2000 estimated terminal value, and
subtracting (iii) the combined total debt outstanding (including debt to be
incurred to fund the Distributions to the Monterey Stockholders) net of cash and
cash equivalents. The terminal values were estimated by multiplying the year
2000's projected unleveraged, tax affected (at a 42% average tax rate) net
income of Monterey by a range of multiples derived from the Comparable Group, as
contained in the Publicly Traded Comparable Company Analysis (ranging from 7.0x
to 10.0x the year 2000's unleveraged net income) plus Homeplex's estimated cash
position at December 31, 2000. This analysis produced implied values for the
combined company's common stock ranging from $2.74 per share to $3.59 per share
(with a median of $3.15 per share).
RELATIVE CONTRIBUTION ANALYSIS. RPR reviewed certain balance sheet and
income statement data for Monterey and Homeplex. RPR noted that as of June 30,
1996 on an as reported basis Monterey had $48.5 million in total assets compared
to $19.8 million for Homeplex. Monterey had $40.5 million and $2.5 million (pro
forma to adjust for the Distributions) in total liabilities and stockholders'
equity, respectively, while Homeplex had $1.1 million and $18.7 million,
respectively.
For the year ended December 31, 1995 and the six months ended June 30,
1996, Monterey reported total revenues of $71.5 million and $32.4 million
compared to $3.6 million and $1.3 million for Homeplex. For the same periods
Monterey reported net income of $6.4 million and $2.0 million compared to $1.1
million and $232,000 for Homeplex. This comparison was contrasted to the pro
forma, fully diluted post Merger ownership analysis of Homeplex which indicated
that the Monterey Stockholders and Warrantholders would own approximately 34.5%
of Homeplex immediately after the Merger.
COMPARABLE MERGER AND ACQUISITION TRANSACTION ANALYSIS. RPR reviewed
selected financial terms of certain recent business combinations. RPR noted
that, after reasonable investigation, no financial terms of business
combinations in the homebuilding industry were publicly available. Accordingly,
RPR reviewed a broader sample of merger and acquisition transactions. RPR noted
that the median P/E multiple (acquisition price to net income) paid in a broad
selection of public company merger and acquisition transactions over the period
from 1985 to 1995 ranged from a low of 15.9x to a high of 24.3x and during the
same time period the median P/E paid in private company merger and acquisition
transactions ranged from a low of 8.5x to a high of 22.0x. This compares
favorably to the pro forma P/E ratio of 2.7x to be paid to the Monterey
Stockholders based on the estimated Merger Consideration.
OTHER FACTORS CONSIDERED. RPR reviewed recent trends in the price per share
of Homeplex Common Stock and noted that on May 31, 1996, the day prior to the
public announcement of the proposed Merger, Homeplex Common Stock last trading
price on the NYSE was $1 7/8 per share. Further, during the period from January
1, 1996 to May 31, 1996, Homeplex Common Stock traded in a range from $1 3/8 per
share to $2 1/8 per share and during the three year period ending December 31,
1995 Homeplex Common Stock traded in a range from $1 3/16 per share to $2 5/8
per share. This was compared to the Homeplex Common Stock price at October 3,
1996 of $2 5/8 per share.
In arriving at its written opinion dated October 4, 1996 and in discussing
its opinion with the Board of Directors, RPR performed certain financial
analyses, portions of which are summarized above. The summary set forth above is
not a complete description of RPR's analyses. RPR believes that its analyses
must be considered as a whole and that selecting portions of its analyses could
create an incomplete view of the process underlying its opinion. In addition,
RPR may have given various analyses more or less weight than other analyses and
may have deemed some assumptions more or less probable than other assumptions,
so that the
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ranges of valuations resulting from any particular analysis described above
should not be taken to be RPR's view of the actual value of Monterey, Homeplex
or the combined companies.
The preparation of a fairness opinion is a complex process involving
subjective judgments and is not necessarily susceptible to partial analysis or
summary description. No company or transaction used in the Publicly Traded
Comparable Company Analysis or the Comparable Merger and Acquisition Transaction
Analysis summarized above is identical to Monterey or Homeplex or the
transaction. Accordingly, any such analysis of the value of the consideration
paid to the Monterey Stockholders involves complex considerations and judgments
concerning differences in the potential financial and operating characteristics
of the comparable companies, as well as other factors relating to the trading
and the acquisition values of the comparable companies. These and other
limitations may detract from the usefulness of Comparable Group's publicly
traded multiples or other valuation methodologies.
In performing its analyses, RPR considered numerous assumptions with
respect to industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
Homeplex and all of which are beyond the control of RPR. The results of the
analyses performed by RPR are not necessarily indicative of actual values, which
may be significantly more or less favorable than suggested by such analyses. The
analyses described above were prepared solely as part of Homeplex's analysis of
the fairness of the consideration to the Monterey Stockholders. The analyses do
not purport to be appraisals or to reflect the prices at which Monterey or the
combined company might actually trade or the actual trading value of Homeplex's
securities.
The RPR Opinion is necessarily based on economic, market, financial and
other conditions as they existed on, and on the information made available to
RPR as of October 4, 1996. It should be understood that, although subsequent
developments may affect its opinion, RPR does not have any obligation to update,
revise or reaffirm its opinion.
RPR, as part of its investment banking services, is regularly engaged in
the valuation of businesses and securities in connection with mergers,
acquisitions, underwritings, sales and distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes. In the ordinary course of its business, RPR may actively trade the
equity securities of Homeplex for its own account and for the account of its
customers and may at any time hold a long or short position in such securities.
For its services as financial advisor, RPR received an aggregate fee of
$80,000 of which $25,000 was paid at the commencement of its engagement and
$25,000 became payable upon the initial delivery of the RPR Opinion. The balance
is due at the closing, except that Homeplex will be entitled to credit $25,000
of fees previously paid to RPR in connection with prior work done by RPR against
the final $30,000 installment. Additionally, Homeplex has agreed to reimburse
RPR for its reasonable out-of-pocket expenses. RPR was retained by Homeplex in
connection with negotiations between Homeplex and American Southwest and
received $80,000 in fees as well as the reimbursement of its out-of-pocket
expenses in connection with such engagement.
DESCRIPTION OF THE MERGER
It is contemplated that pursuant to the Merger and related transactions,
the Monterey Merging Companies will be combined with Homeplex. Prior to the
Merger, MHC-II will form MHC-I into which it will contribute all of its assets,
liabilities and obligations, and MHA-II will form MHA-I into which it will
contribute all of its assets, liabilities and obligations. MHC-II and MHA-II
will then merge with and into Homeplex, with Homeplex surviving and becoming the
parent corporation of MHC-I and MHA-I. MHC-I will continue the land purchase and
construction activities currently undertaken by MHC-II, and MHA-I will continue
the marketing and sales activities currently undertaken by MHA-II. As a result
of the Merger, Homeplex will be primarily engaged in the residential
single-family homebuilding business and the existing assets of Homeplex are to
be converted into cash over time and reinvested in homebuilding operations. Upon
consummation of the Merger, Homeplex will change its name to "Monterey Homes
Corporation."
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MERGER CONSIDERATION
The following discussion does not give effect to the proposed one-for-three
reverse stock split of the Homeplex Common Stock. In the event the proposed
one-for-three reverse stock split is effected, all per share calculations used
to calculate the Merger Consideration shall be proportionately adjusted, as
nearly as practicable.
EXCHANGE SHARES. As consideration for the Merger, the Monterey Stockholders
will receive a number of shares of Exchange Shares equal to (i) the aggregate
book value of MHC-II and MHA-II on the Effective Date ($2.5 million) determined
in accordance with generally accepted accounting principles ("GAAP") consistent
with the historical combined financial statements of Monterey, but reflecting
adjustments for certain costs and reserves agreed to by the parties prior to the
date of the Merger Agreement, multiplied by (ii) a factor of 3.0, and divided by
(iii) the fully diluted book value (after giving effect to any outstanding stock
options, whether vested or not, which dilute book value and after consideration
of any amounts accrued for the related dividend equivalent rights) per share of
Homeplex Common Stock on the Effective Date, determined in accordance with GAAP
consistent with the historical consolidated financial statements of Homeplex. In
the event that the aggregate book value of the Monterey Merging Companies is
less than $2.5 million, the Monterey Stockholders shall contribute cash to the
Monterey Merging Companies immediately prior to the Effective Date in the amount
of such shortfall, and if such aggregate book value shall be more than $2.5
million, the Monterey Merging Companies shall distribute such excess in cash to
the Monterey Stockholders immediately prior to the Effective Date. Cash may be
paid to the Monterey Stockholders in lieu of the Exchange Shares to the extent
believed necessary to preserve the NOL Carryforward, capital loss carryovers,
and built-in losses of Homeplex under the Code up to an amount of cash equal to
the fully diluted book value of 200,000 shares of Homeplex Common Stock as of
the Effective Date. In conjunction with the Merger, Homeplex will cause the
Exchange Shares to be registered under the Securities Act.
WARRANTS. MHA-II and MHC-II have outstanding warrants to purchase 400,000
shares of common stock (the "Monterey Warrants"), which represent approximately
16.5% of the fully diluted capitalization of MHA-II and MHC-II. On the Effective
Date, the Monterey Warrants will be converted into warrants to purchase a number
of shares of Homeplex Common Stock (the "Homeplex Warrants") determined by
multiplying 400,000 by the ratio of (i) the total number of Exchange Shares
issued in the Merger, divided by (ii) 2,427,776, which is the amount of
outstanding shares of the Monterey Merging Companies on a fully diluted basis.
Although all of the Exchange Shares will be issued in the name of the Monterey
Stockholders, the parties to the Merger Agreement will enter into an agreement
pursuant to which Homeplex will hold approximately 16.5% of the Exchange Shares
for release upon exercise of the Homeplex Warrants, and the exercise price paid
upon such exercise will be paid to the Monterey Stockholders. The exercise price
of the Homeplex Warrants will depend upon the amount of the Distributions, but
it is expected to range from approximately $1.30 to $1.70 per share of Homeplex
Common Stock. Upon expiration of unexercised Homeplex Warrants, if any, Homeplex
will release the remaining escrowed Exchange Shares to the Monterey
Stockholders.
CONTINGENT SHARES. In addition to the Exchange Shares, Homeplex has agreed
to issue 800,000 Contingent Shares to the Monterey Stockholders. In connection
with the Merger, Homeplex will cause the Contingent Shares to be registered
under the Securities Act. Approximately 16.5% of the Contingent Shares, or
131,840 Contingent Shares (the "Contingent Warrant Shares"), will be reserved
for issuance upon the exercise of the Homeplex Warrants. When a Homeplex Warrant
is exercised, the holder will receive not only the Exchange Shares into which
the Homeplex Warrant is exercisable, but also will be issued a proportionate
share of the Contingent Warrant Shares. The remaining reserved Contingent Shares
will be issued to the Monterey Stockholders only if certain Homeplex Common
Stock average trading price thresholds are reached at any time during the five
years following the Effective Date as described below, provided that at the time
of any such issuance to a Monterey Stockholder, such Monterey Stockholder is
employed with Homeplex. See "Summary -- Market Price Data for Homeplex Common
Stock." The average trading price thresholds and
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employment restrictions will not apply to the Contingent Warrant Shares. The
Contingent Shares will be issued as follows:
(i) if the closing price of the Homeplex Common Stock on the NYSE (the
"Homeplex Stock Price") averages $1.75 or more for twenty consecutive
trading days at any time during the five-year period following the
Effective Date, then 134,828 Contingent Shares will be issued but only
after the first anniversary of the Effective Date;
(ii) if the Homeplex Stock Price averages $2.50 or more for twenty
consecutive trading days at any time during the five-year period following
the Effective Date, then an additional 266,666 Contingent Shares will be
issued but only after the second anniversary of the Effective Date; and
(iii) if the Homeplex Stock Price averages $3.50 or more for twenty
consecutive trading days at any time during the five-year period following
the Effective Date, then the remaining 266,666 Contingent Shares will be
issued but only after the third anniversary of the Effective Date.
To illustrate the above, assume that the Merger is effected on December 31,
1996. If the Homeplex Stock Price averages $1.75 for twenty consecutive trading
days during the first quarter of 1997, 134,828 Contingent Shares will be issued
to the Monterey Stockholders on January 1, 1998. If, instead, the Homeplex Stock
Price first averages $1.75 for twenty consecutive trading days in June 1999,
approximately 134,828 Contingent Shares will be issued on that date or as soon
thereafter as is practicable. If the Homeplex Stock Price averages $3.50 for
twenty consecutive trading days in the first quarter of 1997, then approximately
134,828 Contingent Shares will be issued on January 1, 1998, approximately
266,666 Contingent Shares will be issued on January 1, 1999, and the remaining
266,666 Contingent Shares will be issued on January 1, 2000.
INDEMNIFICATION FUND. Homeplex will retain from the merger consideration,
as security for the indemnification obligations in favor of Homeplex provided
under the Merger Agreement with respect to any breach of a representation or
covenant therein by Monterey or the Monterey Stockholders, a number of Exchange
Shares equal to $500,000 divided by the average closing price of Homeplex Common
Stock for the last five trading days ending on the Effective Date (the
"Indemnification Fund"). The Indemnification Fund will be adjusted each six
months to maintain its $500,000 value less any amount previously applied to a
loss. Cash can be deposited with Homeplex at any time by the Monterey
Stockholders to replace all or any portion of the Exchange Shares in the
Indemnification Fund. Amounts remaining in the Indemnification Fund will be
released to the Monterey Stockholders on the second anniversary of the Effective
Date, provided that if the Monterey Stockholders have been notified prior to the
second anniversary date of the Effective Date of a loss or claim, the amount of
which is uncertain or contingent, Homeplex will be entitled to retain an amount
of cash or a number of Exchange Shares that would be adequate to indemnify and
hold harmless Homeplex from such loss or claim. When the amount of such
uncertain or contingent loss or claim is fixed, any cash or Exchange Shares
remaining in the Indemnification Fund after application of such indemnification
will be released promptly thereafter to the Monterey Stockholders. The Monterey
Stockholders will be entitled to vote the shares of Homeplex Common Stock held
in the Indemnification Fund. See "The Merger and Related Transactions -- Merger
Agreement -- Indemnification Fund."
DISTRIBUTIONS
Prior to the execution of the Merger Agreement, Monterey made distributions
to the Monterey Stockholders independent of the Merger in an aggregate amount
equal to the estimated Tax Distribution (defined below) and the estimated
Retained Earnings Distribution (defined below). The Tax Distribution means the
amount of tax distributions equal to the Monterey Stockholders' estimated income
tax liability associated with the Monterey Merging Companies' S-corporation
status for the 1996 calendar year in accordance with the S-corporation rules of
the Code. The Retained Earnings Distribution means an amount sufficient to
reduce stockholders' equity of the Monterey Merging Companies to $2.5 million
(the "Targeted Stockholders' Equity") on the Effective Date. The Retained
Earnings Distribution made prior to the execution of the Merger Agreement was
based on an estimation of the earnings and income of the Monterey Merging
Companies through the remainder of the 1996 calendar year and to the Effective
Date. Thus, at the
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time that the Retained Earnings Distribution was made, Monterey Stockholders'
equity was reduced below the Targeted Stockholders' Equity and it is anticipated
that Monterey's earnings through the remainder of 1996 will bring the actual
amount of stockholders' equity back up to the Targeted Stockholders' Equity at
year end when the Merger is contemplated to occur. Monterey obtained the funds
necessary to effect the Distributions from working capital and a $7.5 million
unsecured credit facility. The Distributions were made in cash and aggregated
approximately $9.5 million.
Prior to the Effective Date, Monterey will update the estimated amount of
the Tax Distributions and the Retained Earnings Distributions and will
distribute to the Monterey Stockholders an amount in cash equal to the excess,
if any, of (i) the updated estimates, over (ii) the estimated amounts previously
distributed as contemplated above. If the estimated amounts previously
distributed exceed the updated estimates as of the Effective Date, the Monterey
Stockholders will repay the amount of such excess. Within thirty days of
completion of the audit of Monterey's financial statements as of and for the
year ended December 31, 1996, a final reconciliation of the amount of the
Distributions will be effected.
EFFECTIVE DATE
Subject to and in accordance with the Maryland Corporations and
Associations Code and the Arizona Business Corporation Act, the Articles of
Merger shall be filed with the Secretary of State of the State of Maryland and
the Corporation Commission of the State of Arizona at the earliest possible date
following the satisfaction or waiver of all conditions precedent to the Merger,
which is the last business day of a calendar month. The Merger shall become
effective on the date (the "Effective Date") and time the Articles of Merger are
filed; provided, however, that in no event shall the Effective Date be prior to
December 31, 1996 or later than March 31, 1997, unless otherwise agreed to by
the parties to the Merger Agreement.
CONVERSION AND EXCHANGE OF STOCK CERTIFICATES
On the Effective Date, each share of common stock of the Monterey Merging
Companies (the "Monterey Common Stock") issued and outstanding, by reason of the
Merger and without any action on the part of the holders thereof, shall be
converted into the Merger Consideration divided by the number of issued and
outstanding shares of Monterey Common Stock. On the Effective Date, Homeplex
shall make available, such number of shares of Homeplex Common Stock as shall be
required for conversion in accordance with the Merger Agreement. Each holder of
an outstanding certificate representing shares of Monterey Common Stock (the
"Monterey Stock Certificates"), upon surrender thereof, together with such
supporting documentation as Homeplex shall reasonably require, shall be entitled
to receive a certificate representing the number of whole shares of Homeplex
Common Stock into which the shares of Monterey Common Stock represented by such
surrendered certificate shall have been converted. No dividend or other
distribution payable to holders of Homeplex Common Stock shall be paid to the
holders of certificates representing Monterey Common Stock; provided, however,
that upon surrender and exchange of Monterey Stock Certificates there shall be
paid to the record holders of the stock certificate issued in exchange therefor,
the amount, without interest thereon, of dividends and other distributions,
which subsequent to the Effective Date have become payable with respect to the
number of whole shares of Homeplex Common Stock into which such shares of
Monterey Common Stock shall have been converted. If any certificate for shares
of Homeplex Common Stock is to be issued in a name other than that in which the
certificate which surrendered in exchange therefor is registered, the person
requesting such exchange shall pay any transfer or other taxes required by
reason of the issuance of certificates for such shares of Homeplex Common Stock
in a name other than that of the registered holder of any such certificate
surrendered. Certificates for fractional shares of Homeplex Common Stock shall
not be issued. The total number of shares of Homeplex Common Stock that the
Monterey Stockholders shall have a right to receive will be rounded up to the
nearest whole share of Homeplex Common Stock.
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CHARTER AMENDMENT
The Charter Amendment will, among other things, (i) change the name of
Homeplex to "Monterey Homes Corporation," (ii) reclassify and change each share
of Homeplex Common Stock issued and outstanding into one-third of a share of
Homeplex Common Stock, (iii) amend and make more strict the restrictions on the
transfer of Homeplex Common Stock to preserve the NOL Carryforward, and (iv)
provide for the Class I and Class II Directors. The form of the Articles of
Merger, which includes the Charter Amendment, is attached hereto as Appendix B.
All stockholders are urged to read the Charter Amendment in its entirety.
NAME CHANGE. Upon the effectiveness of the Merger, Homeplex will change its
name to "Monterey Homes Corporation" to be consistent with the business to be
carried on after the Merger.
REVERSE STOCK SPLIT. The Board of Directors has proposed to reclassify and
change each share of Homeplex Common Stock issued and outstanding into one-third
of a share of Homeplex Common Stock, which should result in an increase in the
trading price of Homeplex Common Stock. The Charter Amendment does not change
the terms of the Homeplex Common Stock. The shares of Homeplex Common Stock
after giving effect to the one-for-three reverse stock split will have the same
voting rights, the same rights to dividends and distributions and will be
identical in all other respects to the shares of Homeplex Common Stock now
authorized. No fractional interests will be issued, and no fractional share
interest will entitle the holder thereof to any rights of a stockholder,
including the right to vote. All fractional shares for one-half share or more
shall be increased to the next higher whole number of shares and all fractional
shares of less than one-half share shall be decreased to the next lower number
of whole shares, respectively.
In the event the one-for-three reverse stock split is effected, all per
share calculations and data referred to in the Merger Agreement and the other
agreements referred to therein shall be proportionately adjusted, as nearly as
practicable.
TRANSFER RESTRICTIONS. The Articles of Incorporation of Homeplex prohibit
concentrated ownership of Homeplex which might jeopardize its qualification as a
REIT under the Code as well as the NOL Carryforward. Among other things, these
provisions provide that in the event any person acquires, owns or is deemed to
own in excess of 9.8% of Homeplex Common Stock, the Board of Directors may
redeem such excess shares. In addition, Homeplex may refuse to effectuate any
transfer which would result in any stockholder owning or being deemed to own in
excess of 9.8% of Homeplex Common Stock. Amendments to such transfer
restrictions are being proposed to preserve Homeplex's use of the NOL
Carryforward. The amended transfer restrictions will generally preclude for a
period of up to five years any person from transferring shares of Homeplex's
Common Stock or any other subsequently issued voting or participating stock if
the effect of the transfer would be to (a) make any person or group an owner of
4.9% or more of the outstanding shares of such stock (by value), (b) increase
the ownership position of any person or group that already owns 4.9% or more of
the outstanding shares of such stock (by value), or (c) cause any person or
group to be treated like the owner of 4.9% or more of the outstanding shares of
such stock (by value) for tax purposes. These transfer restrictions will not
apply to (i) the exercise of any stock option issued by Homeplex and that is
outstanding on the Effective Date, (ii) the Hamberlin Stock Options, (iii) the
Contingent Shares, or (iv) the stock options granted to the Monterey
Stockholders. The Board of Directors will have the authority to waive the
transfer restrictions under certain conditions.
CLASSIFIED BOARD. The directors of Homeplex will be divided into two
classes designated as Class I and Class II. Each Class will consist of one-half
of the directors or as close as approximation thereto as possible. The Class I
directors will stand for election at the Annual Meeting and will be elected for
a two-year term. The Class II directors will stand for election at the Annual
Meeting and shall be elected for a one-year term. At each annual meeting of
stockholders, commencing with the annual meeting to be held during the 1997
fiscal year of Homeplex, each of the successors to the directors of the Class
whose term has expired at such annual meeting will be elected for a term running
until the second annual meeting next succeeding his or her election and until
his or her successor is duly elected and qualified.
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NOL CARRYFORWARD
Homeplex has a federal net operating loss tax carryforward of approximately
$57 million, which expires at various times beginning in 2007 and ending in
2009. It is anticipated that future income taxes paid by Homeplex will be
minimized and will consist primarily of state income taxes (since utilization of
Homeplex's state net operating loss may be significantly limited) and the
federal alternative minimum tax. See "Selected Financial Data -- Unaudited Pro
Forma Condensed Combined Financial Data."
The ability of Homeplex to use the NOL Carryforward to offset future
taxable income would be substantially limited under Section 382 of the Code if
an "ownership change," within the meaning of Section 382 of the Code has
occurred or occurs with respect to Homeplex after the years in which the net
operating losses occurred. The parties will obtain an opinion from Homeplex's
counsel that (i) there has not been an "ownership change" of Homeplex prior to
the Effective Date and (ii) the Merger will not cause an "ownership change" to
occur on the Effective Date. The Charter Amendment, which will become effective
on the Effective Date, includes restrictions on the transfer of Homeplex Common
Stock designed to prevent an "ownership change" with respect to Homeplex after
the Merger. See "The Merger and Related Transactions -- Charter Amendment." If
any person or group becomes the owner of 5.0% or more of the outstanding shares
of Homeplex Common Stock prior to the Merger, the Merger could cause an
"ownership change" to occur, resulting in substantial limitations pursuant to
Section 382 of the Code on the availability of the NOL Carryforward to the
combined entity to offset future taxable income. Additionally, pursuant to
Section 384 of the Code, Homeplex may not be permitted to use the NOL
Carryforward to offset taxable income resulting from sales of assets owned by
Monterey at the time of the Merger to the extent that the fair market value of
such assets at the time of the Merger exceeded their tax basis. There is no
assurance that the combined entity will have sufficient earnings after the
Merger to fully utilize the NOL Carryforward. See "The Merger and Related
Transactions -- Certain Federal Income Tax Consequences."
TERMINATION OF REIT STATUS
If the Merger is consummated on December 31, 1996, Homeplex's election to
be a REIT will terminate retroactively effective for the taxable year beginning
January 1, 1996. If the Merger is consummated after December 31, 1996, Homeplex
will revoke its election to be a REIT effective for the taxable year beginning
January 1, 1997. Since its inception, Homeplex has elected to be taxed as a REIT
under the Code. Accordingly, Homeplex generally is not subject to tax on its
income to the extent it distributes its earnings to stockholders and maintains
its qualification as a REIT. As a result of the Merger, Homeplex will no longer
be able to satisfy certain tests with respect to the nature of its assets, which
are required to be met in order to qualify as a REIT. Accordingly, if the Merger
is consummated on December 31, 1996, Homeplex will not have satisfied the REIT
qualification tests for 1996, and its REIT election will terminate retroactively
effective January 1, 1996. As a result of the REIT revocation, Homeplex will be
taxed as a regular domestic C-corporation which is no longer eligible for tax
benefits available to REITs. For example, Homeplex will not be allowed to deduct
dividends paid to its stockholders in computing its taxable income, if any.
Homeplex's assets and cash available for distribution to stockholders will
therefore be reduced to the extent necessary to pay any tax liability. See "Risk
Factors -- Risk Factors of the Merger -- No Dividends."
SENIOR SUBORDINATED NOTES
In October 1994, MMI privately placed $8 million of its 13% Senior
Subordinated Notes due 2001 (the "Notes"). The Notes bear interest at 13% per
annum, subject to incremental increases of up to 17% based on decreases in the
consolidated tangible net worth of Monterey below $2 million and the occurrence
and continuance of defaults under the Notes and the Indenture governing such
Notes (the "Indenture"). Such interest is due and payable semi-annually on April
15 and October 15 of each year, and the outstanding principal of the Notes is
due in full on October 15, 2001. The Notes may be redeemed at the option of MMI,
in whole or part, after October 15, 1998 for a redemption price of 106.5% of the
principal amount if redeemed in the first 12 months thereafter, 103.25% if
redeemed in the second 12 months thereafter, and 100% if redeemed in the third
12 months or thereafter. If a change of control occurs, MMI must offer to
purchase all
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of the Notes for 101% of the principal amount, and if the consolidated tangible
net worth of Monterey declines for two consecutive fiscal quarters below $1.5
million MMI shall offer to purchase 10% of the aggregate Notes outstanding for
100% of the principal amount on a pro rata basis. The Notes are unsecured and
subject Monterey to certain customary covenants and conditions.
Prior to the execution of the Merger Agreement, MMI solicited and obtained
the consent of the requisite number of holders of the Notes to the Merger and
related transactions, including making MHC-II the primary obligor on the Notes,
and to the Distributions, as well as their waiver of certain past covenant
defaults. In connection with such consent solicitation, the holders of more than
half of the aggregate principal amount of Notes agreed not to put their Notes at
101% of the principal amount thereof due to the change of control that would
result should the Merger be effected. The Monterey Stockholders have agreed to
repurchase up to $4 million in principal amount of such Notes which are tendered
for repurchase. Holders of all of the then outstanding Notes (including the
Monterey Stockholders) may elect to have their Notes repurchased by Homeplex at
101% of the principal amount thereof 18 months from the Effective Date. In the
event any Notes are tendered for repurchase 18 months after the Effective Date,
Homeplex would either repurchase such Notes from cash on hand or refinance such
Notes. Homeplex and Monterey believe they will have adequate capital resources
to repurchase, refinance the Notes or allow the Monterey Stockholders to
repurchase such Notes, but if there is a material adverse change in Homeplex
prior to expiration of such 18-month period, a refinancing might be difficult to
achieve or impose significant financing costs and restrictions.
Upon effectuation of the Merger, each of Homeplex and MHA-I, as successor
to MHC, will become a guarantor on the Notes and will be subject to certain
obligations and restrictions. The following is a brief discussion of certain of
the major covenants and restrictions under the Indenture that will be applicable
to MHC-II, MHA-II, Homeplex and other guarantors of the Notes following the
Merger. Such discussion is qualified in its entirety by the provisions of the
Indenture.
The Indenture will prohibit the incurrence by MHC-II, MHA-II, Homeplex and
other guarantors on the Notes of additional indebtedness, subject to certain
exceptions, unless certain coverage ratios are satisfied. The Indenture will
also restrict the ability of such parties to declare dividends or to make
certain other types of restricted payments (including the purchase, redemption
or other acquisition or retirement for value of options, warrants or other
rights to acquire capital stock and the making of certain types of investments),
subject to certain limited exceptions, unless, after giving effect to the
dividend or other restricted payment, the aggregate of all restricted payments
made after the date of issuance of the Notes will not exceed 50% of the
Consolidated Net Income (as defined in the Indenture) of such parties and their
respective subsidiaries from December 31, 1993 to the last day of the fiscal
quarter immediately preceding the date of such restricted payment, and certain
other conditions are also satisfied.
The Indenture will also impose upon such parties restrictions on their
ability to sell, lease, transfer or otherwise dispose of property or assets,
subject to certain exceptions, unless they receive consideration at the time of
such sale or other disposition at least equal to fair market value and apply the
Net Available Proceeds (as defined in the Indenture) received from the sale or
other disposition either to the repayment of senior indebtedness or as an
investment in capital assets used in the Principal Business (as defined in the
Indenture). In certain circumstances, Net Available Proceeds not so applied
within 360 days following an asset sale or other disposition must be used to
purchase Notes.
The Indenture also contains various other restrictions and limitations,
including certain restrictions that would be applicable to any subsidiaries of
Homeplex, other than MHC-II and MHA-II, limitations on transactions with
affiliates, and requirements to maintain a minimum consolidated net worth.
MONTEREY CREDIT FACILITIES
Monterey has historically obtained a significant portion of its working
capital through bank credit facilities secured by substantially all of its real
estate under development. At June 30, 1996, Monterey had available $46.1 million
of short-term, secured revolving construction loan credit facilities, of which
$12.6 million was outstanding. In addition, at June 30, 1996, Monterey had
outstanding $11.4 million of secured non-
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revolving acquisition and development loans which mature at various times from
May 1997 to December 1999. The interest rates under these facilities range from
prime (which was 8.25% at June 30, 1996) plus 0.50% to prime plus 1.0%.
During August 1996, Monterey entered into an agreement with one of its
principal lenders, to borrow up to $7.5 million on an unsecured basis. The loan
is payable within one year of its origination with interest at prime plus 0.50%.
The proceeds of this loan were used in part to fund the Distributions to the
Monterey Stockholders.
Monterey's existing credit facilities will require the combined entity to
comply with the covenants contained in the Indenture and will limit the combined
entity's ability to incur additional indebtedness. Prior to the effective date
of the Merger, Monterey expects to refinance and consolidate substantially all
of the above outstanding loans into one revolving construction, acquisition,
development and working capital credit facility. It is anticipated that the new
credit facility would provide a commitment of approximately $45 million and
encumber substantially all of Monterey's real estate under development. The
credit facility would have an initial term of two years, bear interest at a
range of prime plus 0.25% to prime plus 0.45% and contain various financial
covenants. Monterey has received a non-binding terms summary from two of its
existing primary lenders to provide this new $45 million credit facility.
OPERATIONS AND EXECUTIVE OFFICERS OF HOMEPLEX AFTER THE MERGER; FUTURE STOCK
OPTIONS
After the Merger, Homeplex will be primarily engaged in the homebuilding
business through Monterey. Homeplex will discontinue making mortgage loans and
will convert its existing assets are to be converted into cash over time so that
they can be used to support the future growth of the homebuilding operations. In
light of the change in focus, the existing management of Monterey will become
responsible for directing ongoing operations of the combined entity.
Accordingly, the executive officers of Homeplex will resign, and the executive
officers of Monterey will be elected to the executive offices of Homeplex. See
"The Merger and Related Transactions -- Merger Agreement -- Conditions to
Obligations of Monterey and the Monterey Stockholders" and "Monterey
Management -- Directors and Executive Officers."
It is currently anticipated that after the Merger, Homeplex will adopt a
new broad-based stock option plan pursuant to which directors, executive
officers and key employees will be granted stock options and other types of
stockbased awards. The terms and conditions of the stock option plan, including
the number of shares of Homeplex Common Stock to be made subject to the stock
option plan, have not yet been determined.
REGISTRATION RIGHTS AND LISTING
The Homeplex Common Stock to be issued in the Merger, including the
Contingent Shares and the shares issuable to the Warrantholders, can be
registered for resale under the Securities Act. Homeplex has agreed to prepare
and file with the Commission a registration statement and any other documents
required by the Securities Act in connection with such resales. Homeplex has
also agreed to take any action required to be taken under any applicable state
securities or "blue sky" laws in connection with the issuance of the Homeplex
Common Stock in connection with the Merger.
Homeplex will pay all expenses relating to the registration of shares
pursuant to the registration rights provided under the Registration Rights
Agreement. Each stockholder shall pay any fees and expenses of counsel to the
stockholder, underwriting discounts and commissions, and transfer taxes, if any,
relating to the resale of the holder's Homeplex Common Stock.
MERGER AGREEMENT
THE DETAILED TERMS AND CONDITIONS TO THE CONSUMMATION OF THE MERGER ARE
CONTAINED IN THE MERGER AGREEMENT, WHICH IS ATTACHED HERETO AS APPENDIX A AND
INCORPORATED HEREIN BY REFERENCE. THE FOLLOWING IS INTENDED MERELY AS A SUMMARY
OF CERTAIN MATERIAL TERMS AND
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PROVISIONS OF THE MERGER AGREEMENT. ALL HOMEPLEX STOCKHOLDERS ARE URGED TO READ
THE MERGER AGREEMENT IN ITS ENTIRETY.
REPRESENTATIONS AND WARRANTIES OF MONTEREY AND THE MONTEREY STOCKHOLDERS.
Each of Monterey and the Monterey Stockholders has made certain customary and
other representations and warranties to Homeplex, including, without limitation,
with respect to the following matters: (a) capitalization of Monterey and
ownership of Monterey common stock, (b) outstanding options, warrants and rights
relating to Monterey's capital stock, (c) correctness and completeness of
historical combined financial statements of Monterey, (d) no material adverse
change in the financial condition, business, properties, assets or results of
operations of Monterey since June 30, 1996, (e) Monterey's good and marketable
title to all of its material real and personal properties, (f) absence of
material litigation against or directly affecting Monterey, (g) consents and
approvals required to consummate the Merger by Monterey, (h) existing material
contracts and agreements of Monterey, (i) environmental matters, and (j) no
present intent or plan of the Monterey Stockholders to sell, exchange or
otherwise dispose of any of the shares of Homeplex Common Stock to be received
by them.
REPRESENTATIONS AND WARRANTIES OF HOMEPLEX. Homeplex had made certain
customary and other representations and warranties to Monterey and the Monterey
Stockholders, including, without limitation, with respect to the following
matters: (a) the capitalization of Homeplex, (b) outstanding options, warrants
and rights relating to Homeplex's capital stock, (c) correctness and
completeness of historical consolidated financial statements of Homeplex and its
subsidiaries, (d) no material adverse change in the financial condition,
business, properties, assets or results of operations of Homeplex and its
subsidiaries since June 30, 1996, (e) absence of material litigation against or
directly affecting Homeplex or any of its subsidiaries, (f) consents and
approvals required to consummate the Merger by Homeplex and its subsidiaries,
(g) existing material contracts and agreements of Homeplex, (h) the accuracy of
tax returns and reports of Homeplex, and (i) absence of an "ownership change" of
Homeplex within the meaning of Section 382 of the Code prior to the Effective
Date.
COVENANTS OF MONTEREY AND THE MONTEREY STOCKHOLDERS. Each of Monterey and
the Monterey Stockholders has agreed that, unless Homeplex otherwise agrees in
writing, prior to the Effective Date: (a) Monterey shall use reasonable efforts
to (i) preserve the business of Monterey, (ii) preserve the present goodwill and
advantageous relationships of Monterey with persons having business dealings
with Monterey, and (iii) preserve and maintain all material licenses,
registrations, franchises, and other similar rights of Monterey, (b) Monterey
shall operate its business only in the ordinary course and manner and consistent
with past practice, (c) Monterey shall maintain its books, accounts and records
in the ordinary manner, consistent with prior years, (d) except as contemplated
by the Merger Agreement, Monterey shall not (i) amend its Articles of
Incorporation or Bylaws, (ii) make any change in its capital stock, or (iii)
merge or consolidate with any other corporation or entity or change the
character of its business, (e) Monterey shall not (i) issue any shares of
capital stock, or (ii) grant any option, warrant or other right to purchase
shares of its capital stock, (f) Monterey shall not (i) except as permitted by
the Merger Agreement, increase the compensation payable except in accordance
with normal and customary annual reviews, (ii) introduce or change any employee
benefits, or (iii) amend, renew, modify or extend any employment or other
similar agreement or arrangement, (g) except for the Distributions, Monterey
shall not declare, make or pay any dividend or other distribution or purchase,
redeem or otherwise acquire any of their equity securities, and (h) Monterey
shall use reasonable efforts to obtain all necessary consents and approvals of
other persons and governmental authorities to its performance of the
transactions contemplated by the Merger.
COVENANTS OF HOMEPLEX. Homeplex has agreed that, unless Monterey and the
Monterey Stockholders otherwise agree in writing, prior to the Effective Date:
(a) Homeplex shall use reasonable efforts to (i) preserve the business of
Homeplex and its subsidiaries, (ii) preserve the goodwill and advantageous
relationships of Homeplex and its subsidiaries, and (iii) preserve and maintain
material licenses, registrations, franchises, and other similar rights of
Homeplex and its subsidiaries, (b) Homeplex and its subsidiaries shall operate
their business only in the ordinary course and manner and consistent with past
practice, (c) Homeplex and its subsidiaries shall maintain their books, accounts
and records in the ordinary manner consistent with prior years, (d) neither
Homeplex nor any of its subsidiaries shall (i) amend its Articles of
Incorporation or Bylaws, (ii) make any change in its capital stock, or (iii)
merge or consolidate with any other corporation,
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entity or change the character of its business, (e) neither Homeplex nor any of
its subsidiaries shall (i) issue any shares of capital stock, or (ii) grant any
option, warrant or other right to purchase shares of capital stock, (f) except
as otherwise permitted by the Merger Agreement, neither Homeplex nor any of its
subsidiaries shall (i) increase its compensation payable except in accordance
with normal and customary annual reviews, (ii) introduce or change any employee
benefits, or (iii) amend, renew, modify or extend any employment, or other
similar agreement or arrangement, (g) neither Homeplex nor any of its
subsidiaries shall declare, make or pay any dividend or other distribution;
provided that (i) so long as Homeplex is operated as a REIT, Homeplex shall be
allowed to distribute dividends to the stockholders of Homeplex in accordance
with the Code, and (ii) Homeplex shall distribute as a dividend substantially
all the net gain from any sale of a residual interest in excess of $100,000, (h)
Homeplex shall use reasonable efforts to obtain all necessary consents and
approvals to the performance by Homeplex of the transactions contemplated by the
Merger Agreement, (i) each member of Homeplex's current Board of Directors,
other than Alan D. Hamberlin, shall resign as of the Effective Date and the
Monterey Stockholders shall designate four nominees (two of whom shall be the
Monterey Stockholders and two of whom shall be independent) for Homeplex's Board
of Directors, with Alan D. Hamberlin and the Monterey Stockholders being
nominated as Class II Directors and the remaining two nominees being nominated
as Class I Directors, and (j) for a period of at least two years after the
Effective Date, unless otherwise approved by a majority of the independent
directors of Homeplex with respect to clauses (i) through (vi) below and unless
approved by Alan D. Hamberlin with respect to clause (vii) below, Homeplex
agrees that: (i) Homeplex shall not compensate any person for serving as a
director of its Board of Directors who is not an independent director; (ii)
Homeplex shall not and shall not permit any of its subsidiaries to enter into
any agreement or transaction with any affiliate of Homeplex involving a
transaction required to be reported under the Exchange Act and involving more
than $60,000, except in the ordinary course of business and on terms no less
favorable than would be obtained in a comparable arm's length transaction, (iii)
Homeplex shall not make, or permit any of its subsidiaries to make any loans of
money to any stockholder, director or officer, (iv) Homeplex shall not and shall
not permit any of its subsidiaries to repurchase any shares of Homeplex Common
Stock, (v) after consummation of the Merger, Homeplex's Board of Directors shall
be comprised of at least two persons who are independent directors and one
person who was a member of Homeplex's Board of Directors immediately prior to
the effectiveness of the Merger, (vi) Homeplex shall register for resale the
shares of Homeplex Common Stock, including the Contingent Shares and the shares
to be issued pursuant to the Homeplex Warrants only in accordance with the
Registration Rights Agreement, the form of which is included in Appendix C
attached to this Proxy Statement/Prospectus, and (vii) Homeplex shall not sell
or otherwise dispose of any of its residual interests in mortgage
securitizations.
COVENANTS OF ALL PARTIES. Each of the parties to the Merger Agreement has
agreed that: (a) all rights to indemnification now existing in favor of the
directors or officers of Homeplex and its subsidiaries as provided in their
respective Articles of Incorporation or Bylaws will survive the Merger and
remain in effect, (b) in the event any action, suit, proceeding or investigation
relating to the Merger Agreement or the transactions contemplated thereby is
commenced by a third party, whether before or after the Effective Date, the
parties to the Merger Agreement agree to cooperate and use reasonable efforts to
defend against and respond to such action or investigation, (c) unless and until
the Merger Agreement is terminated, neither it or any of its officers,
directors, affiliates, representatives or agents shall (i) initiate or solicit
any inquiries, engage in any negotiations with respect to a Competing
Transaction, (ii) provide to any other person any information or data relating
to Homeplex or Monterey for the purpose of seeking or encouraging any effort or
attempt to effect a Competing Transaction, or (iii) enter into any agreement
with any other party with respect to a Competing Transaction, (d) it will use
reasonable best efforts to take and to do all things necessary, proper or
advisable to consummate the Merger and the other transactions contemplated by
the Merger Agreement, and (e) the parties to the Merger Agreement shall consult
with each other before issuing any press release or otherwise making any public
statements with respect to the Merger.
CONDITIONS TO THE OBLIGATIONS OF HOMEPLEX. The obligations of Homeplex
under the Merger Agreement are, unless waived by Homeplex, subject to the
satisfaction of the following conditions on or before the Effective Date: (a)
the representations and warranties of Monterey contained in the Merger Agreement
shall have been true and correct in all material respects when made, and shall
be true and correct in all material
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respects on the Effective Date, (b) Monterey shall have in all material respects
performed all obligations and agreements and complied with all covenants and
conditions contained in the Merger Agreement to be performed and complied with
by it, and Monterey shall have obtained each consent and approval necessary in
order to effect the Merger, (c) the stockholders of Homeplex at the Annual
Meeting shall have, by the affirmative vote of at least a majority of the
outstanding shares with respect to item (i) below and by the affirmative vote of
at least a majority of the shares present in person or by proxy and voting at
the Annual Meeting with respect to items (ii) and (iii) below, (i) approved the
Merger Agreement and the Merger, including the Charter Amendment, (ii) approved
the Monterey Stockholder Agreements, and (iii) elected the Nominees as the Class
I and Class II Directors, as applicable, to serve after the Effective Date; and
the stockholders of Homeplex shall have considered and voted upon the Hamberlin
Stock Options and the Stock Option Extension at the Annual Meeting, (d) Homeplex
shall have received a written opinion from Snell & Wilmer, L.L.P., special
counsel for Monterey in form and substance reasonably satisfactory to Homeplex
and its counsel, (e) there shall have been no material adverse change in the
business, properties, prospects (other than changes resulting from general
economic or market conditions over which Monterey has no control), results of
operations or financial condition of Monterey, taken as a whole, (f) no action
or proceeding by any governmental agency shall have been instituted or
threatened which would enjoin restrain or prohibit, or might result in
substantial damages in respect of the Merger Agreement or the consummation of
the transactions contemplated by the Merger Agreement, and no court order shall
have been entered in any action or proceeding instituted by any other party
which enjoins, restrains or prohibits the Merger Agreement or consummation of
the transactions contemplated by the Merger Agreement, (g) any person required
in connection with the Merger or the other transactions contemplated by the
Merger Agreement to file a Notification and Report Form for Certain Mergers and
Acquisitions with the Department of Justice and the FTC pursuant to Title II of
the Hart-Scott-Rodino Act shall have made such filing and the applicable waiting
period with respect to each such filing shall have expired or been terminated,
(h) Homeplex shall have received the fairness opinion satisfactory to it from
RPR with respect to the fairness of the terms of the Merger to the stockholders
of Homeplex from a financial point of view, (i) Homeplex shall have received a
written opinion of H&L, special counsel for Homeplex, to the effect that (i) the
Merger contemplated by the Merger Agreement will qualify as a reorganization
under Section 368(a) of the Code, (ii) there has not been an "ownership change"
of Homeplex within the meaning of Section 382 of the Code prior to the Effective
Date, and (iii) the Merger will not cause an "ownership change" of Homeplex
within the meaning of Section 382 of the Code to occur on the Effective Date,
(j) each of the Monterey Stockholders and Homeplex shall have entered into the
Monterey Stockholder Agreements, (k) Monterey, the Monterey Stockholders and
Homeplex shall have entered into a mutually satisfactory agreement regarding the
release of Homeplex Common Stock upon the exercise or termination of the
Homeplex Warrants and the issuance of the Contingent Shares, the form of which
is included in Appendix C attached to this Proxy Statement/Prospectus, (l)
Monterey shall have furnished certificates of its Chief Executive and Chief
Financial Officers to evidence compliance with the conditions set forth in the
Merger Agreement, and (m) all proceedings taken by Monterey and all instruments
executed and delivered by the Monterey in connection with the transactions
contemplated by the Merger Agreement shall be reasonably satisfactory to counsel
for Homeplex.
CONDITIONS TO THE OBLIGATIONS OF MONTEREY AND THE MONTEREY STOCKHOLDERS.
The obligations of Monterey and the Monterey Stockholders under the Merger
Agreement are, unless waived by Monterey and the Monterey Stockholders, subject
to the satisfaction of the following conditions on or before the Effective Date:
(a) the representations and warranties of Homeplex contained in the Merger
Agreement shall have been true and correct in all material respects when made
and shall be true and correct in all material respects on the Effective Date,
(b) Homeplex shall have all material respects performed all obligations and
agreements and complied with all covenants and conditions contained in the
Merger Agreement to be performed and complied with by it, and Homeplex shall
have obtained each consent and approval necessary in order to effect the Merger,
(c) Monterey shall have received a written opinion from H&L, special counsel for
Homeplex in form and substance reasonably satisfactory to Monterey and its
counsel, (d) there shall have been no material adverse change in the business,
properties, prospects (other than changes resulting from general economic or
market conditions over which Homeplex has no control), results of operations or
financial condition of
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Homeplex, (e) no action or proceeding by any governmental agency shall have been
instituted or threatened which would enjoin, restrain or prohibit, or might
result in substantial damages in respect of the Merger Agreement or the
consummation of the transactions contemplated by the Merger Agreement, and would
in the reasonably judgment of Monterey and the Monterey Stockholders make it
inadvisable to consummate such transaction, and no court order shall have been
entered in any action or proceeding instituted by any other party which enjoins,
restrains or prohibits the Merger Agreement or consummation of the transactions
contemplated by the Merger Agreement, (f) all of the shares of Homeplex Common
Stock, including the Contingent Shares, the Homeplex Warrants and the Homeplex
Common Stock to be released or issued upon exercise of the Homeplex Warrants
shall have been registered under the Securities Act, no stop order suspending
the effectiveness of the registration statement shall have been issued and the
shares of Homeplex Common Stock to be issued under the Merger Agreement shall
have been authorized for listing, subject to official notice of issuance, on the
NYSE, (g) any person required in connection with the Merger or the other
transactions contemplated by the Merger Agreement to file a Notification and
Report Form for Certain Mergers and Acquisitions with the Department of Justice
and the FTC pursuant to Title II of the Hart-Scott-Rodino Act shall have made
such filing and the applicable waiting period with respect to each such filing
shall have expired or been terminated, (h) the approvals of Homeplex's
stockholders referred to in clause (c) of the "Conditions to the Obligations of
Homeplex" set forth above shall have been obtained, (i) each of the Monterey
Stockholders and Homeplex shall have entered into the Monterey Stockholder
Agreements, (j) Monterey, the Monterey Stockholders and Homeplex shall have
entered into a mutually satisfactory agreement regarding the release of Homeplex
Common Stock upon the exercise or termination of the Homeplex Warrants and the
issuance of the Contingent Shares, the form of which is included in Appendix C
attached to this Proxy Statement/Prospectus, (k) all directors (other than the
Alan D. Hamberlin) and officers of Homeplex shall have resigned and William W.
Cleverly and Steven J. Hilton shall have been elected to the offices of Chairman
and Co-Chief Executive Officer, and President and Co-Chief Executive Officer of
Homeplex, respectively, (l) Monterey shall have received a written opinion of
H&L referred to in clause (i) of the "Conditions to the Obligations of Homeplex"
set forth above, (m) Monterey shall have declared and paid the Distributions,
(n) Homeplex shall have furnished certificates of its Chief Executive and Chief
Financial Officers to evidence compliance with the conditions set forth in the
Merger Agreement, (o) all proceedings taken by Homeplex and all instruments
executed and delivered by Homeplex in connection with the transactions
contemplated by the Merger Agreement shall be reasonably satisfactory in form
and substance to counsel for Monterey, (p) the Hamberlin Employment Agreement
shall have been amended to delete the $500,000 cash payment that might be
required to be paid (and the right to accelerate the Hamberlin Stock Options) in
the event of the consummation of the transaction contemplated by the Merger
Agreement, and the employment agreements between Homeplex and each of Jay R.
Hoffman and Barry L. Reger dated July 1, 1996, shall have been amended to
provide that the consummation of the transactions contemplated by the Merger
Agreement will result in a termination of employment by Homeplex without cause
thereunder, and (q) Homeplex shall have executed reasonably satisfactory
agreements to become a guarantor of the Notes and assume the Homeplex Warrants
as of the Effective Date, the forms of which are included in Appendix C attached
to this Proxy Statement/Prospectus.
WAIVERS. The failure of Monterey or the Monterey Stockholders to comply
with any of their obligations, agreements or conditions as set forth in the
Merger Agreement may be waived expressly in writing by Homeplex, or by action of
its Board of Directors without the requirement for a vote of stockholders. The
failure of Homeplex to comply with any of its obligations, agreements or
conditions as set forth herein may be waived expressly in writing by Monterey
and the Monterey Stockholders.
MODIFICATION. The Merger Agreement may be modified at any time in any
respect by the mutual consent of all of the parties thereto, notwithstanding
prior approval by the stockholders of Homeplex. Any such modification may be
approved for Homeplex by its Board of Directors, without further stockholder
approval, and for Monterey by its Board of Directors and the Monterey
Stockholders, except the value or method of calculating the Merger Consideration
may not be increased or materially altered without the consent of the
stockholders of Homeplex given by the same vote as is required under applicable
state law for approval of the Merger Agreement. No consent of the stockholders
of Homeplex or Monterey and the Monterey Stockholders
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shall be required to substitute cash in place of Homeplex Common Stock in
accordance with the provisions of the Merger Agreement.
TERMINATION. The Merger may be terminated on or before the Effective Date
notwithstanding any adoption of the Merger Agreement by the stockholders of
Homeplex or the Monterey Stockholders under certain circumstances, including,
(a) by the mutual agreement of the parties thereto, (b) by either Homeplex or
Monterey and the Monterey Stockholders if the other party or parties willfully
breaches any of its material representations, warranties or covenants contained
in the Merger Agreement, and such breach is not cured or waived within fifteen
business days after written notice thereof, (c) by Homeplex if any of the
conditions precedent to its obligation under the Merger Agreement shall not have
been satisfied, complied with or performed in any material respect, and Homeplex
shall not have waived such failure of satisfaction, noncompliance or
nonperformance, (d) by Monterey and the Monterey Stockholders if any of the
conditions precedent to their obligations under the Merger Agreement shall not
have been satisfied, complied with or performed in any material respect, and
Monterey and the Monterey Stockholders shall not have waived such failure of
satisfaction, noncompliance or nonperformance, (e) at the option of Homeplex or
Monterey and the Monterey Stockholders if any nonappealable final order, decree
or judgment permanently restraining or prohibiting the Merger shall have been
issued by any court or governmental agency having competent jurisdiction, or (f)
by either Homeplex or Monterey and the Monterey Stockholders if the Effective
Date has not occurred on or prior to March 31, 1997, or such later date as shall
have been agreed to by the parties hereto.
FEES AND EXPENSES. In the event that any party to the Merger Agreement,
terminates the Merger as a result of the other party's or parties' willful
breach or willful failure to perform in any material respect any of their
respective representations, warranties, covenants or agreements under the Merger
Agreement or the transactions contemplated thereby, the other party or parties
will reimburse the non-breaching party for all reasonable out-of-pocket fees and
expenses incurred by the non-breaching party in connection with and incidental
to the negotiation, preparation and execution of the Merger Agreement and the
obtaining of the necessary approvals thereof. In the event that a party
terminates the Merger Agreement, other than as a result of (i) the Effective
Date not occurring on or prior to March 31, 1997, (ii) a willful breach or
willful failure to perform by the other party or parties, or (iii) mutual
consent, and then enters into an agreement, letter of intent, or binding
arrangement with respect to a Competing Transaction within one year after
termination of the Merger Agreement, then the terminating party will pay to the
other party or parties a fee, in cash, equal to 2% of the aggregate value of the
Competing Transaction. Except as specifically provided for in the Merger
Agreement, each party will bear its own expenses in connection with the Merger
Agreement and the transactions contemplated thereby; provided, however, Homeplex
and Monterey will each pay one half of any filing fees paid in connection with
any filings made with respect to the Merger Agreement under the Hart-
Scott-Rodino Act.
INDEMNIFICATION OF HOMEPLEX INTERESTS. Notwithstanding any investigation by
Homeplex or any of its representatives, Homeplex and its officers, directors,
and agents shall be indemnified against and held harmless from any and all
damage, loss, liability, and expense (collectively, the "Losses") incurred or
suffered by such parties arising out of any action, suit, claim or demand
arising out of, relating to or based on Monterey's or the Monterey Stockholders'
breach or failure to perform in any material respect any of their
representations, warranties, covenants or agreements under the Merger Agreement
or the transactions contemplated thereby; provided, however, that such action,
suit, claim or demand must be first asserted prior to the second anniversary of
the Effective Date. See "The Merger and Related Transactions -- Merger
Agreement -- Limitations on Indemnification."
INDEMNIFICATION OF THE MONTEREY STOCKHOLDERS' INTERESTS. Notwithstanding
any investigation by the Monterey Stockholders or any of their representatives,
the Monterey Stockholders shall be indemnified against and held harmless from
their pro rata share of any Loss incurred or suffered by the Monterey
Stockholders arising out of any action, suit, claim or demand arising out of,
relating to or based on Homeplex's breach or failure to perform in any material
respect any of its representations, warranties, covenants or agreements under
the Merger Agreement or the transactions contemplated thereby; provided,
however, that such action, suit, claim or demand must be first asserted prior to
the second anniversary of the Effective Date. See "The Merger and Related
Transactions -- Merger Agreement -- Limitations on Indemnification."
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HOMEPLEX COMMITTEE. A committee to be comprised of the independent
directors of Homeplex serving after the Effective Date (the "Committee") was
appointed irrevocably pursuant to the Merger Agreement to exercise Homeplex's
indemnification rights and was authorized to act, as the Committee may deem
appropriate, as Homeplex's agent in respect of receiving all notices, documents
and certificates and making all determinations required with respect to the
indemnification provided for in the Merger Agreement. The appointment of the
Committee was irrevocable and any action taken by the Committee shall be
effective and absolutely binding on Homeplex notwithstanding any contrary action
or direction from any other representative of Homeplex.
NOTICE. Any person or persons entitled to receive indemnification under the
Merger Agreement (the "Indemnified Party") agrees to give prompt written notice
to the person or persons obligated to provide such indemnification (the
"Indemnifying Party") upon (a) the occurrence of any Loss in respect of which
indemnification may be sought or (b) the assertion of any claim or the
commencement of any action or proceeding in respect of which such a Loss may
reasonably be expected to occur (a "Claim"), but the Indemnified Party's failure
to give such notice will not affect the obligations of the Indemnifying Party
except to the extent that the Indemnifying Party is materially prejudiced
thereby. The Indemnifying Party will not be liable for any settlement of a
claimed Loss effected without the consent of the Indemnifying Party, which
consent shall not be unreasonably withheld.
INDEMNIFICATION FUND. To provide the sole and exclusive source of
reimbursement and indemnification for the amount of any Loss or Claim of
Homeplex, Homeplex shall retain a portion of the Exchange Shares as security the
Indemnification Fund. From time to time, the Indemnification Fund may be reduced
and applied (based on the most recent semi-annual valuation date) by the amount
of any Loss. Each share of Homeplex Common Stock held in the Indemnification
Fund will be valued every six months after the Effective Date, with the Monterey
Stockholders delivering additional cash or shares of Homeplex Common Stock or
receiving back excess cash or shares of Homeplex Common Stock to maintain a
$500,000 level at the end of each period, less any amounts previously applied.
The Monterey Stockholders may at any time deposit cash with Homeplex to replace
all or a portion of the Exchange Shares retained by Homeplex as all or part of
the Indemnification Fund. On the second anniversary of the Effective Date, any
cash or Exchange Shares remaining in the Indemnification Fund will be released
to the Monterey Stockholders, provided, that if the Committee has notified the
Monterey Stockholders prior to the second anniversary of the Effective Date of a
Loss or Claim, the amount of which is uncertain or contingent, Homeplex will be
entitled to retain an amount of cash or a number of Exchange Shares that, based
on the Committee's good faith estimate of the potential amount of such Loss of
Claim, would be adequate to indemnify and hold harmless Homeplex for each Loss
or Claim. When the amount of such uncertain or contingent Loss or Claim is
fixed, any cash or Exchange Shares remaining in the Indemnification Fund after
the application for such indemnification, will be released promptly thereafter
to the Monterey Stockholders in the same proportion as the Merger Consideration
was delivered pursuant to the Merger Agreement. The Monterey Stockholders will
be entitled to vote the shares of Homeplex Common Stock held in the
Indemnification Fund.
PROCEDURES. Upon receipt of the notice of a Loss or Claim, the Committee
and the Monterey Stockholders shall work reasonably and in good faith to
determine the amount of such Loss or Claim within thirty days of the receipt of
notice of the Loss or Claim after which time the amount of the Loss or Claim
shall, at the option of either the Committee or the Monterey Stockholders, be
determined by arbitration.
ARBITRATION. All disputes, claims and other matters in controversy arising
directly or indirectly out of or related to the Merger Agreement, or the breach
thereof shall be determined by arbitration and shall be settled by three
arbitrators, one of whom shall be appointed by the Committee, one by the
Monterey Stockholders and the third of whom shall be appointed by the first two
arbitrators. Persons eligible to be selected as arbitrators shall be limited to
attorneys who have been in practice at least fifteen years specializing in
corporate and securities matters and who have had both training and experience
as arbitrators ("Experienced Arbitrators"). If either such person fails to
appoint an arbitrator within ten days of a request in writing by the other such
person to do so or if the first two arbitrators cannot agree on the appointment
of a third arbitrator within thirty days, then such arbitrator shall be
appointed by the American Arbitration Association (which appointment shall not
be limited to Experienced Arbitrators if not made within the applicable time
period).
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<PAGE> 70
Except as to the selection of arbitrators which shall be as set forth above, the
arbitration shall be conducted promptly and expeditiously at such place in
Phoenix, Arizona agreed to between the Committee and the Monterey Stockholders
in accordance with the Commercial Rules of Arbitration of the American
Arbitration Association then in effect so as to enable the arbitrators to
determine the Loss or Claim and/or the existence of a Loss or Claim within
forty-five days of the commencement of the arbitration proceedings. The
arbitrators' resolution of the dispute shall be final, binding and
nonappealable. The nonprevailing party shall bear the expenses of the
arbitrators and the arbitration, including reasonable attorneys fees and costs.
LIMITATIONS ON INDEMNIFICATION. The maximum aggregate amount of
indemnification that may be required of the Monterey Stockholders, on the one
hand, and Homeplex, on the other, pursuant to the Merger Agreement shall be
$500,000 each.
MONTEREY STOCKHOLDER AGREEMENTS
EMPLOYMENT AGREEMENTS. Homeplex and each of William W. Cleverly and Steven
J. Hilton will execute employment agreements (the "Employment Agreements"), each
with a term ending on December 31, 2001 and providing for an initial base salary
of $200,000 per year (increasing by 5% of the prior year's base salary per
year), and an annual bonus for the first two years of the lesser of 4% of the
pre-tax consolidated net income of Homeplex or $200,000. Thereafter the bonus
percentage payout of consolidated net income would be determined by the
then-existing compensation committee of the Board of Directors, provided that in
no event will the bonus payable in any year exceed $200,000 per employee. Mr.
Cleverly will serve as Co-Chief Executive Officer and Chairman, and Mr. Hilton
will serve as Co-Chief Executive Officer and President. If such Monterey
Stockholder voluntarily terminates his employment or is discharged for "Cause,"
Homeplex will have no obligation to pay him his current annual salary or bonus.
If a Monterey Stockholder is terminated during the term of the Employment
Agreement without "Cause" or as a result of his death or permanent disability,
Homeplex will be obligated to pay such Monterey Stockholder (a) his current
annual salary through the term of the Employment Agreement if terminated without
"Cause," or for six months after termination in the event of death or
disability, plus (b) a pro rated bonus. "Cause" is defined to mean only an act
or acts of dishonesty by a Monterey Stockholder constituting a felony and
resulting or intended to result directly or indirectly in substantial personal
gain or enrichment at the expense of Homeplex.
The Employment Agreements contain non-compete provisions that restrict the
Monterey Stockholders until December 31, 2001, from, except in connection with
their performance of their duties under the Employment Agreements, (i) engaging
in the homebuilding business, (ii) recruiting, hiring or discussing employment
with any person who is, or within the past six months was, an employee of
Homeplex, (iii) soliciting any customer or supplier of Homeplex for a competing
business or otherwise attempting to induce any customer or supplier to
discontinue its relationship with Homeplex, or (iv) except solely as a limited
partner with no management or operating responsibilities, engaging in the land
banking or lot development business; provided, however, the foregoing provisions
shall not restrict (A) the ownership of less than 5% of a publicly-traded
company, or (B) in the event the employment of such Monterey Stockholder is
terminated under the Employment Agreement, engaging in the custom homebuilding
business, engaging in the production homebuilding business outside a 100 mile
radius of any project of Homeplex or outside Northern California or engaging in
the land banking or lot development business. The non-compete provisions will
survive the termination of the Employment Agreement unless such Monterey
Stockholder is terminated by Homeplex without Cause.
EMPLOYMENT OPTIONS. In connection with the Employment Agreements, each of
Mr. Cleverly and Mr. Hilton will be granted options to purchase an aggregate of
500,000 shares of Homeplex Common Stock at an exercise price of $1.75 per share
(collectively, the "Employment Options") pursuant to stock option agreements to
be executed simultaneously with the Employment Agreements (collectively, the
"Stock Option Agreements"). The Employment Options expire on December 31, 2002
and will vest annually over three years in equal increments beginning on the
first anniversary of the Effective Date; provided, however, the Employment
Options will vest in full and will be exercisable upon a change of control of
Homeplex prior to the third anniversary of the Effective Date. If a Monterey
Stockholder voluntarily terminates his employment
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<PAGE> 71
with Homeplex or he is terminated as a result of his death or disability, the
Employment Options will be exercisable for a period of six months (if a result
of voluntary termination) and one year (if a result of death or permanent
disability) following such termination. If a Monterey Stockholder is terminated
without Cause, the Employment Options will immediately be exercisable until
December 31, 2002. If Homeplex terminates a Monterey Stockholders' employment
for Cause, the Employment Options will terminate immediately.
REGISTRATION RIGHTS AGREEMENT. Simultaneously with the execution of the
Employment Agreements and the Stock Option Agreements, each of Mr. Cleverly and
Mr. Hilton will enter into a registration rights agreement with Homeplex
providing for demand registration rights and incidental registration rights for
all shares of Homeplex Common Stock owned by such Monterey Stockholder,
including the Exchange Shares, the Contingent Shares and the shares issued
pursuant to the Employment Options (the "Registration Rights Agreement"). The
Employment Agreements, the Stock Option Agreements and the Registration Rights
Agreements are collectively referred to as the "Monterey Stockholder
Agreements." The forms of the Monterey Stockholder Agreements are attached to
this Proxy Statement/Prospectus as Appendix C. All stockholders are urged to
read the Monterey Stockholder Agreements in their entirety.
GOVERNMENTAL AND REGULATORY APPROVALS
Under the Merger Agreement, the obligations of Homeplex and Monterey and
the Monterey Stockholders are conditioned upon the receipt of all required
consents of governmental entities. There can be no assurance that any applicable
regulatory authority will approve or take other required action with respect to
the Merger or as to the date of such regulatory approval or other action.
Homeplex and Monterey and the Monterey Stockholders are not aware of any
government approvals that are required in order to consummate the Merger that
have not been obtained.
ACCOUNTING TREATMENT
The Merger will be accounted for as an acquisition by Homeplex of the
Monterey Merging Companies and will be recorded by Homeplex as a purchase in
accordance with generally accepted accounting principles. See "Selected
Financial Data -- Unaudited Pro Forma Condensed Combined Financial Data."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain material Federal income tax
consequences of the Merger to Homeplex and Monterey. The Federal income tax
discussion set forth below is for general information only and does not address
foreign, state or local tax consequences, estate or gift tax considerations, or
the Federal income tax consequences of the Merger to the Monterey Stockholders.
EACH HOLDER OF MONTEREY COMMON STOCK IS URGED TO CONSULT HIS TAX ADVISOR AS TO
THE TAX CONSEQUENCES TO HIM OF THE MERGER, INCLUDING THE APPLICATION AND EFFECT
OF STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
Neither Homeplex nor Monterey has requested an advance ruling from the
Internal Revenue Service as to the tax consequences of the Merger.
Each of Homeplex and Monterey will receive an opinion from Homeplex's
counsel, Hughes & Luce, L.L.P., stating that based upon the facts,
representations and assumptions set forth in the opinion, for Federal income tax
purposes, (i) the Merger will qualify as a reorganization within the meaning of
Section 368(a) of the Code, (ii) there has not been an "ownership change" of
Homeplex within the meaning of Section 382 of the Code prior to the Effective
Date, and (iii) the Merger will not cause an "ownership change" of Homeplex
within the meaning of Section 382 of the Code to occur on the Effective Date.
Based upon such opinions, no gain or loss will be recognized by Homeplex or
Monterey as a result of the Merger.
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<PAGE> 72
The availability of the NOL Carryforward to offset taxable income of
Homeplex for periods after the Merger is potentially subject to certain
restrictions or limitations under the Code. If an "ownership change" within the
meaning of Section 382 of the Code has occurred or occurs with respect to
Homeplex after the years in which the net operating losses occurred, the ability
of Homeplex to use the NOL Carryforward to offset future taxable income would be
subject to substantial limitations. Based on the opinion described above,
Homeplex will not be subject, as of the Effective Date, to limitations on use of
the NOL Carryforward pursuant to Section 382 of the Code. Additionally, pursuant
to Section 384 of the Code, Homeplex may not be permitted to use the NOL
Carryforward to offset taxable income resulting from sales of assets owned by
Monterey at the time of the Merger to the extent that the fair market value of
such assets at the time of the Merger exceeded their tax basis.
THE FOREGOING DISCUSSION OF FEDERAL INCOME TAX CONSEQUENCES IS NOT TAX
ADVICE AND DOES NOT ADDRESS THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF
THE MERGER TO THE MONTEREY STOCKHOLDERS. ACCORDINGLY, EACH MONTEREY STOCKHOLDER
SHOULD CONSULT SUCH STOCKHOLDER'S OWN TAX AND FINANCIAL ADVISORS AS TO THE
MATTERS DESCRIBED IN THE PROSPECTUS AND ALSO AS TO ANY ESTATE, GIFT, STATE,
LOCAL, OR FOREIGN TAX CONSEQUENCES ARISING OUT OF THE MERGER.
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<PAGE> 73
ELECTION OF BOARD OF DIRECTORS
OVERVIEW
The Annual Meeting will include the election of (i) the Class I Directors
and the Class II Directors to serve upon the effectiveness of the Merger and
until the end of their respective terms and until their successors are elected
(collectively, the "Post Merger Directors"), and (ii) directors to serve until
the effectiveness of the Merger, or if the Merger is not consummated or is
delayed for any reason, until the next annual meeting and until their successors
are elected (collectively, the "Pre Merger Directors").
Pursuant to the authority granted in Homeplex's Articles of Incorporation
and Bylaws, the Board of Directors has determined that five Pre Merger Directors
and five Post Merger Directors be elected at the Annual Meeting and have
nominated for election as such directors the persons identified below as
nominees for the Boards of Directors. If for any reason any nominee ceases to
serve as a director of Homeplex at any time prior to the first anniversary of
the Effective Date, the vacancy will be filled by a person selected by the
remaining nominees then serving as directors; provided, however, if either
Monterey Stockholder ceases to serve, the vacancy will be filled by a person
selected by the remaining Monterey Stockholder. If, by reason of death or other
unexpected occurrence, any one or more of the nominees should for any reason
become unavailable for election, the persons named as proxies in the
accompanying form of proxy may vote for the election of such substitute
nominees, and for such term or terms, as the Board of Directors may propose.
NOMINEES FOR THE BOARD OF DIRECTORS
The nominees, their ages, the period they have served as directors of
Homeplex and Monterey, as applicable, and the position(s) held with Homeplex and
Monterey, as applicable, are shown below.
PRE MERGER DIRECTORS
<TABLE>
<CAPTION>
HOMEPLEX
DIRECTOR
NOMINEES AGE SINCE POSITION(S) HELD WITH HOMEPLEX
----------------------------------- --- -------- ------------------------------------
<S> <C> <C> <C>
Alan D. Hamberlin.................. 47 1988 Chairman of the Board of Directors,
Director and Chief Executive Officer
Jay R. Hoffman..................... 42 1995 Director, President, Secretary,
Treasurer and Chief Financial and
Accounting Officer
Larry E. Cox....................... 47 1995 Director
Mark A. McKinley................... 49 1988 Director
Gregory K. Norris.................. 45 1990 Director
</TABLE>
POST MERGER DIRECTORS
<TABLE>
<CAPTION>
MONTEREY
DIRECTOR
NOMINEES AGE SINCE POSITION(S) HELD WITH MONTEREY
----------------------------------- --- -------- ------------------------------------
<S> <C> <C> <C>
Class I
William W. Cleverly................ 40 1985 Director and President
Steven J. Hilton................... 35 1985 Director, Treasurer and Secretary
Alan D. Hamberlin.................. 47 -- --
Class II
Robert G. Sarver................... 35 -- --
C. Timothy White................... 35 1995 Director
</TABLE>
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<PAGE> 74
As of November 6, 1996, there were 9,716,517 shares of Homeplex Common
Stock outstanding. The number of shares of Homeplex Common Stock beneficially
owned, directly or indirectly, by each nominee and their percentage of
outstanding Homeplex Common Stock at November 6, 1996 and after giving effect to
the Merger are shown below. Beneficial ownership includes both sole voting and
sole investment power.
PRE MERGER OWNERSHIP
<TABLE>
<CAPTION>
TOTAL SHARES
BENEFICIALLY PERCENT
PRE MERGER NOMINEES OWNED(1) OWNERSHIP(2)
--------------------------------------------------------- ------------ ------------
<S> <C> <C>
Mr. Hamberlin*........................................... 344,623(3) 3.44%
Mr. Hoffman*............................................. 78,269(4) **
Mr. McKinley*............................................ 47,507(5) **
Mr. Cox*................................................. 11,651(5) **
Mr. Norris*.............................................. 3,400(5) **
------- ----
All Pre Merger nominees as a Group....................... 485,450(6) 4.78%
======= ====
</TABLE>
<TABLE>
<CAPTION>
TOTAL SHARES
BENEFICIALLY PERCENT
POST MERGER NOMINEES OWNED(1) OWNERSHIP(2)
--------------------------------------------------------- ------------ ------------
<S> <C> <C>
Mr. Hamberlin............................................ 344,623(3) 3.44%
Mr. Cleverly............................................. 10,000 **
Mr. Hilton............................................... -- --
Mr. Sarver............................................... 150,000 1.54%
Mr. White................................................ -- --
------- ----
All Post Merger Nominees as a Group...................... 504,623(3) 5.08%
======= ====
</TABLE>
- ---------------
* Each director and executive officer of Homeplex may be reached through
Homeplex at 5333 North Seventh Street, Suite 219, Phoenix, Arizona 85014.
** Less than 1% of the outstanding shares of Homeplex Common Stock.
(1) Includes, where applicable, shares of Homeplex Common Stock owned of record
by such person's minor children and spouse and by other related individuals
and entities over whose shares of Homeplex Common Stock such person has
custody, voting control or the power of disposition.
(2) The percentages shown include the shares of Homeplex Common Stock actually
owned as of November 6, 1996 and the shares of Homeplex Common Stock which
the person or group had the right to acquire within 60 days of such date. In
calculating the percentage of ownership, all shares of Homeplex Common Stock
which the identified person or group had the right to acquire within 60 days
of November 6, 1996 upon the exercise of options are deemed to be
outstanding for the purpose of computing the percentage of the shares of
Homeplex Common Stock owned by such person or group, but are not deemed to
be outstanding for the purpose of computing the percentage of the shares of
Homeplex Common Stock owned by any other person. The Hamberlin Stock Options
are not included as these will not be approved prior to the Annual Meeting.
If approved at the Annual Meeting, options covering 500,000 shares of
Homeplex Common Stock will be exercisable.
(3) Includes 37,900 shares of Homeplex Common Stock indirectly beneficially
owned by Mr. Hamberlin through a partnership and 306,723 shares of Homeplex
Common Stock which Mr. Hamberlin had the right to acquire within 60 days of
November 6, 1996 by the exercise of stock options (including dividend
equivalent rights). The Hamberlin Stock Options are not included as these
will not be approved prior to the Annual Meeting. If approved at the Annual
Meeting, options covering 500,000 shares of Homeplex Common Stock will be
exercisable.
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<PAGE> 75
(4) Includes 15,000 shares of Homeplex Common Stock owned by Mr. Hoffman and
63,269 shares of Homeplex Common Stock which Mr. Hoffman had the right to
acquire within 60 days of November 6, 1996 by the exercise of stock options
(including dividend equivalent rights).
(5) All of such shares of Homeplex Common Stock are shares which Mr. McKinley,
Mr. Norris and Mr. Cox had the right to acquire within 60 days of November
6, 1996 by the exercise of stock options (including dividend equivalent
rights).
(6) Includes 432,550 shares of Homeplex Common Stock which such persons had the
right to acquire within 60 days of November 6, 1996 by the exercise of stock
options (including dividend equivalent rights). The Hamberlin Stock Options
are not included as these will not be approved prior to the Annual Meeting.
If approved at the Annual Meeting, options covering 500,000 shares of
Homeplex Common Stock will be exercisable.
Upon consummation of the Merger, approximately 13,616,517 shares of
Homeplex Common Stock will be outstanding. The number of shares of Homeplex
Common Stock estimated to be beneficially owned, directly and indirectly, by
each Nominee and their estimated percentage of outstanding Homeplex Common Stock
immediately after giving effect to the Merger are shown below. Beneficial
ownership includes both sole voting and sole investment power.
POST MERGER OWNERSHIP
<TABLE>
<CAPTION>
TOTAL SHARES
BENEFICIALLY PERCENT
PRE MERGER NOMINEES OWNED(1) OWNERSHIP(2)
--------------------------------------------------------- ------------ ------------
<S> <C> <C>
Mr. Hamberlin............................................ 344,623(3) 2.45%
Mr. Hoffman.............................................. 78,269(4) *
Mr. Cox.................................................. 47,507(5) *
Mr. McKinley............................................. 11,651(5) *
Mr. Norris............................................... 3,400(5) *
------- ----
All Pre Merger Nominees as a Group....................... 485,450(6) 3.42%
======= ====
</TABLE>
<TABLE>
<CAPTION>
TOTAL SHARES
BENEFICIALLY PERCENT
POST MERGER NOMINEES OWNED(1) OWNERSHIP(2)
--------------------------------------------------------- ------------ ------------
<S> <C> <C>
Mr. Hamberlin............................................ 344,623(3) 2.48%
Mr. Cleverly............................................. 1,960,000(7) 14.39%
Mr. Hilton............................................... 1,950,000(7) 14.32%
Mr. Sarver............................................... 150,000 1.10%
Mr. White................................................ -- --
--------- -----
All Post Merger Nominees as a Group...................... 4,404,623(7) 31.64%
========= =====
</TABLE>
- ---------------
* Less than 1% of the outstanding shares of Homeplex Common Stock.
(1) Includes, where applicable, shares of Homeplex Common Stock estimated to be
owned of record by such person's minor children and spouse and by other
related individuals and entities over whose shares of Homeplex Common Stock
such person has custody, voting control or the power of disposition.
(2) The percentages shown include the shares of Homeplex Common Stock estimated
to be actually owned as of the Effective Date and the estimated shares of
Homeplex Common Stock which the person or group will have the right to
acquire within 60 days of such date. In calculating the percentage of
ownership, the estimated amount of all shares of Homeplex Common Stock which
the identified person or group will have the right to acquire within 60 days
of the Effective Date upon the exercise of options are deemed to be
outstanding for the purpose of computing the percentage of the shares of
Homeplex Common Stock estimated to be owned by such person or group, but are
not deemed to be outstanding for the purpose of computing the percentage of
the shares of Homeplex Common Stock estimated to be owned by any other
person. The Hamberlin Stock Options are not included as these will not be
approved prior to the Annual
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<PAGE> 76
Meeting. If approved at the Annual Meeting, options covering 500,000 shares
of Homeplex Common Stock will be exercisable.
(3) Includes 37,900 shares of Homeplex Common Stock indirectly beneficially
owned by Mr. Hamberlin through a partnership and 306,723 shares of Homeplex
Common Stock which Mr. Hamberlin will have the right to acquire within 60
days of the Effective Date by the exercise of stock options (including
dividend equivalent rights). The Hamberlin Stock Options are not included as
these will not be approved prior to the Annual Meeting. If approved at the
Annual Meeting, options covering 500,000 shares of Homeplex Common Stock
will be exercisable.
(4) Includes 15,000 shares of Homeplex Common Stock owned by Mr. Hoffman and
63,269 shares of Homeplex Common Stock which Mr. Hoffman will have the right
to acquire within 60 days of the Effective Date by the exercise of stock
options (including dividend equivalent rights).
(5) All of such shares of Homeplex Common Stock are shares which Mr. McKinley,
Mr. Norris and Mr. Cox will have the right to acquire within 60 days of the
Effective Date by the exercise of stock options (including dividend
equivalent rights).
(6) Includes 432,550 shares of Homeplex Common Stock which such persons will
have the right to acquire within 60 days of the Effective Date by the
exercise of stock options (including dividend equivalent rights). The
Hamberlin Stock Options are not included as these will not be approved prior
to the Annual Meeting. If approved at the Annual Meeting, options covering
500,000 shares of Homeplex Common Stock will be exercisable.
(7) Assumes none of the Homeplex Warrants are exercised by the Warrantholders.
None of the Hamberlin Stock Options are included as these will not be
approved prior to the Annual Meeting. If approved at the Annual Meeting,
options covering 500,000 shares will be exercisable.
The Merger Agreement requires that the Post Merger Directors be comprised
of at least two persons who are independent directors and at least one person
who is a Pre Merger Director. The present principal occupations and other
biographical information with respect to the Nominees are as follows.
NOMINEES FOR PRE MERGER DIRECTORS
Alan D. Hamberlin has been a director and Chief Executive Officer of
Homeplex since its organization in July 1988 and Chairman of the Board of
Directors since January 1990. Mr. Hamberlin also served as the President of
Homeplex from its organization until September 1995. Mr. Hamberlin served as the
President and Chief Executive Officer of the managing general partner of
Homeplex's former Manager. Mr. Hamberlin has been President of Courtland Homes,
Inc., a Phoenix, Arizona single-family residential homebuilder, since July 1983.
Mr. Hamberlin has served as a Director of American Southwest Financial
Corporation and American Southwest Finance Co., Inc. since their organization in
September 1982. Mr. Hamberlin also has served as a Director of American
Southwest Affiliated Companies since its organization in March 1985 and of
American Southwest Holdings, Inc. since August 1994.
Jay R. Hoffman has been the President and a director of Homeplex since
September 1995 and the Secretary, Treasurer and Chief Financial and Accounting
Officer of Homeplex since July 1988. Mr. Hoffman also served as the Vice
President of the Homeplex from July 1988 to September 1995. Mr. Hoffman, a
certified public accountant, engaged in the practice of public accounting with
Kenneth Leventhal & Company from March 1987 through June 1988 and with Arthur
Andersen & Co. from June 1976 through March 1987.
Larry E. Cox has been a director of Homeplex since November 1995. Mr. Cox
is currently the managing member of Taro Properties Arizona, L.L.C. and
President of Taro Properties Arizona, Inc., land development and investment
companies. Prior to that, Mr. Cox was Vice President of Forward Planning for A-M
Homes, a residential homebuilder, from August 1989 to January 1992. Mr. Cox is
also on the Community Relations Board of the Bank of Arizona.
Mark A. McKinley has been a director of Homeplex since May 1988. Mr.
McKinley is currently Senior Vice President of NationsBank Mortgage Corporation.
Prior to that, he was the Co-Founder, President and Director of Cypress
Financial Corporation organized in 1983 and Managing Director of Rancho Santa
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<PAGE> 77
Margarita Mortgage Corporation, organized in 1990. From 1968 through 1983, Mr.
McKinley served as Senior Vice President of The Colwell Company, a publicly held
mortgage banking corporation and was responsible for administration of secondary
marketing, hedging operations and loan sales.
Gregory K. Norris has been a director of Homeplex since June 1990. Mr.
Norris has been the President of Norris & Benedict Associates P.C., certified
public accountants, or its predecessor firms since November 1979. Mr. Norris
previously was engaged in the practice of public accounting with Bolan, Vassar
and Borrows, certified public accountants, from December 1978 until November
1979 and with Ernst & Whinney (now Ernst & Young, LLP) from July 1974 until
December 1978.
NOMINEES FOR CLASS I POST MERGER DIRECTORS
Alan D. Hamberlin has been a director and Chief Executive Officer of
Homeplex since its organization in July 1988 and Chairman of the Board of
Directors since January 1990. Mr. Hamberlin also served as the President of
Homeplex from its organization until September 1995. Mr. Hamberlin served as the
President and Chief Executive Officer of the managing general partner of
Homeplex's former Manager. Mr. Hamberlin has been President of Courtland Homes,
Inc., a Phoenix, Arizona single-family residential homebuilder, since July 1983.
Mr. Hamberlin has served as a Director of American Southwest Financial
Corporation and American Southwest Finance Co., Inc. since their organization in
September 1982. Mr. Hamberlin also has served as a Director of American
Southwest Affiliated Companies since its organization in March 1985 and of
American Southwest Holdings, Inc. since August 1994.
William W. Cleverly co-founded Monterey in 1985 and currently serves as
President and a director of Monterey. Mr. Cleverly's primary operating
responsibilities are land acquisition, development financing, and marketing.
From 1983 to 1985, Mr. Cleverly was the President and founder of a real estate
development company which developed and marketed multi-family projects. Mr.
Cleverly received his undergraduate degree from the University of Arizona, and
is a member of the Central Arizona Homebuilders' Association of Arizona and the
National Homebuilders' Association.
Steven J. Hilton co-founded Monterey in 1985 and currently serves as
Treasurer, Secretary, and a director of Monterey. Mr. Hilton's primary operating
responsibilities include land acquisition, development financing, and
construction. From 1985 to 1986, Mr. Hilton served as a project manager for
Premier Community Homes, a residential homebuilder. From 1984 to 1985, Mr.
Hilton served as a project manager for Mr. Cleverly's real estate development
company. Mr. Hilton received his undergraduate degree from the University of
Arizona, and is a member of the Central Arizona Homebuilders' Association, the
National Homebuilders' Association, and the National Board of Realtors and the
Scottsdale Board of Realtors.
NOMINEES FOR CLASS II POST MERGER DIRECTORS
Robert G. Sarver has served as the Chairman and Chief Executive Officer of
GB Bancorporation, a bank holding company for Grossmont Bank, San Diego's
largest community bank, since 1995. Mr. Sarver currently serves as a director of
Zion's Bancorporation, a publicly held bank holding company. In 1990, Mr. Sarver
was a co-founder and currently serves as the Executive Director of Southwest
Value Partners and Affiliates, a real estate investment company. In 1984, Mr.
Sarver founded National Bank of Arizona, Inc. and served as President until it
was acquired by Zion's Bancorporation in 1994. Mr. Sarver received his
undergraduate degree from the University of Arizona and is a certified public
accountant.
C. Timothy White has served as a director of Monterey since February 1995.
Since 1989, Mr. White has been an attorney with the law firm of Tiffany & Bosco,
P.A. in Phoenix, Arizona. During 1995 and the first six months of 1996, Monterey
paid Tiffany & Bosco, P.A. $206,000 and $54,000, respectively, for legal
services rendered. Mr. White received his undergraduate degree from the
University of Arizona and his law degree from Arizona State University.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR EACH NOMINEE FOR THE
PRE MERGER BOARD OF DIRECTORS AND THE POST MERGER BOARD OF DIRECTORS.
62
<PAGE> 78
1995 MEETINGS OF THE BOARD OF DIRECTORS
Homeplex's Board of Directors held a total of ten meetings during the
fiscal year ended December 31, 1995. One director was absent for one of the ten
meetings. The Audit Committee met separately at one formal meeting. One director
was absent for such Audit Committee meeting.
COMMITTEES OF THE BOARD OF DIRECTORS
Messrs. Cox, McKinley and Norris are members of Homeplex's Audit Committee.
COMPENSATION OF DIRECTORS
Homeplex pays an annual director's fee to each independent director equal
to $20,000, a fee of $1,000 for each meeting of the Board of Directors attended
by each independent director and reimbursement of costs and expenses for
attending such meetings. During 1995, the independent directors also accrued
dividend equivalent rights, in the following amounts: (i) 932 with respect to
Mr. McKinley, (ii) 228 with respect to Mr. Norris, and (iii) 200 with respect to
Mr. Cox.
In addition, Homeplex's directors are eligible to participate in its stock
option plan. During 1995, Mr. Cox was granted 10,000 stock options at $1.50 per
share under Homeplex's stock option plan. One-third of the options are currently
exercisable, one-third become exercisable on December 13, 1996 and the remaining
one-third become exercisable on December 13, 1997. During the first six months
of 1996, no stock options were granted to any director. See "Homeplex
Management -- Stock Option Plan."
BOARD OF DIRECTORS' REPORT ON EXECUTIVE COMPENSATION
The Board of Directors is responsible for reviewing and determining
Homeplex's compensation policies and the compensation paid to executive
officers, including approving the Hamberlin Employment Agreement. There is no
compensation committee that reviews and makes recommendations to the Board of
Directors on cash compensation, stock option awards and other compensation for
Homeplex's executive officers.
In order to more closely align Mr. Hamberlin's compensation with the
interests of Homeplex's stockholders, the Board of Directors approved the
Hamberlin Employment Agreement. The Hamberlin Employment Agreement provides for
Mr. Hamberlin to receive an annual base salary of $1.00, Mr. Hamberlin is not
entitled to any bonuses except as granted by the Board of Directors in its
absolute discretion. In lieu of an annual base salary, Homeplex granted Mr.
Hamberlin the Hamberlin Stock Options (subject to stockholder approval), and if
the Hamberlin Stock Options are not approved at the Annual Meeting, the
Hamberlin PSRs.
Homeplex also compensates its executive officers through the stock option
plan approved by the stockholders. The Board of Directors believes that stock
option grants provide an incentive that aligns the executive officers' interests
with those of the stockholders by giving them an equity stake in the business.
Homeplex's stock options are of significant value to the executive officer
receiving such options only to the extent that (i) the price of Homeplex Common
Stock increases above the option grant price which is the fair market value on
the date of the grant and/or (ii) dividend distributions on Homeplex Common
Stock results in the accrual of dividend equivalent rights with respect to the
stock options. Thus, the Board of Directors believes that Homeplex's stock
option plan motivates its executive officers to manage Homeplex in a manner that
will provide the best overall return to Homeplex's stockholders. All authorized
options have been issued under Homeplex's current stock option plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The entire Board of Directors performed the function of determining
Homeplex's compensation policies applicable to its executive officers. Alan D.
Hamberlin, the Chairman of the Board of Directors, also was the President and
Chief Executive Officer of Homeplex during the fiscal year. Although Mr.
Hamberlin served on
63
<PAGE> 79
Homeplex's Board of Directors, he did not participate in the Board of Directors'
decisions regarding the approval of his employment agreement or grants of stock
options to him.
PERFORMANCE GRAPH
The following chart compares the cumulative total stockholder return on
Homeplex Common Stock during the five years ended December 31, 1995, with a
cumulative total return on the Standard & Poor's 500 Stock Index and an industry
index (the "Index") prepared by the National Association of Real Estate
Investment Trusts ("NAREIT"). The Index consists of Mortgage Real Estate
Investment Trusts as compiled by NAREIT. The comparison assumes $100 was
invested on December 31, 1990 in Homeplex Common Stock and in each of the
foregoing indices and assumes reinvestment of dividends.
<TABLE>
<CAPTION>
Measurement Period
(Fiscal Year Covered) Homeplex NAREIT Index S&P 500 Index
<S> <C> <C> <C>
1990 100 100 100
1991 227 132 131
1992 86 134 141
1993 46 154 155
1994 37 117 157
1995 57 190 216
</TABLE>
64
<PAGE> 80
SELECTED FINANCIAL DATA
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The Unaudited Pro Forma Condensed Combined Income Statement Data set forth
below presents the results of operations of the combined entity, assuming the
Merger occurred on January 1, 1995, for the twelve months ended December 31,
1995 and the six months ended June 30, 1996. The Unaudited Pro Forma Condensed
Combined Balance Sheet Data set forth below presents the financial position of
the combined entity assuming the Merger occurred on June 30, 1996. The Unaudited
Pro Forma Condensed Combined Financial Data assumes the Monterey Stockholders
received the Distributions prior to the Merger. Adjustments necessary to reflect
these assumptions and to restate historical combined balance sheets and results
of operations are presented in the Pro Forma Adjustments columns, which are
further described in the Notes to Selected Unaudited Pro Forma Condensed
Combined Financial Data.
The historical financial information for Homeplex is derived from the
audited consolidated financial statements of Homeplex as of and for the year
ended December 31, 1995, and the unaudited consolidated financial statements of
Homeplex as of and for the six months ended June 30, 1996. The historical
financial information for Monterey is derived from the audited combined
financial statements of Monterey as of and for the year ended December 31, 1995,
and the unaudited combined financial statements of Monterey as of and for the
six months ended June 30, 1996.
The following information does not purport to present the financial
position or results of operations of Homeplex and Monterey had the Merger, the
Distributions and the other events assumed therein occurred on the dates
specified, nor is it necessarily indicative of the results of operations of
Homeplex and Monterey as they may be in the future or as they may have been had
the Merger and such other events been consummated on the dates shown. The
Selected Unaudited Pro Forma Condensed Combined Financial Data is based on
certain assumptions and adjustments described in the related Notes to Unaudited
Pro Forma Condensed Combined Financial Data and should be read in conjunction
with the Merger Agreement, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for each of Homeplex and Monterey, and the
audited and unaudited historical financial statements and notes thereto of
Homeplex and Monterey included elsewhere in this Proxy Statement/Prospectus.
65
<PAGE> 81
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MONTEREY
-----------------------------------------
AS HOMEPLEX PROFORMA PROFORMA
HISTORICAL ADJUSTMENTS(2) ADJUSTED HISTORICAL COMBINED ADJUSTMENTS(2) COMBINED
---------- -------------- -------- ---------- -------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Real estate under
development........... $ 43,773 $ -- $ 43,773 $ -- $43,773 $ -- $ 43,773
Real estate loans and
other receivables..... 820 -- 820 3,852 4,672 -- 4,672
Residual interests...... -- -- -- 4,625 4,625 -- 4,625
Cash and cash
equivalents........... 1,613 (516)(b) 1,097 10,853 11,950 (780)(b) 11,170
Option deposits......... 972 -- 972 -- 972 -- 972
Other assets............ 1,272 -- 1,272 422 1,694 (750)(c) 944
Deferred tax asset...... -- -- -- -- -- 6,783 (c) 6,783
Goodwill................ -- -- -- -- -- 1,686 (c) 1,686
--------- -------- -------- ---------- -------- -------- ------------
Total Assets... $ 48,450 $ (516) $ 47,934 $ 19,752 $67,686 $ 6,939 $ 74,625
======== ======== ======== ======== ======== ======== ============
LIABILITIES & STOCKHOLDERS' EQUITY:
Accounts payable and
accruals.............. $ 3,452 $ -- $ 3,452 $ 1,072 $ 4,524 $ -- $ 4,524
Home sale deposits...... 4,980 -- 4,980 -- 4,980 -- 4,980
Notes payable........... 32,075 5,443(a) 37,518 -- 37,518 -- 37,518
--------- -------- -------- ---------- -------- -------- ------------
Total Liabilities....... 40,507 5,443 45,950 1,072 47,022 -- 47,022
--------- -------- -------- ---------- -------- -------- ------------
Common stock............ 5 -- 5 99 104 (5)(e) 138
39 (d)
Additional paid-in
capital............... 8 -- 8 84,046 84,054 (8)(e) 92,930
8,884 (d)
Retained earnings
(accumulated
deficit).............. 7,930 (5,443)(a) 1,971 (65,055) (63,084 ) (1,971)(e) (65,055)
(516)(b)
Treasury stock.......... -- -- -- (410) (410 ) -- (410)
--------- -------- -------- ---------- -------- -------- ------------
Total Stockholders'
Equity.............. 7,943 $ (5,959) 1,984 18,680 20,664 6,939 27,603
--------- -------- -------- ---------- -------- -------- ------------
Total Liabilities and
Stockholders'
Equity.............. $ 48,450 $ (516) $ 47,934 $ 19,752 $67,686 $ 6,939 $ 74,625
======== ======== ======== ======== ======== ======== ============
Pro forma net book value
per share............. $ 2.00
=============
Pro forma common shares
outstanding........... $ 13,777,000
=============
</TABLE>
- ------------------------------------------------------------------------
See accompanying "Notes to Unaudited Pro Forma Condensed Combined Financial
Data."
66
<PAGE> 82
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
------------------- PRO FORMA PRO FORMA
MONTEREY HOMEPLEX COMBINED ADJUSTMENTS(3) COMBINED
-------- --------- -------- -------------- ---------
<S> <C> <C> <C> <C> <C>
Home and land sales....................... $71,491 $ -- $71,491 $ -- $71,491
Cost of home and land sales............... 60,333 -- 60,333 225 (f) 60,558
------- --------- ------- ----- -------
Gross Margin.............................. 11,158 -- 11,158 (225) 10,933
Selling, general and administrative
expenses................................ 4,898 1,599 6,497 250 (g) 6,382
(648)(h)
281 (i)
(113)(j)
115 (k)
------- --------- ------- ----- -------
Operating income (loss)................... 6,260 (1,599) 4,661 (110) 4,551
------- --------- ------- ----- -------
Other income (expense):
Interest income on real estate loans.... -- 1,618 1,618 -- 1,618
Income from residual interests.......... -- 1,283 1,283 -- 1,283
Interest expense........................ -- (868) (868) -- (868)
Miscellaneous income, net............... 141 663 804 -- 804
------- --------- ------- ----- -------
Total other income (expense)......... 141 2,696 2,837 -- 2,837
------- --------- ------- ----- -------
Income before income taxes................ 6,401 1,097 7,498 (110) 7,388
Income tax expense........................ -- -- -- 813 (l) 813
------- --------- ------- ----- -------
Net income................................ $ 6,401 $ 1,097 $ 7,498 $ (923) $ 6,575
======= ========= ======= ===== =======
Net income per share:
Primary................................. $ .11 $ .47
========= =======
Fully-diluted........................... $ .11 $ .45
========= =======
Weighted average common shares
outstanding -- primary.................. 9,737,302 14,000,000
========= ==========
Weighted average common shares
outstanding -- fully diluted............ 9,737,302 14,668,000
========= ==========
</TABLE>
- ------------------------------------------------------------------------
See accompanying "Notes to Unaudited Pro Forma Condensed Combined Financial
Data."
67
<PAGE> 83
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
-------------------- PRO FORMA PRO FORMA
MONTEREY HOMEPLEX COMBINED ADJUSTMENTS(3) COMBINED
-------- -------- -------- -------------- ---------
<S> <C> <C> <C> <C> <C>
Home and land sales.................. $32,417 $ -- $32,417 $ -- $32,417
Cost of home and land sales.......... 27,738 -- 27,738 225 (f) 27,963
------- ------ ------- ------ -------
Gross Margin......................... 4,679 -- 4,679 (225) 4,454
Selling, general and administrative
expenses........................... 2,737 651 3,388 105 (g) 3,401
(157)(h)
64 (i)
(56)(j)
57 (k)
------- ------ ------- ------ -------
Operating income (loss).............. 1,942 (651) 1,291 (238) 1,053
------- ------ ------- ------ -------
Other income (expense):
Interest income on real estate
loans........................... -- 366 366 -- 366
Income from residual interests..... -- 525 525 -- 525
Interest expense................... -- (238) (238 ) -- (238)
Miscellaneous income, net.......... 27 379 406 -- 406
------- ------ ------- ------ -------
Total other income
(expense)................ 27 1,032 1,059 -- 1,059
------- ------ ------- ------ -------
Income before extraordinary loss and
income taxes....................... 1,969 381 2,350 (238) 2,112
Extraordinary loss from early
extinguishment of debt............. -- (149) (149 ) 149 (m) --
------- ------ ------- ------ -------
Income before income taxes........... 1,969 232 2,201 (89) 2,112
Income tax expense................... -- -- -- 232 (l) 232
------- ------ ------- ------ -------
Net income........................... $ 1,969 $ 232 $ 2,201 $ (321) $ 1,880
======= ====== ======= ====== =======
Net income per share:
Primary
Before extraordinary item............ $ 0.04 $ 0.13
Extraordinary item................... (0.02) --
------ -------
Total...................... $ 0.02 $ 0.13
====== =======
Fully Diluted
Before extraordinary item............ $ 0.04 $ 0.13
Extraordinary item................... (0.02) --
------ -------
Total...................... $ 0.02 $ 0.13
====== =======
Weighted average common shares
outstanding -- primary............. 9,885,624 13,950,000
========= ==========
Weighted average common shares
outstanding -- fully diluted....... 9,980,051 14,981,000
========= ==========
</TABLE>
- ------------------------------------------------------------------------
See accompanying "Notes to Unaudited Pro Forma Condensed Combined Financial
Data."
68
<PAGE> 84
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
1. Overview. The Unaudited Pro Forma Condensed Combined Income Statements
are presented as if the combination of Monterey and Homeplex occurred on January
1, 1995. The Unaudited Pro Forma Condensed Combined Balance Sheet is presented
assuming the combination occurred on June 30, 1996.
The combination is expected to be recorded as a purchase in accordance with
generally accepted accounting principles and, accordingly, the assets and
liabilities of the acquired entity (Monterey) are presented at their estimated
fair values as of that date. See "The Merger and Related Transactions."
The Merger Agreement provides that the Monterey Stockholders and the
Warrantholders will receive a number of Exchange Shares equal to the pro forma
book value of Monterey on the Effective Date multiplied by a factor of 3.0 and
divided by the fully diluted book value (giving effect to outstanding stock
options) per share of Homeplex Common Stock on the Effective Date. The Merger
Agreement requires Monterey to make the Distributions so that the ending book
value of Monterey immediately prior to the Merger equals $2.5 million, as
adjusted for the exclusion of transaction costs incurred by Monterey. Assuming
an Effective Date of June 30, 1996, the pro forma financial information reflects
a calculation that results in Homeplex issuing approximately 3.9 million shares
of Exchange Shares to the Monterey Stockholder's (83.5% or approximately 3.3
million shares) and the Warrantholders (16.5% or approximately 600,000 shares)
in exchange for the outstanding shares and warrants of Monterey. The Merger
Agreement requires the Merger to occur on or about December 31, 1996.
Accordingly, the number of shares issued will vary based on Homeplex's fully
diluted book value at the Effective Date. See "The Merger and Related
Transactions -- Merger Consideration."
In addition, Homeplex will issue up to 800,000 Contingent Shares, subject
to the trading price thresholds and employment restrictions. Approximately
131,840 Contingent Shares will be reserved for issuance on the Effective Date
for issuance upon the exercise of the Homeplex Warrants. The remaining 668,160
shares of Contingent Stock will be issued to the Monterey Stockholders if
certain Homeplex Common Stock price targets are reached for twenty consecutive
days at any time during the five years following the Effective Date, provided
that at the time of any such issuance to a Monterey Stockholder, such Monterey
Stockholder is still employed with Homeplex. If the stock price does not reach
such thresholds within five years following the date of the Merger, such
Contingent Stock will not be issued. See "The Merger and Related Transactions --
Merger Consideration."
In addition, pursuant to the Employment Agreements options to purchase one
million shares of Homeplex Common Stock will be granted to the Monterey
Stockholders at an exercise price of $1.75, which options will vest over the
three years following the Merger and expire at the end of the sixth year
following the Merger. The value of the options are considered compensation
expense for the combined entity which will be recognized over the three-year
vesting period. See "The Merger and Related Transactions -- Monterey Stockholder
Agreements."
The Merger Agreement provides that the Monterey Stockholders will receive
an amount that approximates the Distributions to reduce the adjusted book value
of Monterey to $2.5 million. Assuming an Effective Date of June 30, 1996, the
Distributions reflected in the pro forma financial information have been
calculated at approximately $5.4 million. The estimated Distributions amounted
to approximately $9.5 million due to the additional earnings Monterey is
expected to produce subsequent to June 30, 1996 but prior to the Effective Date.
See "The Merger and Related Transactions -- Distributions."
By effecting the Merger, Homeplex will cause a change in its tax status
from a REIT to a C-corporation and Monterey will terminate its Subchapter S tax
status. See "The Merger and Related Transactions -- Termination of REIT Status."
By utilizing the NOL Carryforward, it is anticipated that the income taxes
paid by the combined entity will consist primarily of state income taxes (since
utilization of the Homeplex state net operating loss may be significantly
limited) and the federal alternative minimum tax. Any federal income tax expense
generated by amortization of the deferred tax asset recognized for book purposes
is assumed to be offset by a decrease in the
69
<PAGE> 85
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA -- (CONTINUED)
reserve against the deferred tax asset and, accordingly, will have no net income
statement impact. See "The Merger and Related Transactions -- NOL Carryforward."
Management anticipates that no dividends will be declared or paid on the
common stock subsequent to the Merger and, accordingly, no pro forma dividend
information has been presented in the Unaudited Pro Forma Condensed Combined
Financial Data.
The Unaudited Pro Forma Condensed Combined Financial Data does not give
effect to proposed one-for-three stock split described elsewhere in this Proxy
Statement/Prospectus.
The following adjustments have been made to arrive at the Unaudited Pro
Forma Condensed Combined Financial Data.
2. Pro Forma Condensed Combined Balance Sheet Adjustments at June 30, 1996.
(a) The Merger Agreement calls for Monterey to make the Tax
Distribution and Retained Earnings Distribution so that the ending book
value of Monterey immediately prior to the Merger equals $2.5 million, as
adjusted. The Distributions were made from available cash and proceeds from
borrowings of Monterey. As a result, the Distributions have been presented
along side the historical balance sheet of Monterey rather than as a pro
forma adjustment contemplated in the Merger. The estimated Distributions
amounted to approximately $9.5 million due to the additional earnings
Monterey is expected to produce subsequent to June 30, 1996, but prior to
the Effective Date.
(b) To record the payment of certain Merger costs and related expenses
assumed to be incurred prior to and concurrent with the Effective Date of
the Merger estimated at $1,596,000. Of the $1,596,000, approximately
$1,080,000 will be paid by Homeplex, of which $780,000 is attributable to
the Merger and has been capitalized and included as a component of the
purchase price. The remaining $300,000 incurred by Homeplex will be
expensed.
Additionally, approximately $516,000 of costs incurred by Monterey is
attributable to the Merger and to the cost of obtaining waivers from the
holders of the Notes for prior defaults. Because this amount was expensed
prior to the Tax Distribution and Retained Earnings Distribution, it has
been presented along side the historical balance sheet of Monterey rather
than as a pro forma adjustment contemplated in the Merger. However, in
accordance with the Merger Agreement, this amount has been excluded for
purposes of computing the Tax Distribution and Retained Earnings
Distribution to arrive at the $2.5 million ending adjusted net book value
of Monterey.
(c) Utilizing an estimated stock price of $2.21 per share of Homeplex
Common Stock, which approximates the average stock for five days before and
after the public announcement of the Merger, the purchase price is
estimated as follows:
<TABLE>
<S> <C>
Consideration paid:
Estimated fair value of Homeplex common stock.................... $8,923,000
Estimated transaction costs...................................... 780,000
----------
Total consideration.............................................. $9,703,000
----------
Estimated fair value of net assets of Monterey................... $1,234,000
Estimated value of deferred tax asset............................ 6,783,000
----------
Estimated fair value of net assets acquired...................... $8,017,000
----------
Excess of purchase price over fair value of net assets
acquired....................................................... $1,686,000
==========
</TABLE>
Assuming the Merger occurred on June 30, 1996, the excess of purchase
price over the fair value of net assets acquired is attributable to
goodwill, which is to be amortized over 20 years. The allocation of the
purchase price among the assets and liabilities of Monterey results
primarily in the write-off of certain
70
<PAGE> 86
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA -- (CONTINUED)
deferred financing costs totaling $750,000 assumed to have no future value
to the combined entity. In addition, the transaction results in the
recording of the deferred tax asset relating to the benefit of operating
loss carryforwards, net of applicable valuation reserves and deferred tax
assets relating to the write off of the deferred financing costs.
The allocation of purchase cost in the pro forma financial statements
is based on available information. Management does not currently believe
that any adjustments to the final allocation of purchase price will have a
material effect on the Unaudited Pro Forma Condensed Combined Financial
Data.
(d) To record the effects of the issuance of Homeplex Common Stock to
the Monterey Stockholders and Warrantholders and additional paid-in capital
resulting from the Merger.
(e) To reclassify the remaining equity accounts of Monterey into
Homeplex's equity accounts, while giving effect to the legal entity
remaining subsequent to the Merger.
3.Pro Forma Condensed Combined Income Statements Adjustments for the Year Ended
December 31, 1995 and the Six Month Period Ended June 30, 1996.
(f) To record the amortization of additional capitalized interest
incurred in connection with the issuance of notes payable used to fund the
Tax Distribution and the Retained Earnings Distribution.
(g) To adjust for the estimated compensation expense expected to be
incurred as specified in the Employment Agreements with Messrs. Cleverly
and Hilton, net of previous compensation expense no longer recognized by
Monterey for these officers. This amount also includes an adjustment to
reflect additional compensation expense for the bonuses to be paid to
Messrs. Cleverly and Hilton for meeting certain net income levels as
specified in the Employment Agreements. The annual bonus amount for each
Monterey Stockholder is equal to the lesser of $200,000 or 4% of pre-tax
income.
(h) To eliminate compensation expense recorded by Homeplex for
employees terminated in connection with the Merger.
(i) To record compensation expense incurred in connection with the
issuance of options to purchase one million shares of Homeplex Common Stock
which will be issued to the Monterey Stockholders on the Effective Date,
and all of which are assumed to vest. The compensation expense for the
vested options is being recognized over the three year graded vesting
period. The compensation expense for such options was based on an estimated
stock price of $2.21 per share assumed on the date of grant. The actual
amount of compensation expense may vary based on the fair value of Homeplex
Common Stock on the date of grant of the options.
(j) To eliminate the amortization of deferred financing costs which
will be written off in connection with the Merger.
(k) To record the amortization of goodwill, which is being amortized
over 20 years.
(l) To record the amount of income taxes relating to the alternative
minimum tax and state income taxes, which has been estimated at 11% of
income before income taxes.
(m) To eliminate the effects of the extraordinary item due to its
nonrecurring nature.
4. Non-recurring Items. Due to the non-recurring nature of certain items
relating to the Merger which will affect the first year of operations following
the Effective Date, such items have been excluded from the Pro Forma Condensed
Combined Income Statement for the Year Ended December 31, 1995.
The first item excluded from the pro forma financial statements relates to
the estimated termination costs for Homeplex employees amounting to
approximately $300,000 expected to be incurred immediately following the Merger.
71
<PAGE> 87
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA -- (CONTINUED)
Additionally, no effect has been given in the Pro Forma Condensed Combined
Income Statement to the potential compensation expense that would be recorded if
the 668,160 of Contingent Shares are subsequently earned and issued to the
Monterey Stockholders. Assuming the stock prices are reached in accordance with
the vesting periods previously described, and the Monterey Stockholders remain
employed by the combined entity in such periods, compensation expense relating
to such shares would amount to approximately $236,000, $667,000 and $933,000,
respectively, for the three years following the Effective Date. The actual
amount of compensation expense pertaining to the Contingent Shares may vary
based on the Homeplex Common Stock price on the date the Contingent Shares
become issuable.
For purposes of computing earnings per share information, the Contingent
Shares have been excluded from "weighted average common shares
outstanding -- primary" and included in "weighted average common shares
outstanding -- fully diluted" in the accompanying Pro Forma Condensed Combined
Income Statements.
72
<PAGE> 88
PRO FORMA CAPITALIZATION
The following table sets forth the pro forma capitalization of the combined
entity of Homeplex and Monterey assuming the Merger occurred as of June 30,
1996. See "Selected Financial Data -- Unaudited Pro Forma Condensed Financial
Data." This table should be read in conjunction with the consolidated historical
financial statements of Homeplex and the combined historical financial
statements of Monterey, including the notes thereto, included elsewhere in this
Proxy Statement/Prospectus.
PRO FORMA CAPITALIZATION
(IN THOUSANDS)
<TABLE>
<S> <C>
Notes payable due within one year................................................. $ 12,718
========
Notes payable (excluding amounts due within one year)............................. $ 24,800
Stockholders' Equity:
Common stock, $.01 par value; 50,000,000 shares authorized; 13,616,517 issued
and outstanding following the Merger......................................... 138
Additional paid in capital...................................................... 92,930
Accumulated deficit............................................................. (65,055)
Treasury stock.................................................................. (410)
--------
Total Stockholders' equity.............................................. 27,603
--------
Total Capitalization.............................................................. $ 52,403
========
</TABLE>
73
<PAGE> 89
HOMEPLEX HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data for Homeplex for each of the years in the five year period ended December
31, 1995 and the six months ended June 30, 1996 and 1995. Such data has been
derived from the audited consolidated financial statements (including related
notes thereto) of Homeplex for the years ended December 31, 1995, 1994, 1993,
1992 and 1991 and the unaudited consolidated financial statements (including
related notes thereto) for the six months ended June 30, 1996 and 1995.
HOMEPLEX HISTORICAL CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
------- -------- -------- ------- ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Income (loss) from mortgage assets... $15,507 $(14,068) $(21,814) $(1,203) $3,564 $2,181 $1,270
Interest expense..................... 4,535 2,750 2,274 1,383 868 478 238
Other expense........................ 2,945 2,315 1,822 1,938 1,599 905 651
Income (loss) before extraordinary
loss/effect of accounting change... 8,027 (19,133) (25,910) (4,524) 1,097 798 381
Cumulative effect of accounting
change(1).......................... -- -- (6,078) -- -- -- --
Extraordinary loss(2)................ -- -- -- -- -- -- (149)
------- -------- -------- ------- ------ ------ ------
Net income (loss).................... $ 8,027 $(19,133) $(31,988) $(4,524) $1,097 $ 798 $ 232
======= ======== ======== ======= ====== ====== ======
Income (loss) per share before effect
of accounting change/extraordinary
loss............................... $ .81 $ (1.93) $ (2.66) $ (.47) $ .11 $ .08 $ .04
Cumulative effect of accounting
change per share................... -- -- (.63) -- -- -- --
Extraordinary loss per share......... -- -- -- -- -- -- (.02)
------- -------- -------- ------- ------ ------ ------
Net income (loss) per share.......... $ .81 $ (1.93) $ (3.29) $ (.47) $ .11 $ .08 $ .02
======= ======== ======== ======= ====== ====== ======
Cash dividends per share(3).......... $ 1.70 $ .40 $ .03 $ .02 $ .03 $ -- $ --
======= ======== ======== ======= ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------
1991 1992 1993 1994 1995 AT JUNE 30, 1996
-------- ------- ------- ------- ------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Real estate loans..................... $ -- $ -- $ 320 $ 9,260 $ 4,048 $ 3,852
Residual interests.................... 112,988 66,768 17,735 7,654 5,457 4,625
Total assets.......................... 121,502 87,063 43,882 31,150 27,816 19,752
Long-term debt........................ 16,450 31,000 19,926 11,783 7,819 --
Total liabilities..................... 43,462 32,357 21,505 13,508 9,368 1,072
Stockholders' equity.................. 78,040 54,706 22,377 17,642 18,448 18,680
</TABLE>
- ---------------
(1) Reflects the cumulative effect of adoption of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities."
(2) Reflects extraordinary loss from early extinguishment of long-term debt.
(3) For any taxable year in which Homeplex qualifies and elects to be treated as
a REIT under the Code, Homeplex will not be subject to federal income tax on
that portion of its taxable income that is distributed to stockholders in or
with respect to that year. Regardless of such distributions, however,
Homeplex may be subject to tax on certain types of income.
74
<PAGE> 90
HOMEPLEX MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information regarding the
consolidated financial position of Homeplex as of June 30, 1996, and its results
of operations for the six months ended June 30, 1996 and 1995, and the twelve
months ended December 31, 1995, 1994 and 1993. This discussion should be read in
conjunction with Homeplex's audited consolidated financial statements and
related notes thereto appearing elsewhere in this Proxy Statement/Prospectus. In
the opinion of management, the unaudited interim data reflect all adjustments,
consisting only of normal recurring adjustments, necessary to fairly present
Homeplex'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. For information
relating to factors that could affect future operating results, see "Risk
Factors -- Risk Factors of Homeplex." Any forward-looking statements should be
considered in light of such factors, as well as the discussion set forth below.
See "Forward-Looking Statements" and "Risk Factors -- Risk Factors of Homeplex."
Results of Operations for the Six Months ended June 30, 1996 and 1995.
Homeplex had net income of $232,000 or $.02 per share for the six months
ended June 30, 1996 compared to net income of $798,000 or $.08 per share for the
comparable period in 1995. Results for the six months ended June 30, 1996
include an extraordinary loss from the early extinguishment of debt of $149,000,
or $.02 per share.
Homeplex's income from mortgage assets was $1,270,000, for the six months
ended June 30, 1996 as compared to income of $2,181,000 for the comparable
period in 1995. Interest income on real estate loans decreased from $1,197,000,
for the six months ended June 30, 1995 to $366,000, for the comparable period in
1996 due to a reduction of Homeplex's real estate lending programs. See
"Homeplex's Management's Discussion and Analysis of Financial Condition and
Results of Operation -- Liquidity, Capital Resources and Commitments."
Homeplex's interest expense declined from $478,000 for the six months ended
June 30, 1995 to $238,000 for the comparable period in 1996 as a result of
Homeplex reducing its long-term debt.
Results of Operations for the Twelve Months ended December 31, 1995 and 1994.
Homeplex had net income of $1,097,000 or $.11 per share in 1995 compared to
a net loss of $4,524,000 or $.47 per share in 1994.
Homeplex's income from Mortgage Assets was $3,564,000 in 1995 compared to a
loss of $1,203,000 in 1994. The above amounts include a net charge of $3,343,000
in 1994 to write down Homeplex's investments in several of its residual
interests. There were no write-downs of residual interests in 1995. See
"Homeplex Management's Discussion and Analysis of Financial Condition and
Results of Operation -- Interest Rates and Prepayments."
Interest income on real estate loans increased from $1,113,000 in 1994 to
$1,618,000 in 1995 due to the expansion of Homeplex's real estate lending
program. See "Homeplex's Management's Discussion and Analysis of Financial
Condition and Results of Operation -- Liquidity, Capital Resources and
Commitments."
Homeplex's interest expense declined from $1,383,000 in 1994 to $868,000 in
1995 due to a reduction of the average aggregate long-term debt outstanding.
General and administrative expenses in 1994 include $340,000 of legal and
investment banking expenses related to merger negotiations with a privately held
company which were subsequently terminated.
Results of Operations for the Twelve Months ended December 31, 1994 and 1993.
Homeplex incurred a net loss of $4,524,000 or $.47 per share in 1994
compared to a net loss of $31,988,000 or $3.29 per share in 1993.
75
<PAGE> 91
Homeplex's loss from Mortgage Assets was $1,203,000 in 1994 compared to a
loss of $21,814,000 in 1993. The above amounts include net charges of $3,343,000
in 1994 and $22,312,000 in 1993 to write down Homeplex's investments in several
of its residual interests. Write-downs of residual interests declined in 1994 as
compared to 1993 because of a decrease in the average balance of residual
interests owned by Homeplex and a decline in projected prepayment rates. See
"Homeplex's Management's Discussion and Analysis of Financial Condition and
Results of Operation -- Interest Rates and Prepayments."
Interest income on real estate loans increased from $29,000 in 1993 to
$1,113,000 in 1994 due to the expansion of Homeplex's real estate lending
program. See "Homeplex's Management's Discussion and Analysis of Financial
Condition and Results of Operation -- Liquidity, Capital Resources and
Commitments."
Homeplex's interest expense declined from $2,274,000 in 1993 to $1,383,000
in 1994 due to a reduction of the average aggregate long-term debt outstanding.
General and administrative expenses in 1994 include $340,000 of legal and
investment banking expenses related to merger negotiations with a privately held
company which were subsequently terminated.
Liquidity, Capital Resources and Commitments. Homeplex raised $80,593,000
in connection with its initial public offering on July 27, 1988. The proceeds
were immediately utilized to purchase residual interests. Subsequently, through
October 1988, Homeplex purchased an additional $59,958,000 of residual interests
which were initially financed using a combination of borrowings under repurchase
agreements and Homeplex's bank line of credit. Homeplex has not purchased any
residual interests since October 1988.
Since December 1993, Homeplex has originated real estate loans secured by
various first deeds of trust on real properties located in Arizona. Homeplex's
loan program seeks higher returns by targeting loan opportunities to which
Homeplex can respond on a more timely basis than traditional real estate
lenders. At June 30, 1996, both of Homeplex's loans were secured by properties
located in Arizona. As a result of this geographic concentration, unfavorable
economic conditions in Arizona could increase the likelihood of defaults on
these loans and affect Homeplex's ability to protect the principal and interest
on such loans following foreclosures upon the real properties securing such
loans. In the latter half of 1995, in anticipation of a potential acquisition
transaction, Homeplex slowed its origination of real estate loans. At June 30,
1996 Homeplex's real estate loans outstanding totaled $3,852,000 and bore
interest at 16%, payable monthly, with all principal due within one year.
On December 17, 1992, a wholly owned limited purpose subsidiary of Homeplex
issued $31 million of secured notes under an indenture to a group of
institutional investors. Such notes bore interest at 7.81% and required
quarterly payments of principal and interest with the balance due on February
15, 1998. Such notes were secured by certain residual interests of Homeplex and
by funds held by the note trustee. Homeplex used $3,100,000 of the proceeds to
establish a reserve fund to be used to make the scheduled principal and interest
payments on such notes if the cash flow available from the collateral was not
sufficient to make the scheduled payments. Depending on the level of certain
specified financial ratios relating to the collateral, the cash flow from the
collateral was required to either repay the notes at par, increase the reserve
fund up to its $7,750,000 maximum or was remitted to Homeplex.
On May 15, 1996 Homeplex repaid the remaining outstanding note balance of
$6,828,000 plus accrued interest. Homeplex paid prepayment penalty fees of
$94,000 and wrote off the remaining unamortized balance of $55,000 of
capitalized debt costs in connection with such repayment resulting in an
extraordinary loss of $149,000 from the early extinguishment of debt.
At June 30, 1996, Homeplex did not have any used or unused short-term debt
or line of credit facilities.
As a REIT, Homeplex is not subject to income tax at the corporate level as
long as it distributes 95% of its taxable income to its stockholders. At
December 31, 1995, Homeplex had a net operating loss carryforward, for income
tax purposes, of approximately $57 million. This tax loss may be carried
forward, with certain restrictions, for up to 14 years to offset future taxable
income, if any. Until the tax loss carryforward is fully utilized or expires and
if Homeplex retains its status as a REIT, Homeplex will not be
76
<PAGE> 92
required to distribute dividends to its stockholders except for income that is
deemed to be excess inclusion income.
Interest Rates and Prepayments. One of Homeplex's major sources of income
is its income from residual interests which consists of Homeplex's investment in
real estate mortgage investment conduits ("REMICs"). Homeplex's cash flow and
return on investment from its residual interests are highly sensitive to the
prepayment rate on the related mortgage certificates and the variable interest
rates on variable rate mortgage-collateralized bonds ("CMOs" or "Bonds") and
mortgage pass-through certificates ("MPCs" or "Pass-Through Certificates").
At June 30, 1996, Homeplex's proportionate share of floating rate CMOs and
MPCs in the eight REMICs was $29,225,000 in principal amount that pays interest
based on LIBOR and $3,787,000 in principal amount that pays interest based on
COFI. Consequently, absent any changes in prepayment rates on the related
mortgage certificates, increases in LIBOR and COFI will decrease Homeplex's net
income, and decreases in LIBOR and COFI will increase Homeplex's net income. The
average LIBOR and COFI rates were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1993 1994 1995 AT JUNE 30, 1996
------ ------ ------ ----------------
<S> <C> <C> <C> <C>
LIBOR............................... 3.22% 4.33% 6.00% 5.44%
COFI................................ 4.16% 3.83% 4.96% 4.84%
</TABLE>
Homeplex's cash flow and return on investment from residual interests also
is sensitive to prepayment rates on the mortgage certificates securing the CMOs
and underlying the MPCs. In general, slower prepayment rates will tend to
increase the cash flow and return on investment on investment from interests.
The rate of principal prepayments on mortgage certificates is influenced by a
variety of economic, geographic, social and other factors. In general,
prepayments of the mortgage certificates should increase when the current
mortgage interest rates fall below the interest rates on the fixed rate mortgage
loans underlying the mortgage certificates. Conversely, the extent that then
current mortgage interest rates exceed the interest rates on the mortgage loans
underlying the mortgage certificates, prepayments of such mortgage certificates
should decrease. Prepayment rates also may be affected by the geographic
location of the mortgage loans underlying the mortgage certificates, conditions
in mortgage loan, housing and financial markets, the assumability of the
mortgage loans and general economic conditions.
Accounting Matters. Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" (SFAS No. 121), which Homeplex will adopt for its fiscal year
ending December 31, 1996, will require "that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of asset may not be recoverable." In the opinion of management,
the adoption of SFAS No. 121 will not have any material effect on Homeplex.
In November 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123).
This statement establishes financial accounting standards for stock-based
employee compensation plans. SFAS 123 permits Homeplex to choose either a new
fair value based method or the current APB Opinion 25 intrinsic value based
method of accounting for its stock-based compensation arrangements. SFAS 123
requires pro forma disclosures of net earnings and earnings per share computed
as if the fair value based method had been applied in financial statements of
companies that continue to follow current practice in accounting for such
arrangements under Opinion 25. SFAS 123 applies to all stock-based employee
compensation plans in which an employer grants shares of its stock or other
equity instruments to employees except for employee stock ownership plans. SFAS
123 also applies to plans in which the employer incurs liabilities to employees
in amounts based on the price of the employer's stock, i.e., stock option plans,
stock purchase plans, restricted stock plans, and stock appreciation rights. The
statement also specifies the accounting for transactions in which a company
issues stock options or other equity instruments for services provided by
nonemployees or to acquire goods or services from outside suppliers or vendors.
The recognition provisions of SFAS 123 for companies choosing to adopt the new
fair
77
<PAGE> 93
value based method of accounting for stock-based compensation arrangements may
be adopted immediately and will apply to all transactions entered into fiscal
years that begin after December 15, 1995. The disclosure provisions of SFAS 123
are effective for fiscal years beginning after December 15, 1995; however,
disclosure of the pro forma net earnings per share, as if the fair value method
of accounting for stock-based compensation had been elected, is required for all
awards granted in fiscal years beginning after December 31, 1994.
78
<PAGE> 94
MONTEREY HISTORICAL COMBINED FINANCIAL DATA
The following table sets forth selected historical combined financial data
for Monterey for each of the years in the five year period ended December 31,
1995 and the six months ended June 30, 1996 and 1995. Such data has been derived
from the audited (other than operating statement data for 1991 which was
reviewed) combined financial statements (including related notes thereto) of
Monterey for the years ended December 31, 1995, 1994, 1993, 1992 and 1991 and
the unaudited combined financial statements (including related notes thereto)
for the six months ended June 30, 1996 and 1995.
MONTEREY HISTORICAL COMBINED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
----------- ------- ------- ------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING STATEMENT DATA:
Total Revenues.................. $20,365 $35,111 $40,543 $60,941 $71,491 $26,444 $32,417
Cost of sales................... 17,128 29,544 34,664 50,655 60,332 23,050 27,738
Selling, general and
administrative expense........ 2,528 3,383 3,267 4,123 4,899 2,205 2,737
------- ------- ------- ------- ------- ------- -------
Operating income................ 709 2,184 2,612 6,163 6,260 1,189 1,942
Other income (expense).......... (40) 32 (92) 102 141 113 28
------- ------- ------- ------- ------- ------- -------
Net earnings.................... $ 669 $ 2,216 $ 2,520 $ 6,265 $ 6,401 $ 1,302 $ 1,970
======= ======= ======= ======= ======= ======= =======
Net earnings per share(1)....... $ .33 $ 1.09 $ 1.24 $ 3.09 $ 3.15 $ .64 $ .97
======= ======= ======= ======= ======= ======= =======
Cash dividends per share(2)..... $ -- $ .32 $ .78 $ 1.23 $ 2.07 $ 1.57 $ 1.55
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
----------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA: (UNAUDITED)
Unit sales contracts (net of
cancellations)................ 108 151 167 243 241 119 133
Units closed.................... 71 133 142 201 239 93 125
Units in backlog at end of
period........................ 57 75 100 142 144 168 152
Aggregate sales value of homes
in backlog.................... $16,227 $19,970 $30,826 $43,981 $37,891 $49,368 $45,985
Average sales price per home
closed........................ $ 287 $ 264 $ 285 $ 299 $ 284 $ 297 $ 302
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------- AT JUNE 30,
1991 1992 1993 1994 1995 1996
----------- ------- ------- ------- ------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Real estate under
development.................. $ 7,168 $ 9,553 $13,736 $17,917 $33,929 $43,773
Total assets................... 8,958 12,366 19,227 28,820 42,654 48,450
Notes payable.................. 3,221 3,463 7,632 12,255 24,316 32,075
Stockholders' equity(2)........ 630 2,193 3,121 6,898 9,108 7,943
</TABLE>
- ---------------
(1) Numbers exclude the effect of outstanding warrants to purchase 400,000
shares of common stock of Monterey. Accordingly, for purposes of computing
earnings per share, management utilized 2,027,776 weighted average shares
outstanding in each period presented. After giving pro forma effect to such
warrants as if they had been exercisable, net income per share at June 30,
1995 and 1996 would have been $.54 and $.81, respectively. Due to
Monterey's status as an S-corporation for federal income tax purposes,
Monterey is not subject to federal income tax, rather the Monterey
Stockholders are taxed directly on the net income of Monterey.
(2) The historical combined financial data set forth in the preceding tables do
not reflect the Distributions, totaling approximately $9.5 million made by
Monterey prior to entering into the Merger Agreement, but subsequent to
June 30, 1996. See "Selected Financial Data -- Unaudited Pro Forma
Condensed Combined Financial Data" and "The Merger and Related
Transactions -- Distributions."
79
<PAGE> 95
MONTEREY MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information regarding the
combined financial position of Monterey as of December 31, 1995 and June 30,
1996, and its results of operations for the six months ended June 30, 1996 and
1995, and the twelve months ended December 31, 1995, 1994 and 1993. All material
balances and transactions between the Monterey companies have been eliminated.
This discussion should be read in conjunction with Monterey's Audited Combined
Financial Statements and related Notes thereto appearing elsewhere in this Proxy
Statement/Prospectus. In the opinion of management, the unaudited interim data
reflect all adjustments, consisting only of normal recurring adjustments,
necessary to fairly present Monterey'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. For information relating to factors that could affect future
operating results, see "Risk Factors -- Risk Factors of Monterey." Any
forward-looking statements should be considered in light of such factors, as
well as the discussion set forth below. See "Forward-Looking Statements," and
"Risk Factors -- Risk Factors of Monterey."
GENERAL
Monterey's results of operations for any period are affected by many
factors such as the number of development projects under construction, the
length of the development cycle of each project, product mix and design,
weather, availability of financing, suitable development sites, material and
labor, and national and local economic conditions. Historically, Monterey has
operated primarily in the semi-custom, luxury segment of the homebuilding
industry. Monterey's expansion into the move-up segment of the market has
resulted in product mix and design becoming more substantial factors affecting
the average home sales price and gross margins. Monterey experiences greater
competition from other homebuilders in the move-up segment of the market that
can affect its ability to increase sales prices even if costs are rising. The
average sales price of homes is further influenced by home size and desirability
of project locations.
In recent periods, the demand for homes and availability of capital for
land acquisition, development and home construction in Arizona has increased. In
response to these conditions, Monterey has expanded its operations to acquire
additional sites for development of new projects. As of June 30, 1996, Monterey
was actively selling homes in eleven communities and was in various stages of
preparation to open for sales in two new communities. At June 30, 1995, Monterey
was actively selling homes in six communities. There can be no assurance that
the favorable conditions in Arizona will continue.
Due to the faster than anticipated sales and closing rates occurring in
certain subdivisions of Monterey during 1995 and the slower than anticipated
completion of lot development in four new subdivisions in late 1995, Monterey's
inventory of finished lots entering 1996 was lower than expected. This finished
lot shortage may reduce unit sales and home closing revenue for the balance of
1996 and may result in net income being lower than 1995 net income. Start up
costs incurred by the Tucson entities also may negatively impact Monterey's net
income in 1996.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Revenues. The following table presents comparative first half 1996 and 1995
housing revenues.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, DOLLAR/UNIT PERCENTAGE
------------------- INCREASE INCREASE
1996 1995 (DECREASE) (DECREASE)
------- ------- ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Dollars............................... $31,492 $26,444 $5,048 19.1%
Units Closed.......................... 125 93 32 34.4%
Average Sales Price................... $ 251.9 $ 284.3 $(32.4) (11.4%)
</TABLE>
80
<PAGE> 96
The increase in revenues of approximately $5.0 million during the first half of
1996 over the previous year's first half, was caused primarily by increased unit
closings, partially offset by lower average sales prices. Unit closings
increased due to the increase in the number of subdivisions producing home
closings (from six in the prior year's first half to seven in the current year's
first half) and due to a larger number of closings from Monterey's Vintage
Condominium Project than were obtained during the prior year's first half. The
average sales price decreased from the prior year due to an increase in closings
produced by Monterey's lower-priced Vintage Condominium subdivision.
Housing Gross Profit. Housing gross profit equals housing revenues, net of
housing cost of sales, which include developed lot costs, units construction
costs, amortization of common community costs (such as the cost of model homes,
and architectural, legal and zoning costs), interest, sales tax, warranty,
construction overhead and closing costs. The following table presents
comparative first half 1996 and 1995 housing gross profit.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------- DOLLAR/UNIT PERCENTAGE
(DOLLARS IN THOUSANDS) 1996 1995 INCREASE INCREASE
---------------------------------------- ------ ------ ------------ ----------
<S> <C> <C> <C> <C>
Dollars................................. $4,173 $3,394 $779 23.0%
Percent of Housing Revenues............. 13.2% 12.8% .4% 3.1%
</TABLE>
The increase in gross profit is primarily attributable to a 19.1% increase in
revenues and, to a lesser extent, a .4% increase in the gross profit margin. The
gross profit margin increased primarily due to lower direct construction costs
and construction overhead, mostly offset by higher lot costs and capitalized
interest in cost of sales.
Land Closings. Monterey closed one land sale during the first half of 1996,
which produced revenue of $925,000 and gross profit of $206,000. No land sales
occurred during the prior year's first half, Monterey does not typically acquire
land for resale, but may on occasion sell land which is not needed for immediate
development or which is a residual part of a larger parcel.
Selling, General and Administrative Expenses. The selling, general and
administrative expenses category includes advertising, model and sales office,
sales administration, commission and corporate overhead charges. Selling,
general and administrative expenses were approximately $2.7 million for the six
months ended June 30, 1996 compared to approximately $2.2 million for the six
months ended June 30, 1995. The increase was caused mainly by increased sales
commissions based on greater sales volume and increased advertising and overhead
expenses generated in supporting a greater number of active subdivisions.
Net Earnings. Net earnings increased to approximately $2.0 million for the
six months ended June 30, 1996 from approximately $1.3 million for the prior
year's first half. This increase is primarily the result of $506,000 in profit
recognized on the land sale which closed in the second quarter, somewhat offset
by increased selling, general and administrative expenses.
Income Tax Expense. Monterey is organized as a Subchapter S-Corporation for
Federal and State income tax purposes and, therefore, reports no income tax
expense.
RESULTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995 AND 1994
Revenues. The following table presents comparative 1995 and 1994 housing
revenues.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31, DOLLAR/UNIT PERCENTAGE
------------------- INCREASE INCREASE
(DOLLARS IN THOUSANDS) 1995 1994 (DECREASE) (DECREASE)
-------------------------------------- ------- ------- ------------ ----------
<S> <C> <C> <C> <C>
Dollars............................... $67,926 $59,995 $7,931 13.2%
Units Closed.......................... 239 201 38 18.9%
Average Sales Price................... $ 284.2 $ 298.5 $(14.3) (4.8%)
</TABLE>
81
<PAGE> 97
The increase in revenues of approximately $7.9 million during 1996 over the
previous year was caused primarily by increased unit closings, partially offset
by lower average sales prices. Unit closings increased due to the increase in
the number of subdivisions producing home closings from four to five and
increased demand for homes in the Phoenix Metropolitan area. The decrease in
average sales price per unit in 1995 reflects a 183.3% increase in the total
number of unit closings relating to Monterey's lower-priced, move-up homes (136
in 1995 versus 48 in 1994).
Housing Gross Profit. The following table presents comparative 1995 and
1994 housing gross profit.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, DOLLAR/UNIT PERCENTAGE
------------------- INCREASE INCREASE
(DOLLARS IN THOUSANDS) 1995 1994 (DECREASE) INCREASE
----------------------------------------- ------- ------- ----------- ----------
<S> <C> <C> <C> <C>
Dollars.................................. $10,725 $10,045 $680 6.8%
Percent of Housing Revenues.............. 15.7% 16.8% (1.1%) 6.5%
</TABLE>
The increase in gross profit is primarily attributable to a 13.2% increase in
revenues offset in part by a 1.1% decrease in the gross profit margin. The
decrease in gross margin percentage resulted from (i) higher construction
overhead caused by a general increase in projects in the planning stage, (ii)
increased interest expense related primarily to an $8 million subordinated debt
offering in 1994, and (iii) higher sales taxes as a result of tax rate increases
in both Maricopa County and the City of Scottsdale, all of which were partially
offset by decreased land costs associated with lower financing rates on other
borrowings.
Land Closings. During 1995, Monterey closed one land sale producing revenue
of $3,565,000 and gross profit of $433,000, while in 1994 Monterey closed one
land sale producing revenue of $946,000 and gross profit of $241,000.
Selling, General and Administrative Expenses. Selling, general, and
administrative expenses were approximately $4.9 million in 1995, an increase of
approximately $800,000, or 19.5%, over the approximately $4.1 million reported
for 1994. Approximately $200,000 of this increase resulted from increased sales
commissions based on greater sales volume. The remaining increase is the result
of expanded operations. Selling, general, and administrative expenses as a
percentage of revenue remained stable (6.9% in 1995 compared to 6.8% in 1994).
Other Income. Other income was $141,000 in 1995, an increase of $39,000, or
38.3%, over the $102,000 reported in 1994.
Net Earnings. Net earnings for 1995 were approximately $6.4 million, an
increase of approximately $100,000, or 1.6%, over the approximately $6.3 million
reported in 1994. This increase was primarily the result of greater land sales
profit in 1995 compared to 1994. Net earnings as a percentage of revenue
declined to 9.0% in 1995 from 10.3% in 1994. This decrease is attributable to a
lower gross margin percentage in 1995.
RESULTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1994 AND 1993
Revenues. The following table presents comparative 1994 and 1993 housing
revenues.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------- DOLLAR/UNIT
(DOLLARS IN THOUSANDS) 1994 1993 INCREASE INCREASE
------------------------------------------- ------- ------- ----------- --------
<S> <C> <C> <C> <C>
Dollars.................................... $59,995 $40,543 $19,452 48.0%
Units Closed............................... 201 142 59 41.5%
Average Sales Price........................ $ 298.5 $ 285.5 $ 13.0 4.6%
</TABLE>
The increase in revenues of approximately $19.5 million during 1994 over the
previous year was caused primarily by increased unit closings and by higher
average sales prices. Unit closings increased due to the increased demand for
homes in the Phoenix Metropolitan area, particularly in Monterey's 7600 Lincoln
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Subdivision, a semi-custom luxury community. The increase in average sales price
per unit results from greater unit closings relating to Monterey's higher-priced
semi-custom luxury communities.
Housing Gross Profit. The following table presents comparative 1994 and
1993 housing gross profit.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------ DOLLAR/UNIT PERCENTAGE
1994 1993 INCREASE INCREASE
(DOLLARS IN THOUSANDS) ------- ------ ----------- ----------
<S> <C> <C> <C> <C>
Dollars................................... $10,045 $5,879 $ 4,166 70.9%
Percent of Housing Revenues............... 16.8% 14.5% 2.3% 15.9%
</TABLE>
The increase in gross profit is primarily attributable to a 48% increase in
revenues and a 2.3% increase in the gross profit margin. The increase in gross
margin percentage was largely the result of very strong housing demand in the
local market during 1994 and late 1993, which enabled Monterey to raise unit
sales prices in excess of cost increases.
Land Closings. During 1994, Monterey closed one land sale producing
$946,000 of revenue and $241,000 in gross profit. During 1993, Monterey closed
no land sales.
Selling, General and Administrative Expenses. Selling, general, and
administrative expenses for 1994 were approximately $4.1 million, an increase of
approximately $800,000, or 24.2%, from the approximately $3.3 million reported
in 1993. Approximately $700,000 of this increase resulted from increased sales
commissions due to greater unit sales volume. Selling, general, and
administrative expenses as a percentage of revenue decreased to 6.8% in 1994
from 8.1% in 1993.
Minority Interest. Minority interest expense was $0 in 1994 and $226,000 in
1993. Minority interest was entirely attributable to the partnership formed to
develop the Monterey at Mountain View project, in which Monterey owned an 82.5%
interest. The partnership completed the project in 1994 and 100% of the equity
in the partnership was distributed.
Other Income. Other income was $102,000 in 1994, a decrease of $31,000, or
23.5%, from the $133,000 reported in 1993.
Net Earnings. Net earnings for 1994 were approximately $6.3 million, an
increase of approximately $3.8 million, or 152%, from the approximately $2.5
million reported in 1993. The increase was primarily the result of 59 more unit
closings in 1994 than 1993. Net earnings increased as a percentage of revenues
to 10.3% in 1994 from 6.1% in 1993. This increase was substantially due to a
higher gross margin percentage in 1994, as discussed above.
DEVELOPMENT PROJECTS. At June 30, 1996, Monterey had 17 subdivisions under
various stages of development. Monterey was actively selling in 11 subdivisions,
was sold out in four subdivisions, and was in various stages of preparation to
open for sales in two subdivisions. Monterey owns the underlying land in five
subdivisions subject to bank acquisition financing and the underlying land in
six subdivisions free from any acquisition financing. The lots in the remaining
six subdivisions are purchased from developers on a rolling option basis. During
the second quarter of 1996, the Monterey purchased one new subdivision and
entered into one new rolling lot option contract to increase the lots available
to Monterey in one existing subdivision. Depending on market conditions, the
Monterey may elect to make additional selective property acquisitions throughout
the remainder of the current year.
LIQUIDITY AND CAPITAL RESOURCES. Historically, Monterey has used a
combination of existing cash, unused borrowing capacity, internally generated
funds, and customer deposits to meet its working capital requirements. At June
30, 1996 and December 31, 1995, respectively, Monterey had available
approximately $46.1 million and approximately $32.0 million in short-term,
secured, revolving construction loan agreements of which approximately $12.6 and
approximately $9.0 million were outstanding. Monterey also had outstanding
approximately $11.4 and $7.0 million at June 30, 1996 and December 31, 1995,
respectively, of secured, non-revolving construction loan agreements, as well as
the Notes.
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At June 30, 1996, Monterey was in default of certain covenants with respect
to the Notes, and such defaults may have cross-defaulted substantially all of
Monterey's other outstanding indebtedness. Prior to entering into the Merger
Agreement on September 13, 1996, Monterey received consents from the requisite
number of holders of the Notes to waive the past covenant defaults and to amend
certain terms and covenants of the Indenture.
The Indenture and Monterey's various loan agreements contain restrictions
which could, depending on the circumstances, affect Monterey's ability to obtain
additional financing in the future. See "Risk Factors -- Risk Factors of
Monterey -- Additional Financing; Limitations," "The Merger and Related
Transactions -- Senior Subordinated Notes" and "The Merger and Related
Transactions -- Monterey Credit Facilities." If Monterey at any time is not
successful in obtaining sufficient capital to fund its then-planned development
and expansion costs, some or all of its projects may be significantly delayed or
abandoned. Any such delay or abandonment could result in cost increases or the
loss of revenues and could have a material adverse effect on Monterey's results
of operation and ability to repay its indebtedness.
Net cash flow received from all activities improved by approximately $3.5
million from the six months ended June 30, 1995 to the six months ended June 30,
1996 due primarily to a temporary reduction in development activities resulting
from Monterey's determination that its finished lot inventory was sufficient to
meet sales demand in 1996 without significant additional lot inventory. Monterey
anticipates that development activity will increase to meet expected sales
demand in the last half of 1997 and in 1998.
The cash flow for each of Monterey's communities can differ substantially
from reported earnings, depending on the status of the development cycle. The
early stages of development or expansion require significant cash outlays for,
among other things, land acquisition, obtaining plat and other approvals,
construction of amenities which may include community tennis courts, swimming
pools and ramadas, model homes, roads, certain utilities and general
landscaping. Since these costs are capitalized, this can result in income
reported for financial statement purposes during those early stages
significantly exceeding cash flow. After the early stages of development and
expansion when these expenditures are made, cash flow can significantly exceed
income reported for financial statement purposes, as cost of sales includes
charges for substantial amounts of previously expended costs.
In August 1996, Monterey entered into a $7.5 million unsecured credit
facility with one of its principal lenders. The proceeds from this credit
facility, along with available working capital, were used to make the
Distributions to the Monterey Stockholders, which were approximately $9.5
million, in September 1996, prior to Monterey entering into the Merger
Agreement.
NET ORDERS. Net orders for any period represent the number of units ordered
by customers (net of units canceled) multiplied by the average sales price per
units ordered.
The following table presents comparative first half 1995 and 1996 net
orders.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------- DOLLAR/UNIT PERCENTAGE
1996 1995 INCREASE INCREASE
(DOLLARS IN THOUSANDS) ------- ------- ----------- ----------
<S> <C> <C> <C> <C>
Dollars.................................. $38,091 $30,581 $ 7,510 24.6%
Units Ordered............................ 133 119 14 11.8%
Average Sales Price...................... $ 286.4 $ 257.0 $ 29.4 11.4%
</TABLE>
The dollar volume of net orders increased by 24.6% over the prior years
first half due to an increase in average sales prices and to a lesser extent by
slightly higher unit sales. The average sales price increased due to a greater
portion of sales occurring in Monterey's lower-priced Vintage Condominium
subdivision during the prior year's first half. The increase in net orders has
generally been caused by the number of subdivisions open for sale, increasing to
11 in 1996 from 7 in 1995.
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Monterey does not include sales which are contingent on the sale of the
customer's existing home as orders until the contingency is removed.
Historically Monterey has experienced a cancellation rate of less than 16% of
gross sales.
NET SALES BACK LOG. Backlog represents net orders of Monterey which have
not closed.
The following table presents comparative June 30, 1996 and December 31,
1995 net sales back log.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DOLLAR/UNIT PERCENTAGE
(DOLLARS IN THOUSANDS) 1996 1995 INCREASE INCREASE
------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Dollars............................... $45,985 $ 37,891 $ 8,094 21.4%
Units in Backlog...................... 152 144 8 5.6%
Average Sales Price................... $ 302.5 $ 263.1 $ 39.4 15.0%
</TABLE>
Dollar backlog increased 21.4% over the past six months due to an increase in
units in backlog and an increase in average sales price. Average sales price has
increased due to the sell out of Monterey's lower-priced Vintage Condominium
subdivision. Units in backlog increased 5.6% due to seasonal fluctuations which
cause year-end backlog to typically be lower than at other times during the
year.
VALUATION OF REAL ESTATE INVENTORIES. All of Monterey's real estate
inventories consist of real estate under development which includes undeveloped
and developed lots, homes under construction in various stages of completion and
completed homes. For financial reporting purposes, such inventories must be
carried at the lower of historical cost unless expected future net cash flows
(undiscounted and without interest charges) are less than such cost, in which
case the inventories would be written down to estimated fair value less costs to
sell. Monterey reviews the valuation of its real estate inventory on a regular
basis. Based on these reviews, Monterey believes that the carrying value of its
real estate inventory is appropriate.
IMPACT OF INFLATION. Operations of Monterey can be negatively impacted by
inflation. Real estate and residential housing prices are affected by inflation,
which can cause increases in interest rates, the price of land, raw materials
and subcontracted labor. Unless costs are recovered through higher sales prices,
gross margins will decrease and losses can be incurred. If interest rates
increase, construction and financing costs also increase, which can result in
lower gross margins or in losses. High mortgage interest rates may also make it
more difficult for Monterey's potential customers to finance the purchase of
their new homes and sell their existing homes.
SEASONALITY. Monterey has historically closed more units in the second half
of the fiscal year than in the first half, due in part to the slightly seasonal
nature of the market for its semi-custom, luxury product homes. Monterey expects
that this seasonal trend will continue in the future, but may change slightly as
operations expand within the move-up segment of the market.
ACCOUNTING MATTERS. Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" (SFAS No. 121), which Monterey will adopt for its fiscal year
ending December 31, 1996, will require "that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of asset may not be recoverable." In the opinion of management,
the adoption of SFAS No. 121 will not have any material effect on Monterey.
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HOMEPLEX BUSINESS DESCRIPTION
OVERVIEW
Homeplex is engaged in the business of making short-term and
intermediate-term mortgage loans on improved and unimproved real property ("Real
Estate Loans") and owns Mortgage Assets as described herein. In 1993, Homeplex
decided to shift its focus to making Real Estate Loans from the ownership of
Mortgage Assets consisting of mortgage instruments, including residential
mortgage loans and mortgage certificates representing interest in pools of
residential mortgage loans ("Mortgage Instruments") and mortgage interests,
commonly known as residual interests, representing the right to receive the net
cash flows on Mortgage Instruments ("Mortgage Interests"). Substantially all of
Homeplex's Mortgage Instruments and the Mortgage Instruments underlying
Homeplex's Mortgage Interests currently secure or underlie mortgage-
collateralized bonds, mortgage pass-through certificates, or other mortgage
securities issued by various issuers.
At June 30, 1996, Homeplex had outstanding two Real Estate Loans
aggregating $3,852,000, both with a loan term of one year or less and an
interest rate of 16% per annum. Homeplex's Real Estate Loans have been
concentrated in Arizona.
Homeplex was incorporated in the State of Maryland in May 1988 and
commenced operations on July 27, 1988. Homeplex changed its name from Emerald
Mortgage Investments Corporation to Homeplex Mortgage Investments Corporation in
April 1990. Homeplex's office is located at 5333 North 7th Street, Suite 219,
Phoenix, Arizona 85014 and its telephone number is 602-265-8541.
Homeplex has elected to be taxed as a REIT pursuant to Sections 856 through
860 of the Code. Accordingly, Homeplex generally is not subject to tax on its
income to the extent that it distributes at least 95% of its taxable earnings to
stockholders and maintains its qualification as a REIT. As part of the Merger,
however, Homeplex will discontinue its status as a REIT because it will no
longer be able to meet certain tests with respect to the nature of its assets,
share ownership and the amount of distributions, among other things, which are
required to be met in order to qualify as a REIT. As a result, any distributions
to Homeplex's stockholders thereafter will not be deductible by Homeplex in
computing its taxable income.
REAL ESTATE LOANS
Homeplex makes or acquires short-term and intermediate-term Real Estate
Loans. A short-term loan generally has a maturity of one year or less and an
intermediate-term loan generally has a maturity of not more than three years.
Such loans are expected to consist primarily of first mortgage loans,
development loans, interim construction loans, bridge loans, and to a much
lesser extent, junior mortgage loans and wrap-around mortgage loans.
Homeplex may make or acquire development or interim construction loans on
unimproved real properties which are either expected to be developed within a
reasonable period of time, generally less than one year, into income-producing
properties, are being subdivided into lots for resale, or are being held for
resale by the borrowers. Certain of the other loans to be made by Homeplex may
be made on a first mortgage basis on the security of apartment complexes,
shopping centers, warehouses, office buildings and other commercial and
industrial properties, and as bridge loans on contemplated income-producing
projects during leasing activities. Homeplex also may make or acquire junior
mortgage loans and wraparound mortgage loans, although such Real Estate Loans
are not expected to represent a significant portion of Homeplex's real estate
loan portfolio.
Homeplex's Real Estate Loans may be made on both large and small properties
and in various combinations and may incorporate a variety of financing
techniques. There are no limitations on the types of properties on which
Homeplex may make or acquire loans. Homeplex's Real Estate Loans will provide
for regular debt service payments, normally consisting of interest only with
repayment of principal on maturity or earlier as the result of contractual
provisions requiring balloon payments of principal. Homeplex also may make or
acquire loans on the security of apartments or office buildings with repayment
to be derived from the conversion of the properties to condominiums and the sale
of units.
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In general, the amount of each real estate loan made by Homeplex will not
exceed at the date the loan is funded, when added to the amount of any existing
senior indebtedness, (i) 95% of Homeplex's assessment of the value of the
property in the case of improved income-producing property or unimproved real
property and (ii) 90% of Homeplex's assessment of the value of the property on
the assumption that construction or development, as the case may be, is
completed substantially in accordance with the plans and specifications as of
the date the loan commitment is provided, in the case of construction or
development loans. Such loan-to-value ratio may be increased in the case of a
specific real estate loan if, in the judgment of Homeplex, the real estate loan
is supported by credit or collateral adequate to justify a higher ratio.
Homeplex may make Real Estate Loans to borrowers that acquire properties for
prices below their appraised value. Thus, the loan-to-cost ratios of certain of
the Homeplex's Real Estate Loans may exceed the loan-to-value ratios described
above. As a result, loans by Homeplex may not be limited to the purchase price
of a property.
Homeplex's Real Estate Loans generally provide for fixed interest rates
although it may make or acquire loans which float with changes in the prime rate
or other benchmark interest rates. Interest rates on Real Estate Loans will be
determined by taking into account a variety of factors including the prevailing
interest rate in the area for the type of loan being considered, the proposed
term of the loan, the loan-to-value ratio, and the creditworthiness of the
borrower and any guarantors.
CURRENT REAL ESTATE LOANS. In the latter half of 1995, in anticipation of a
potential acquisition transaction, Homeplex slowed its origination of real
estate loans. The following table sets forth information relating to Homeplex's
outstanding Real Estate Loans at June 30, 1996.
<TABLE>
<CAPTION>
INTEREST AMOUNT
DESCRIPTION RATE PAYMENT TERMS OUTSTANDING
- ---------------------------------- -------- ---------------------------------- -----------
<S> <C> <C> <C>
First Deed of Trust on 41 acres of 16% Interest only monthly, principal
land in Gilbert, Arizona due October 18, 1996; may be
extended for one year under
certain terms and conditions $ 1,580,000
First Deed of Trust on 33 acres of 16% Interest only monthly, principal
land in Tempe, Arizona due November 21, 1995; extended
for one year on November 21, 1995
under the same terms and
conditions $ 2,272,000
</TABLE>
The Real Estate Loan with an outstanding amount of $2,272,000 as of June
30, 1996 was repaid in full on August 14, 1996, leaving only one Real Estate
Loan with an outstanding amount of $1,338,000 as of November 6, 1996.
TYPES OF REAL ESTATE LOANS. In furtherance of its objectives, Homeplex may
make and acquire a wide variety of real estate loans. In connection with certain
of Homeplex's real estate loans, a portion of Homeplex's return could be in the
form of deferred interest payments, accruing in each year of the loan but
payable only on repayment of the loans. Such deferred interest may accrue at a
fixed rate over the term of a loan or may accrue at a faster rate in the later
period of a loan. In either case, the present value of deferred interest is less
than it would be if received currently.
The types of real estate loans which Homeplex may make or acquire include
the following.
First Mortgage Loans. First mortgage loans will be secured by first
mortgages on the fee or a leasehold interest is improved income-producing real
property and generally will provide for repayment in full prior to the end of
the amortization period. Such loans will be in an amount which generally will
not exceed 95% of Homeplex's assessment of value of the property.
Land Loans. Land loans are first or junior mortgage loans on unimproved
real property normally providing only for interest payments prior to maturity.
Such loans are made on properties held by borrowers for inventory, investment or
development purposes and generally are expected to be repaid from the proceeds
of the resale of the properties. As a result and due in addition to the absence
of cash flow, such loans normally
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<PAGE> 103
are considered more risky than loans on improved property. The maximum
loan-to-value ratio will generally not exceed 90% of Homeplex's assessment of
the value of the property.
Development Loans. Development loans are mortgage loans made to finance or
refinance the acquisition of unimproved land and the costs of developing such
land into finished sites, including the installation of utilities, drainage,
sewage and road systems. Such loans are expected to be repaid from the proceeds
of construction loans or the sale of the developed sites. Homeplex will not
normally require the borrower to have a commitment for a construction or
long-term mortgage loan on the developed property. In some instances, Homeplex
may receive an equity participation or other interest in connection with the
property being developed. The original term of any development loan made by
Homeplex generally will not exceed three years, and the maximum loan-to-value
ratio generally will not exceed 90% of Homeplex's assessment of the value of the
property on the assumption that development is completed substantially in
accordance with the plans and specifications as of the date the loan commitment
is provided.
Construction Loans. Construction loans are mortgage loans made to finance
the acquisition of land and the erection of improvements thereon, such as
residential subdivisions, apartment complexes, shopping centers, office
buildings, and commercial and industrial buildings. Such loans generally have
maturities of less than three years and usually provide for higher yields than
those prevailing on long-term mortgage loans on comparable properties.
Disbursements by Homeplex under construction loan commitments will be related to
actual construction progress. Before a construction loan is made or acquired,
Homeplex in most cases, will either require that the borrower have a commitment
from a responsible financial institution for financing upon completion or will
itself have made the determination that such a loan is available or unnecessary.
In some cases, Homeplex may receive an equity participation or other interest in
connection with the property being constructed. Construction loans will be in
amount which generally will not exceed 90% of Homeplex's assessment of value of
the property on the assumption that construction is completed substantially in
accordance with the plans and specifications as of the date the loan commitment
is provided. Construction loans made to finance single family tract developments
or condominiums generally will be repaid from proceeds of the sale of completed
residential units.
Junior Mortgage Loans. Junior mortgage loans will be secured by mortgages
which are subordinate to one or more prior liens on the fee or a leasehold
interest in real property and generally, but not in all cases, will provide for
repayment in full prior to the end of the amortization period. Such loans will
be in an amount which, when added to the amount of prior liens, generally will
not exceed 90% of Homeplex's assessment of the value of the property.
Wrap-Around Mortgage Loans. Wrap-around mortgage loans are expected to be
made or acquired by Homeplex on real property which is already subject to prior
mortgage indebtedness in an amount which, when added to the amount of prior
indebtedness, generally will not exceed 90% of Homeplex's assessment of the
value of the property. A wrap-around loan is a junior mortgage loan having a
principal amount equal to the sum of the outstanding balance under the existing
mortgage loans plus the amount actually advanced under the wrap-around mortgage
loan. Under a wrap-around mortgage loan, Homeplex would make principal payments
to the holders of the prior mortgage loans but ordinarily only to the extent
that payments are received from the borrower. Homeplex expects to negotiate all
wrap-around mortgage loans so that the borrowers' payments to be made to
Homeplex will equal or exceed the amount of Homeplex's principal and interest
payments on the underlying loans.
Homeplex also is permitted to invest in agreements for sale, which for the
most part are governed by contract law but generally provide a statutory method
for foreclosure. In addition, Homeplex is permitted to acquire real estate loans
secured by other comparable security devices as permitted by applicable state
law.
In those types of loans described above, Homeplex generally receives as
security for its loan a deed of trust or mortgage on the property financed.
Loans generally will be made on a nonrecourse basis by which recourse will be
limited to the real properties on which the loans have been made so that in the
event of default Homeplex would be required to rely on the value of such real
property to protect its interests. In other instances, Homeplex's real estate
loans will be made on a full recourse basis so that the borrower will be liable
for any deficiency in the event that proceeds of a foreclosure or trustee's sale
were insufficient to repay the
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loan. In connection with any loans to a corporation or other non-individual
borrower, Homeplex may require that the loan be personally guaranteed by the
borrower's principal individual owners. In addition, Homeplex may purchase or
otherwise acquire participations or fractional interests in real estate loans
which are originated by parties that are not affiliated with Homeplex or may
retain participations or fractional interests in such loans which Homeplex has
originated and a portion of which have been acquired by parties that are not
affiliated with Homeplex. In such cases, Homeplex may not have control over the
loan or the unrestricted right to institute foreclosure proceedings. Except for
the personal guarantees of a borrower's owners, it is not intended that any loan
will be guaranteed or insured.
STANDARDS FOR REAL ESTATE LOANS. In making or acquiring a real estate loan,
Homeplex considers various relevant real property and financial factors
including the value of the property underlying the loan as security, the
location and other aspects of the property, the potential for development of the
property within one to three years, the income-producing capacity and quality of
the property, the rate and terms of the loan (including the discount from the
face amount of the note that can be obtained giving consideration to the current
interest rates and Homeplex's overall portfolio) and the quality, experience and
creditworthiness of the borrower. Homeplex will calculate internal rates of
return in reviewing the terms and purchase discount that can be obtained.
Although Homeplex generally receives a deed of trust or mortgage on the
financed property as security for each real estate loan, it may use other
security devices from time to time. In most cases, recourse for a real estate
loan will be limited to the real property securing the loan.
Homeplex will not make or acquire a real estate loan on any one property if
the aggregate amount of all senior mortgage loans outstanding on the property
plus the loan of Homeplex would exceed an amount equal to 95% of the value of
the property as determined by Homeplex. Homeplex may lend additional funds to
the borrower if the outstanding principal amount plus any outstanding senior
indebtedness encumbering the property and additional advances does not exceed
95% of the value of the underlying property at the time the real estate loan is
made or at the time of any new appraisal.
In general, Homeplex will make or acquire real estate loans in amounts
ranging from a minimum of $300,000 to a maximum of $5 million.
Homeplex may obtain a current independent appraisal for a property on which
it plans to make or acquire a real estate loan, the cost of which usually will
be paid by the borrower. Homeplex also may require, among other things, a survey
and a aerial photograph of the property underlying each real estate loan.
Homeplex, however, generally relies on its own analysis and not on appraisals
and other documents in determining whether to make or acquire a particular loan.
It should be noted that appraisals are estimates of value and should not be
relied upon as measures of true worth or realizable value. Homeplex will require
that the borrower obtain a mortgagee's or owner's title insurance policy or
commitment as to the priority of a mortgage or the condition of title be
obtained in connection with each real estate loan. Homeplex also will require
public liability insurance naming Homeplex as an additional insured for claims
arising on or about each underlying property when making a real estate loan and,
to the extent permitted by the existing loan documents, when acquiring a real
estate loan. Such liability insurance will be for suitable amounts as determined
by Homeplex, but to the extent that a borrower incurs uninsured liabilities or
liabilities in excess of the applicable coverage, such liabilities may adversely
affect the borrower's ability to repay the real estate loan.
In some cases, Homeplex may attempt to obtain equity participations in
connection with making real estate loans. Participations are designed to provide
the potential for a higher return when such equity participations are deemed by
management to be in the best interests of Homeplex. Such a participation is
expected to be in the form of additional interest based upon items such as gross
receipts from the property securing the loan in excess of certain levels or
appreciate in the value of the property on whose security Homeplex has made the
real estate loan based upon either sales price or increases in value. There can
be no assurance, however, that any real estate loans will be structured in this
manner or that any such loans will provide enhanced yields.
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<PAGE> 105
In determining whether to make or acquire a real estate loan, Homeplex also
will review the borrower's ability to repay the loan. Despite such review, the
ability of a borrower to repay the principal amount of a loan will depend
primarily upon the borrower's ability to obtain sufficient funds to pay the
outstanding principal balance of the real estate loan by refinancing, sale or
other disposition of the property underlying the real estate loan.
Homeplex will invest in agreements for sale or real estate contracts of
sale only if such contracts are in recordable form and are appropriate recorded
in the chain of title.
MATURITY OF LOANS. Homeplex expects that its real estate loans generally
will provide for payment of interest only during their term and for repayment of
principal in full at maturity, generally within one to two years after funding.
Homeplex plans to reinvest the proceeds which are received by it upon loan
repayments.
Homeplex believes its policy of making and acquiring short-term and
intermediate-term real estate loans will enable it to reinvest loan repayment
proceeds in new loans and thus to vary its portfolio more quickly in response to
changing economic, financial and investment conditions than would be the case if
Homeplex were to make long-term real estate loans.
Homeplex may incur indebtedness in order to meet expenses of holding any
property on which Homeplex has theretofore made a real estate loan and has
subsequently taken over the operations of the underlying property as a result of
default or to protect a real estate loan. In addition, Homeplex may incur
indebtedness in order to complete development of a property on which Homeplex
has theretofore made a development or land loan and has subsequently taken over
the operation of the underlying property as a result of default. Homeplex also
may utilize a line of credit in order to prevent default under senior loans or
to discharge them entirely if this becomes necessary to protect Homeplex's real
estate loans. Such borrowing may be required if foreclosure proceedings are
instituted by the holder of a mortgage loan that is senior to that held by
Homeplex.
The amount and terms and conditions of any line of credit will affect the
profitability of Homeplex and the funds that will be available to satisfy its
obligations. Interest will be payable on a line of credit regardless of the
profitability of Homeplex. Homeplex's ability to increase its return through
borrowings will depend in part upon Homeplex's ability to generate income from
its borrowed funds based upon the difference between Homeplex's return on
investment from such borrowed funds and the interest rate charged by its lender
for the funds. Adverse economic conditions could increase defaults by borrowers
on the real estate loans and could impact Homeplex's ability to make its loan
payments to its lenders. Adverse economic conditions could also increase
Homeplex's borrowing costs and cause the terms on which funds become available
to the unfavorable. In such circumstances, Homeplex could be required to
liquidate some of its loans at a significant loss.
Homeplex may pledge real estate loans as security for any borrowing. In
addition, any property acquired by Homeplex upon default and foreclosure of any
real estate loan may be pledged as collateral for a line of credit.
REMEDIES UPON DEFAULT BY BORROWER. Real Estate Loans are subject to the
risk of default, in which event Homeplex would have the added responsibility of
foreclosing and protecting its loans. In the state of Arizona, where all of
Homeplex's real estate loans have been made, Homeplex will have a choice of two
alternative and mutually exclusive remedies in the event of default by a
borrower with respect to a real estate loan secured by a deed of trust. In such
case, Homeplex either can proceed to cause the trustee under the deed of trust
to exercise its power of sale under the deed of trust and sell the collateral at
a non-judicial sale or it can choose to have the deed of trust judicially
foreclosed as if it were a mortgage. In the event of default, by a borrower with
respect to a real estate loan secured by a mortgage, Homeplex will have no
election of remedies and will be required to foreclose the mortgage judicially.
Remedies in other states in which Homeplex may acquire or make real estate loans
could vary significantly from those available in Arizona.
In Arizona, the mortgages must be foreclosed judicially. A judicial
foreclosure is usually a time consuming and potentially expensive undertaking.
Under judicial foreclosure proceedings, the borrower does not have a right to
reinstate the loan and can only cure its default by either paying the entire
accelerated sum
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owing under the note before the judicial sale or by redeeming the property
within six months after the date of the judicial sale.
The major advantage of a deed of trust is that Arizona law permits the
beneficiary of a deed of trust to foreclose the deed of trust as a mortgage
through judicial proceedings or by a non-judicial trustee's sale. A nonjudicial
trustee's sale conducted under the power of sale provided to the trustee usually
is more expedient and less expensive than a judicial foreclosure and may be held
any time after 90 days from the date of recording of the trustee's notice of
sale. Furthermore, unlike a judicial foreclosure, there is no redemption period
following a non-judicial sale. The major disadvantage of a deed of trust is the
significantly greater reinstatement rights granted to a borrower. Before a
trustee's sale, the borrower under a deed of trust has a right to reinstate the
contract and deed of trust as if no breach or default had occurred by payment of
the entire amount then due, plus costs and expenses, reasonable attorney's fees
actually incurred, the recording fee for cancellation of notice of sale and the
trustee's fee. The accelerated portion of the loan balance need not be paid in
order to reinstate. As a result, a borrower could repeatedly be in default under
a deed of trust and use its right to reinstate the loan under successive
non-judicial sale proceedings. Nonetheless, the borrower's right to reinstate a
deed of trust without payment of the accelerated portion of the loan balance can
be cut off upon the filing of an action to judicially foreclose the deed of
trust as a mortgage.
In the case of both judicial and non-judicial foreclosure, if a proceeding
under the Bankruptcy Code is commenced by or against a person or other entity
having an interest in the real property that secures payment of the loan, then
the foreclosure will be prevented from going forward until authorization to
foreclose is obtained from the Bankruptcy Court. During the period when the
foreclosure is stayed by the Bankruptcy Court, it is possible that payments,
including payments from any interest reserve account, may not be made on the
loan if so ordered by the Bankruptcy Court. The length of time during which the
foreclosure is delayed as a result of the bankruptcy, and during the payments
may not be made, is indefinite. In addition, under the Bankruptcy Code, the
Bankruptcy Court may render a portion of the loan unsecured if it determines
that the value of the real property that secures payment of the loan is less
than the balance of the loan, and, under other circumstances, may modify or
otherwise impair the lien of the lender in connection with the defaulted
mortgage or deed of trust.
Homeplex will have the right to bid on and purchase the property underlying
a real estate loan at a foreclosure or trustee's sale following a default by the
borrower. If Homeplex is the successful bidder and purchases a property
underlying a real estate loan, Homeplex's return on such real estate loan will
depend upon the amount of cash or other funds that can be realized by selling or
otherwise disposing of the property. There can be no assurance that Homeplex
will be able to sell such a property on terms favorable to Homeplex particularly
as the result of real estate market conditions. Recent conditions in real estate
loan markets have affected the availability and cost of real estate loans,
thereby making real estate financing difficult and costly to obtain and impeding
the ability of real estate owners to sell their properties at favorable prices.
Such conditions may adversely affect the ability of Homeplex to sell the
property securing a real estate loan in the event that Homeplex deems it in the
best interests of Homeplex to foreclose upon and purchase the property. To the
extent that the funds generated by such actions are less than the amounts
advanced by Homeplex for such real estate loan, Homeplex may realize a loss of
all or part of the principal and interest on the loan. Thus, there can be no
assurance that Homeplex will not experience financial loss upon a default by a
borrower.
TRANSACTIONS WITH AFFILIATES AND JOINT VENTURE INVESTMENTS. Homeplex does
not intend to make real estate loans to affiliates. Homeplex may enter into
joint ventures, general partnerships and loan participations with third parties
for the purpose of acquiring or making real estate loans in accordance with
Homeplex's investment policies. Any such investments will be made consistently
with the then existing Commission interpretations and case law respecting the
applicability of the Investment Company Act.
OWNERSHIP OF UNDERLYING REAL ESTATE. Homeplex will make or acquire real
estate loans for investment or make or acquire real estate loans primarily for
sale or other disposition in the ordinary course of business. Homeplex may be
required to engage in real estate operations if, among other things, Homeplex
forecloses on a property on which it has made or acquired a real estate loan and
takes over management of the property. Since the ownership of equity interests
in real estate underlying a real estate loan is not an objective of
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<PAGE> 107
Homeplex, such operations would only be conducted for a limited period pending
sale of the properties so acquired.
MORTGAGE ASSETS
Homeplex owns mortgage assets as described herein consisting of mortgage
interests (commonly known as "residuals") and mortgage instruments. Mortgage
Instruments consist of mortgage certificates representing interests in pools of
residential mortgage loans ("Mortgage Certificates").
Mortgage interests entitle Homeplex to receive net cash flows (as described
below) on mortgage instruments securing or underlying Mortgage Securities and
are treated for federal income tax purposes as interests in real estate mortgage
investments conduits ("REMICs") under the Code. Substantially all of Homeplex's
mortgage instruments and the mortgage instruments underlying Homeplex's mortgage
interests currently secure or underlie mortgage-collateralized bonds ("CMOs" or
"Bonds"), mortgage pass-through certificates ("MPCs" or "Pass-Through
Certificates") or other mortgage securities (collectively, "Mortgage
Securities").
Homeplex's mortgage assets generate net cash flows ("Net Cash Flows") which
result primarily from the difference between (i) the cash flows on mortgage
instruments (including those securing or underlying various series of Mortgage
Securities as described herein) together with reinvestment income thereon and
(ii) the amount required for debt service payments on such Mortgage Securities,
the costs of issuance and administration of such Mortgage Securities and other
borrowing and financing costs of Homeplex. The revenues received by Homeplex are
derived from the Net Cash Flows received directly by Homeplex as well as any Net
Cash Flows received by trusts in which Homeplex has a beneficial interest to the
extent of distributions to Homeplex as the owner of such beneficial interest.
Mortgage Certificates consist of fully-modified pass-through
mortgage-backed certificates guaranteed by GNMA ("GNMA Certificates"), mortgage
participation certificates issued by FHLMC ("FHLMC Certificates"), guaranteed
mortgage pass-through certificates issued by FNMA ("FNMA Certificates") and
certain other types of mortgage certificates and mortgage-collateralization
obligations ("Other Mortgage Certificates").
Mortgage Securities consisting of CMOs and MPCs typically are issued in
series. Each such series generally consists of several serially maturing classes
secured by or representing interests in mortgage instruments. Generally,
payments of principal and interest received on the mortgage instruments
(including prepayments on such mortgage instruments) are applied to principal
and interest payments on one or more classes of the CMOs or MPCs. Scheduled
payments of principal and interest on the mortgage instruments and other
collateral are intended to be sufficient to make timely payments of interest on
such CMOs or MPCs and to retire each class of such CMOs or MPCs by its stated
maturity or final payment date. Homeplex also finances its mortgage assets in
long-term structured obligations involving borrowings or other credit
arrangements secured by mortgage instruments or mortgage interests owned by
Homeplex.
CURRENT MORTGAGE ASSETS. As of June 30, 1996, Homeplex owned approximately
$45,812,000 in principal amount of mortgage instruments which have been pledged
in a long-term financing transaction. As of June 30, 1996, Homeplex also owned
mortgage interests with respect to seven separate series of Mortgage Securities
with a net amortized cost balance of approximately $4,623,000 (representing the
aggregate purchase price paid for such mortgage interests less the amount of
distributions on such mortgage interests received by Homeplex representing a
return of investment).
Homeplex owns mortgage interests which entitle it to receive the Net Cash
Flows on the mortgage instruments pledged to secure the following four series of
Bonds: (i) the Series 1 Mortgage-Collateralized Bonds issued by Westam Mortgage
Financial Corporation ("Westam") (the "Series 1 Bonds" or "Westam 1"), (ii) the
Series 3 Mortgage-Collateralized Bonds issued by Westam (the "Series 3 Bonds" or
"Westam 3"), (iii) the Series 65 Mortgage-Collateralized Bonds issued by
American Southwest Financial Corporation ("ASW") (the "Series 65 Bonds" or "ASW
65") and (iv) the Series 5 Mortgage-Collateralized Bonds issued by Westam (the
"Series 5 Bonds" or "Westam 5"). Each of these series of Bonds are CMOs,
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<PAGE> 108
and an election has been made to treat the mortgage instruments and other
collateral securing series of Bonds as REMICs.
Homeplex also owns the residual interest in the REMIC with respect to the
Series 17 Multi-Class Mortgage Participation Certificates (Guaranteed) ("FHLMC
17") issued by the Federal Home Loan Mortgage Corporation ("FHLMC") and 20.20%
and 45.07%, respectively, of the residual interests in the REMICs with respect
to the FNMA REMIC Trust 1988-24 Guaranteed REMIC Pass-Through Certificates
("FNMA 24") and the FNMA REMIC Trust 1988-25 Guaranteed REMIC Pass-Through
Certificates ("FNMA 25") issued by the Federal National Mortgage Association
("FNMA"). An election has been made to treat the mortgage instruments and other
collateral underlying each of the above series of Mortgage Securities as REMICS.
Homeplex has not purchased any mortgage interests since October 26, 1988.
All of the series described above collectively are referred to herein as
the "Outstanding Mortgage Securities." For purposes of the remainder of this
section only, "Bonds," "Pass-Through Certificates," "Mortgage Securities," "Net
Cash Flows" and "Mortgage Instruments" refer to the Bonds issued by ASW and
Westam, the Pass-Through Certificates by FHLMC and FNMA, the Outstanding
Mortgage Securities, the Net Cash Flows generated by the mortgage instruments
securing or underlying the Specified Mortgage Securities, and the mortgage
instruments securing or underlying the Outstanding Mortgage Securities,
respectively. Unless otherwise specified, information as to the Outstanding
Mortgage Securities is as of their respective closing dates.
The Outstanding Mortgage Securities were issued during the period from
April 29, 1988 through October 26, 1988 in an aggregate original principal
amount of $2,700,200,000, and all are collateralized by or represent interests
in mortgage instruments.
THE MORTGAGE INSTRUMENTS SECURING OR UNDERLYING THE OUTSTANDING MORTGAGE
SECURITIES. The mortgage instruments pledged as collateral for the Bonds are
beneficially owned by the Issuers of such Bonds, and Homeplex owns the residual
interests in the REMICs with respect to the Bonds. The mortgage instruments
contained in the pools underlying the Pass-Through Certificates are beneficially
owned by the holders of the Pass-Through Certificates (including the holders of
the residual interests relating thereto), and Homeplex owns 100%, 20.20% and
45.07% of the residual interest in the REMICs with respect to FHLMC 17, FNMA 24
and FNMA 25, respectively. The mortgage instruments securing or underlying the
Mortgage Securities consist of mortgage-backed certificates guaranteed by GNMA
("GNMA Certificates"), mortgage participation certificates issued by FHLMC
("FHLMC Certificates") and guaranteed mortgage pass-through certificates issued
by FNMA ("FNMA Certificates"). As of June 30, 1996, the GNMA Certificates has an
aggregate principal balance of $173,323,000, the FHLMC Certificates had an
aggregate principal balance of $53,118,000 and the FNMA Certificates had an
aggregate principal balance of $118,094,000.
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The following table sets forth the remaining principal balances, the
weighted average pass-through rates, the weighted average mortgage coupon rates
and the weighted average remaining terms to maturity of the mortgage instruments
pledged as collateral for each series of Bonds or contained in the pool
underlying each series of Pass-Through Certificates. The information presented
in the table was provided to Homeplex by the respective issuer of each series of
Mortgage Securities. Homeplex did not issue such Mortgage Securities and is
relying on the respective Issuers regarding the accuracy of the information
provided.
SUMMARY OF MORTGAGE INSTRUMENT CHARACTERISTICS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
WEIGHTED AVERAGE REMAINING
SERIES OF TYPE OF REMAINING AVERAGE MORTGAGE TERM
MORTGAGE MORTGAGE PRINCIPAL PASS-THROUGH COUPON TO MATURITY
SECURITIES INSTRUMENT BALANCE(1) RATE RATE (YEARS)(1)
- ------------------------------------ ---------- --------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C>
Westam 1............................ GNMA $32,895 10.50% 11.00% 20.3
Westam 3............................ GNMA 39,657 9.50 10.00 21.2
ASW 65.............................. GNMA 39,241 10.00 10.50 21.1
Westam 5............................ GNMA 61,530 9.00 9.50 20.7
FHLMC 17............................ FHLMC 53,118 10.00 10.57 21.0
FNMA 24............................. FNMA 48,937(2) 10.00 10.65 21.7
FNMA 25............................. FNMA 69,157(3) 9.50 10.14 21.7
</TABLE>
- ---------------
(1) As of June 30, 1996.
(2) Homeplex owns a 20.2% interest in the residual interest in the REMIC with
respect to FNMA 24.
(3) Homeplex owns a 45.07% interest in the residual interest in the REMIC with
respect to FNMA 25.
The prepayment experience on the mortgage instruments securing or
underlying the Mortgage Securities will significantly affect the average life of
such Mortgage Securities because all or a portion of such prepayments will be
paid to the holders of the related Mortgage Securities as principal payments on
such Mortgage Securities. Prepayments on mortgage loans commonly are measured by
a prepayment standard or model. The model used herein (the "Prepayment
Assumption Model") is based on an assumed rate of prepayment each month of the
unpaid principal amount of a pool of new mortgage loans expressed on an annual
basis. One hundred percent of the Prepayment Assumption Model assumes that each
mortgage loan underlying a Mortgage Certificate (regardless of interest rate,
principal amount, original term to maturity or geographic location) prepays at
an annual compounded rate of 0.2% per annum of its outstanding principal balance
in the first month after origination, that this rate increases by an addition
0.2% per annum in each month thereafter until the thirtieth month after
origination and in the thirtieth month and in each month thereafter prepays at a
constant prepayment rate of 6% per annum.
The Prepayment Assumption Model does not purport to be either a historical
description of the prepayment experience of any pool of mortgage loans or a
prediction of the anticipated rate of prepayment of any pool of mortgage loans,
including the mortgage loans underlying the Mortgage Certificates, and there is
no assurance that the prepayment of the mortgage loans underlying the Mortgage
Certificates will conform to any of the assumed prepayment rates. The rate of
principal payments on pools of mortgage loans is influenced by a variety of
economic, geographic, social and other factors. In general, however, mortgage
instruments are likely to be subject to higher prepayment rates if prevailing
interest rates fall significantly below the interest rates on the mortgage loans
underlying the Mortgage Certificates. Conversely, the rate of prepayment would
be expected to decrease if interest rates rise above the interest rate on the
mortgage loans underlying the Mortgage Certificates. Other factors affecting
prepayment of mortgage loans include changes in mortgagors' housing needs, job
transfers, unemployment, mortgagors' net equity in the mortgaged properties,
assumability of mortgage loans and servicing decisions.
DESCRIPTION OF THE OUTSTANDING MORTGAGE SECURITIES. Each series of Bonds
constitutes a nonrecourse obligation of the Issuer of such series of Bonds
payable solely from the mortgage instruments and any other
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collateral pledged to secure such series of Bonds. All of the Bonds are rated
"AAA" by Standard & Poor's Corporation. All of the Bonds have been issued in
series pursuant to indentures (the "Indenture") between the Issuer and a bank
trustee (the "Trustee") which holds the underlying mortgage instruments and
other collateral pledged to secure the related series of Bonds.
Each series of the Bonds is structured so that the monthly payments on the
mortgage instruments pledged as collateral for such series of Bonds, together
(in certain cases) with reinvestment income on such monthly payments at the
rates required to be assumed by the rating agencies rating such Bonds or at the
rates provided pursuant to a guaranteed investment contract, will be sufficient
to make timely payments of interest on each class of Bonds of such series (each
a "Bond Class"), to begin payment of principal on each Bond Class not later than
its "first mandatory principal payment date" or "first mandatory redemption
date" (as defined in the related Indenture) and to retire each Bond Class no
later than its "stated maturity" (as defined in the related Indenture).
Each series of Pass-Through Certificates represents beneficial ownership
interests in a pool ("Mortgage Pool") of mortgage instruments formed by the
Issuer thereof and evidences the right of the holders of such Pass-Through
Certificates to receive payments of principal and interest at the pass-through
rate with respect to the related Mortgage Pool. Pass-Through Certificates issued
by FHLMC or FNMA generally are not rated by any rating agency. The Pass-Through
Certificates issued by FHLMC have been issued pursuant to an agreement ("Pooling
Agreement") which generally provides for the formation of the Mortgage Pool and
the performance of administrative and servicing functions. The Pass-Through
Certificates issued by FNMA have been issued pursuant to a trust agreement
("Trust Agreement") between FNMA in its corporate capacity and in its capacity
as trustee which generally provides for the formation of the Mortgage Pool and
the performance of administrative and servicing functions. The Pass-Through
Certificates are not obligations of the Issuers thereof.
Each series of Pass-Through Certificates is structured so that the monthly
payments of principal and interest on the mortgage instruments in the Mortgage
Pool underlying such series of Pass-Through Certificates are passed through on
monthly payment dates to the holders of each class of Pass-Through Certificates
of such series (each a "Pass-Through Class") as payments of principal and
interest, respectively, and each Pass-Through Class is retired no later than its
"final payment date" or "final distribution date" (as defined in the related
Pooling Agreement or Trust Agreement, respectively).
With respect to FHLMC 17, FHLMC guarantees to each holder of a Pass-Through
Certificate that bears interest the timely payment of interest at the applicable
interest rate on such Pass-Through Certificates. FHLMC also guarantees to each
holder of a Pass-Through Certificate the payment of the principal amount of such
holder's Pass-Through Certificates as payments are made on the underlying FHLMC
Certificates. Such guarantees, however, do not assure Homeplex any particular
return on its mortgage interests with respect to these Mortgage Securities. The
FHLMC 17 Pass-Through Certificates have been issued pursuant to agreements
between the holders of the Pass-Through Certificates and FHLMC, which holds and
administers, or supervises the administration of, the pool of mortgage
instruments underlying the Pass-Through Certificates.
With respect to FNMA 24 and FNMA 25, FNMA is obligated to distribute on a
timely basis to the holders of the Pass-Through Certificates required
installments of principal and interest and to distribute the principal balance
of each Class of Pass-Through Certificate in full no later than its applicable
"final distribution date," whether or not sufficient funds are available in the
"certificate account" (as defined in the offering circular). The guarantee of
FNMA is not backed by the full faith and credit of the United States. The FNMA
24 and FNMA 25 Pass-Through Certificates represent beneficial ownership
interests in trusts created pursuant to a Trust Agreement. FNMA is responsible
for the administration and servicing of the mortgage loans underlying the FNMA
Certificates, including the supervision of the servicing activities of lenders,
if appropriate, the collection and receipt of payments from lenders, and the
remittance of distributions and certain reports to holders of the Pass-Through
Certificates.
Interest payments on the Bond Classes and the Pass-Through Classes
(together "Classes") are due and payable on specified payment dates, except with
respect to principal only or zero coupon Classes ("Principal
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Only Classes") which do not bear interest and with respect to compound interest
Classes ("Compound Interest Classes") as to which interest accrues but generally
is not paid until other designated Classes in the same series of Mortgage
Securities are paid in full. The payment dates for the Mortgage Securities are
monthly. Each Class of Mortgage Securities, except the Principal Only Classes,
provides for the payment of interest either at a fixed rate, or at an interest
rate which resets periodically based on a specified spread from (i) the
arithmetic mean of quotations of the London interbank offered rates ("LIBOR")
for one-month Eurodollar deposits, subject to a specified maximum interest rate,
(ii) the Monthly Weighted Average Cost of Funds Index for Eleventh District
Savings Institutions (the "COF Index"), as published by the Federal Home Loan
Bank of San Francisco (the "FHLB/SF"), subject to a specified maximum interest
rate or (iii) or indices specified in the prospectus supplement of offering
circular for a series of Mortgage Securities.
According to information furnished by the FHLB/SF, the COF Index is based
on financial reports submitted monthly to the FHLB/SF by Eleventh District
savings institutions and is computed by the FHLB/SF for each month by dividing
the cost of funds (interest paid during the month by Eleventh District savings
institutions on savings, advances and other borrowings) by the average of the
total amount of those funds outstanding at the end of that month and at the end
of the prior month, subject to certain adjustments. According to such FHLB/SF
information, the COF Index reflects the interest cost paid on all types of funds
held by Eleventh District savings institutions, and is weighted to reflect the
relative amount of each type of funds held at the end of the particular month.
The COF Index has been reported each month since August 1981.
Principal payments on each Class of the Mortgage Securities are made on
monthly payment dates. Payments of principal generally are allocated to the
earlier maturing Classes until such Classes are paid in full. However, in
certain series of Mortgage Securities, principal payments on certain Classes are
made concurrently with principal payments on other Classes of such series of
Mortgage Securities in certain specified percentages (as described in the
prospectus supplement or offering circular for such series of Mortgage
Securities). In addition, payments of principal on certain Classes (referred to
as "SAY," "PAC," "SMRT" or "SPPR" Classes) occur pursuant to a specified
repayment schedule to the extent funds are available therefor, regardless of
which other Classes of the same series of Mortgage Securities remain
outstanding. Each of the Principal Only Classes has been issued at a substantial
discount from par value and receives only principal payments. Certain Classes of
the Mortgage Securities will be subject to redemption at the option of the
Issuer of such series (in the case of FHLMC 17) or upon the instruction of
Homeplex (as the holder of the residual interest in the REMICs with respect to
the other Mortgage Securities Classes subject to redemption) on the dates
specified herein in accordance with the specific terms of the related Indenture,
Pooling Agreement or Trust Agreement, as applicable. Certain Classes which
represent the residual interest in the REMIC with respect to a series of
Mortgage Securities (referred to as "Residual Interest Classes") generally also
are entitled to additional amounts, such as the remaining assets in the REMIC
after the payment in full of the other Classes of the same series of Mortgage
Securities and any amount remaining on each payment date in the account in which
distributions on the mortgage instruments securing or underlying the Mortgage
Securities are invested after the payment of principal and interest on the
related Mortgage Securities and the payment of expenses.
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The table below sets forth certain information regarding the Mortgage
Securities with respect to which Homeplex owns all or a part of the Mortgage
Interest as of June 30, 1996.
SUMMARY OF THE MORTGAGE SECURITIES
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
PASS-
REMAINING THROUGH RATE
PRINCIPAL OF THE
BALANCE OF THE MORTGAGE
MORTGAGE INSTRUMENTS FIRST
INSTRUMENTS COLLATERALIZING STATED OPTIONAL
COLLATERALIZING OR MATURITY REDEMPTION
OR UNDERLYING UNDERLYING INITIAL REMAINING OR FINAL OR
THE MORTGAGE THE MORTGAGE ISSUE PRINCIPAL PRINCIPAL PAYMENT TERMINATION
SERIES(1) SECURITIES(2) SECURITIES CLASS DATE BALANCE BALANCE(2) COUPON DATE DATE
- --------- -------------- ------------ ---------- -------- --------- --------- ------------ -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Westam 1 $ 32,895 10.50% 1-A 4/29/88 $109,228 $ 4,142 Variable 9/1/12 6/1/98
Rate(3)
1-B 4/29/88 85,142 0 8.55 1/1/09 6/1/98
1-C 4/29/88 44,380 4,912 8.55 9/1/12 6/1/98
1-Z(4) 4/29/88 11,250 24,975 9.90 5/1/18 6/1/98
Westam 3 $ 39,657 9.50% 3-A 6/30/88 $ 80,960 $ 0 Variable 6/1/07 8/1/98
Rate(5)
3-B 6/30/88 54,000 0 6.00 10/1/02 8/1/98
3-C 6/30/88 16,000 0 6.00 10/1/04 8/1/98
3-D 6/30/88 25,040 0 6.00 6/1/07 8/1/98
3-E(4) 6/30/88 24,000 40,331 9.45 7/1/18 8/1/98
ASW 65 $ 39,241 10.00% 65-A 6/29/88 $ 41,181 $ 0 9.00% 5/1/14 8/1/98
65-B 6/29/88 7,746 0 Variable 9/1/14 8/1/98
Rate(6)
65-C(7) 6/29/88 11,872 0 8.25 10/1/18 8/1/98
65-D(7) 6/29/88 21,169 0 7.25 10/1/18 8/1/98
65-E(7) 6/29/88 6,965 0 7.50 10/1/18 8/1/98
65-F(7) 6/29/88 19,977 7,960 7.50 10/1/18 8/1/98
65-G(7) 6/29/88 12,540 12,540 7.50 10/1/18 8/1/98
65-H(7) 6/29/88 60,344 19,696 Variable 10/1/18 8/1/98
Rate(6)
65-I(7) 6/29/88 32,230 0 7.00 10/1/18 8/1/98
65-J(7) 6/29/88 23,476 0 Variable 10/1/18 8/1/98
Rate(6)
65-Z(4) 6/29/88 12,500 0 7.75 10/1/18 8/1/98
Westam 5 $ 61,530 9.00% 5-A 7/28/88 $ 70,488 $ 0 Variable 8/1/18 (9)
Rate(8)
5-B(10) 7/28/88 39,784 0 Zero 8/1/18 (9)
Coupon
5-Y(7) 7/28/88 139,728 62,715 8.95 8/1/18 (9)
FHLMC 17 $ 53,118 10.00% 17-A(7) 9/30/88 $ 26,000 $ 0 9.35% 5/15/02 (14)
17-B(7) 9/30/88 98,850 0 9.00 9/15/19 (14)
17-C 9/30/88 92,400 0 Variable 10/15/19 (14)
Rate(12)
17-D(10) 9/30/88 27,750 0 Zero 10/15/19 (14)
Coupon
17-E(7) 9/30/88 $ 75,400 0 9.30 2/15/12 (14)
17-F(7) 9/30/88 26,700 0 9.35 12/15/13 (14)
17-G(7) 9/30/88 67,400 0 9.55 3/15/17 (14)
17-H(7) 9/30/88 34,700 9,411 9.70 6/15/18 (14)
17-I(7) 9/30/88 43,696 43,696 9.90 10/15/19 (14)
17-J(7) 9/30/88 7,104 0 9.00 10/15/19 (14)
17-R(11) 9/30/88 100 11 Residual(13) 10/15/19 (14)
</TABLE>
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<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
PASS-
REMAINING THROUGH RATE
PRINCIPAL OF THE
BALANCE OF THE MORTGAGE
MORTGAGE INSTRUMENTS FIRST
INSTRUMENTS COLLATERALIZING STATED OPTIONAL
COLLATERALIZING OR MATURITY REDEMPTION
OR UNDERLYING UNDERLYING INITIAL REMAINING OR FINAL OR
THE MORTGAGE THE MORTGAGE ISSUE PRINCIPAL PRINCIPAL PAYMENT TERMINATION
SERIES(1) SECURITIES(2) SECURITIES CLASS DATE BALANCE BALANCE(2) COUPON DATE DATE
- --------- -------------- ------------ ---------- -------- --------- --------- ------------ -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FNMA $ 48,937 10.00% 24-A(7) 10/26/88 $ 13,300 $ 0 7.00% 3/25/02 (19)
24(15)
24-B(7) 10/26/88 33,499 0 7.00 3/25/11 (19)
24-C(7) 10/26/88 13,200 0 0 2/25/13 (19)
24-D(7) 10/26/88 29,100 0 7.00 3/25/16 (19)
24-E(7) 10/26/88 16,700 3,357 7.00 7/25/17 (19)
24-F(16) 10/26/88 217,350 26,672 Variable 10/25/18 (19)
Rate(17)
24-G(7) 10/26/88 18,899 18,899 7.00 10/25/18 (19)
24-H(7) 10/26/88 36,100 0 9.50 7/25/16 (19)
24-J(7) 10/26/88 32,850 0 9.50 4/25/17 (19)
24-K(7) 10/26/88 72,151 0 9.50 10/25/18 (19)
24-L 10/26/88 17,050 0 Zero 10/25/18 (19)
Coupon
24-R(11) 10/26/88 100 10 Residual(18) 10/25/18 (19)
FNMA $ 69,157 9.50% 25-A(7)(21) 10/25/88 $165,000 $ 0 9.00% 6/25/08 (19)
25(20)
25-B(7) 10/25/88 270,823 60,680 9.25 10/25/18 (19)
25-C(16) 10/25/88 37,500 8,402 Variable 10/25/18 (19)
Rate(22)
25-D 10/25/88 70,912 0 Variable 10/25/18 (19)
Rate(23)
25-E 10/25/88 139,575 0 Variable 10/25/18 (19)
Rate(24)
25-G(25) 10/25/88 66,115 0 Zero 10/25/18 (19)
Coupon
25-R(11) 10/25/88 75 75 Residual(26) 10/25/18 (19)
</TABLE>
- ---------------
(1) Unless otherwise specified, Homeplex owns 100% of the residual interest
with respect to each series of Mortgage Securities.
(2) As of June 30, 1996.
(3) Determined monthly, and generally equal to 0.65% above the arithmetic mean
of LIBOR, subject to a maximum rate of 12.75%.
(4) Compound Interest Class.
(5) Determined monthly, and generally equal to 0.70% above the arithmetic mean
of LIBOR, subject to a maximum rate of 13.00%.
(6) Determined monthly, and generally equal to 0.80%, 0.70% and 0.95%,
respectively, above the arithmetic mean or LIBOR, subject to a maximum rate
of 13.50%, 12.50% and 14.00%, respectively.
(7) SAY, PAC, SMRT, SPPR or other Class which receives a preferential
allocation of principal payments during a designated period.
(8) Determined monthly, and generally equal to 0.85% above the arithmetic mean
of LIBOR, subject to a maximum rate of 14.00%.
(9) The Westam 5 Bonds may be redeemed at any time after the aggregate
principal amount of such Bonds then outstanding is less than 10% of their
original aggregate principal amount.
(10) Principal Only Class.
(11) Residual Interest Class. This class represents the "residual interest" in
the REMIC with respect to such Series.
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(12) Determined monthly, and generally equal to 0.90% above the arithmetic mean
of LIBOR, subject to a maximum rate of 13.00%.
(13) The Class of Pass-Through Certificates will bear interest on each payment
date in an amount equal to the amounts received as interest payments on the
FHLMC Certificates in the Mortgage Pool on such payment date, less the
aggregate amount of interest payable on the FHLMC 17 Pass-Through
Certificates (other than the Residual Interest Class) on such payment date.
(14) The FHLMC 17 Pass-Through Certificates may be redeemed in whole, but not in
part, on any payment date if the aggregate principal amount of such
Pass-Through Certificates outstanding is less than 1% of the initial
principal amount of such Pass-Through Certificates.
(15) Homeplex owns a 20.20% interest in the residual interest in the REMIC with
respect to FNMA 24.
(16) Paid principal in the manner of a SAY, PAC, SMRT or SPPR Class with respect
to a portion of its principal balance.
(17) Determined monthly, and generally equal to 2.10% below the product of 1.15
and the arithmetic mean of LIBOR, subject to a maximum rate of 12.50%.
(18) On each payment date, the Class of Pass-Through Certificates will receive
the excess of the sum of all distributions payable on the FNMA Certificates
underlying the Pass-Through Certificates on such payment date over all
amounts distributable on such payment date as principal and interest on
each Class of the Pass-Through Certificates (including amounts
distributable as principal on this Class of Pass-Through Certificates).
(19) Not subject to optional redemption.
(20) Homeplex owns a 45.07% interest in the residual interest in the REMIC with
respect to FNMA 25.
(21) On any payment date on which the principal distributions from the FNMA
Certificates underlying the FNMA 25 Pass-Through Certificates are not
sufficient to reduce the principal balance of this Class of such
Pass-Through Certificates to a designated amount, the amount of interest
distributed from the FNMA Certificates underlying such Pass-Through
Certificates not required to be paid out as interest on such Pass-Through
Certificates on such payment date ("Excess Interest") will be applied to
reduce the principal balance of this Class to the designated amount for
that payment date.
(22) Determined monthly, and generally equal to .7586% above the product of
.9632 and the COF Index, subject to a maximum rate of 11.3054%.
(23) Determined monthly, and generally equal to 1.5229% below the product of
.9247 and the COF Index, subject to a maximum rate of 9.50%.
(24) Determined monthly, and generally equal to 1.25% above the COF Index,
subject to a maximum rate of 14.00%.
(25) On any payment date on which this Class of Pass-Through Certificates
receives principal payments, 30% of the Excess Interest will be applied to
reduce the principal balance of this Class.
(26) When Excess Interest is used to pay principal on Classes 25-A and 25-G, the
amount of Excess Interest so applied will be added to the principal balance
of this Class of Pass-Through Certificates. In addition, on each Payment
Date, this Class of Pass-Through Certificates will receive the excess of
the sum of all distributions payable on the FNMA Certificates underlying
the FNMA 25 Pass-Through Certificates on such payment date over all amounts
distributable on such payment date as principal and interest (including
amounts distributable as principal on this Class of Pass-Through
Certificates).
NET CASH FLOWS. The Net Cash Flows available from Homeplex's mortgage
assets are derived principally from three sources: (i) the favorable spread
between the interest or pass-through rates on the mortgage instruments securing
or underlying the Mortgage Securities and the interest or pass-through rates of
the Mortgage Securities Classes, (ii) reinvestment income in excess of the
amount thereof required to be applied
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<PAGE> 115
to pay the principal of and interest on the Mortgage Securities, and (iii) any
amounts available from prepayments on the mortgage instruments securing or
underlying the Mortgage Securities that are not necessary for the payment son
the Mortgage Securities. The amount of Net Cash Flows generally decreases over
time as the Classes are retired. Distributions of Net Cash Flows represent both
the return on and the return of the investment on the mortgage assets purchased.
In addition, Homeplex may exercise its rights in accordance with the terms of a
series of Mortgage Securities to redeem all or a part of such series prior to
maturity and sell the related mortgage instruments, in which case the net
payment (after payment of the Mortgage Securities and related costs) will be
remitted to Homeplex.
The principal factors which influence Net Cash Flows are as follows:
(1) Other factors being equal, Net Cash Flows in each payment period
tend to decline over the life of a series of Mortgage Securities, because
(a) as normal amortization of principal and principal prepayments occur on
the mortgage instruments securing or underlying such Mortgage Securities,
the principal balances of earlier, lower-yielding Classes of such Mortgage
Securities are reduced, thereby resulting in a reduction of the favorable
spread between the weighted average interest or pass-through rate on
outstanding Classes and the interest or pass-through rates on the mortgage
instruments securing or underlying such Mortgage Securities and (b) the
higher coupon mortgage instruments are likely to be prepaid faster,
reinforcing the same effect.
(2) The rate of prepayments on the mortgage instruments securing or
underlying a series of Mortgage Securities significantly affects the Net
Cash Flows. Because repayments shorten the life of the mortgage loans
underlying the mortgage instruments securing or underlying a series of
Mortgage Securities, a higher rate of prepayments normally reduces overall
Net Cash Flows. The rate of prepayments may be expected to vary over the
life of a series of Mortgage Securities, and the timing of prepayments will
further affect their significance. The rate of prepayments is affected by
mortgage interest rates and other factors. Generally, increases in mortgage
interest rates reduce prepayment rates, while decreases in mortgage
interest rates increase prepayment rates. Because an important component of
Net Cash Flows derives from the spread between the weighted average
interest or pass-through rate on the mortgage instruments securing or
underlying a series of Mortgage Securities and the weighed average interest
or pass-through rate on the outstanding classes of such Mortgage Securities
Classes, a higher than expected level of prepayments concentrated during
the early life of such Mortgage Securities (thereby reducing the weighted
average life of the earlier, lower-yielding Classes) has a more negative
effect on Net Cash Flows than the same volume of Prepayments have at a
constant rate over the life of such Mortgage Securities or at a later date.
(3) With respect to Variable Rate Classes of Mortgage Securities,
increases in the level of the index on which the interest rate for such
Variable Rate Classes are based increase the interest or pass-through rate
payable on Variable Rate Classes and thus reduce or, in some instances,
eliminate Net Cash Flows, while decreases in the level of the relevant
index decrease the interest or pass-through rate payable on Variable Rate
Classes and thus increase Net Cash Flows.
(4) The interest rate at which the monthly cash flow from the mortgage
instruments securing or underlying a series of Mortgage Securities may be
reinvested until payment dates for such Mortgage Securities influences the
amount of reinvestment income contributing to the Net Cash Flows unless
such reinvestment income is not paid to the owner of the related Mortgage
Asset.
(5) The administrative expenses of a series of Mortgage Securities (if
any) may increase as a percentage of Net Cash Flows as the outstanding
balances of the mortgage instruments securing or underlying such Mortgage
Securities decline, if some of such administrative expenses are fixed. In
later years, it can be expected that fixed expenses will exceed the
available cash flow. Although reserve funds generally are established to
cover such shortfalls, there can be no assurance that such reserves will be
sufficient to cover such shortfalls. In addition, although each series of
Mortgage Securities (other than FNMA 24 or FNMA 25) generally has an
optional redemption provision that allows the Issuer thereof (in the case
of FHLMC 17) or Homeplex (as the holder of the residual interest in the
REMICs with respect to the other series of Mortgage Securities) to retire
the remaining Classes that are subject to
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<PAGE> 116
redemption or retirement after a certain date, there can be no assurance
that the Issuer or Homeplex will exercise such options and, in any event,
in a high interest rate environment the market value of the remaining
mortgage instruments securing or underlying the Mortgage Securities may be
less than the amount required to retire the remaining outstanding Classes.
Homeplex may be liable for, or its return subject to, administrative
expenses relating to a series of Mortgage Securities if reserves prove to
be insufficient. Moreover. any unanticipated liability or expenses with
respect to the Mortgage Securities could adversely affect Net Cash Flows.
OTHER POLICIES
INVESTMENT COMPANY ACT. Homeplex intends to operate in such a manner as not
to be within the definition of investment company under the Investment Company
Act of 1940. Homeplex may not invest in public entities similar to Homeplex and
may not invest in securities of other issuers for the purpose of exercising
control.
HEDGING. Homeplex from time to time hedges its mortgage assets and
indebtedness in whole or in part so as to provide protection from interest rate
fluctuations or other market movements. With respect to assets, hedging can be
used either to increase the liquidity or decrease the risk of holding as asset
by guaranteeing, in whole or in part, the price at which such asset may be
disposed of prior to its maturity. With respect to indebtedness, hedging can be
used to limit, fix or cap the interest rate on variable interest rate
indebtedness. Homeplex's hedging activities may include the purchase of interest
rate cap agreements, the consummation of interest rate swaps, the purchase of
Stripped Mortgage Securities, the maintenance of short positions in financial
future contracts, the purchase of put options on such contracts and the trading
of forward contracts. Certain of the federal income tax requirements that
Homeplex has been required to satisfy to qualify as a REIT have limited its
ability to hedge.
CAPITAL RESOURCES
Subject to the terms of Homeplex's Bylaws, the availability and cost of
borrowings, various market conditions and restrictions that may be contained in
Homeplex's financing arrangements from time to time and other factors as
described herein, Homeplex may increase the amount of funds available for its
activities with the proceeds of borrowings including borrowings under lines of
credit, loan agreements, repurchase agreements and other credit facilities.
Subject to the foregoing, Homeplex's borrowings may bear fixed or variable
interest rates, may require additional collateral in the event that the value of
existing collateral declines on a market value basis and may be due on demand or
upon the occurrence of certain events. Repurchase agreements are agreements
pursuant to which Homeplex sells assets for cash and simultaneously agrees to
repurchase such assets on a specified date for the same amount of cash plus an
interest component. Homeplex also may increase the amount of funds available for
investment through the issuance of debt securities (including Mortgage
Securities). In general, Homeplex may make use of short-term borrowings to
provide additional funds when it is able to borrower at interest rates lower
than the yields expected to be earned on such funds. If borrowing costs are
higher than the yields generated by such funds, Homeplex's ability to utilize
borrowed funds may be substantially reduced and it may experience losses.
A substantial portion of the assets of Homeplex are pledged to secure
indebtedness incurred by Homeplex. Accordingly, such assets will not be
available for distribution to the stockholders of Homeplex in the event of
Homeplex's liquidation except to the extent that the value of such assets
exceeds the amount of such indebtedness.
At June 30, 1996 Homeplex did not have any used or unused short-term debt
or line of credit facilities.
Homeplex in the future may increase its capital resources by making
additional offerings of Homeplex Common Stock or securities convertible into
Homeplex Common Stock. The effect of such offerings may be the dilution of the
equity of stockholders of Homeplex or the reduction of the market price of
shares of
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Homeplex's Common Stock, or both. Homeplex is unable to estimate the amount,
timing or nature of future sales of its Common Stock as such sales will depend
upon Homeplex's need for additional funds, market conditions and other factors.
HOMEPLEX MANAGEMENT
EXECUTIVE OFFICERS
The executive officers of Homeplex are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS HELD
--------------------------------------- --- ---------------------------------------
<S> <C> <C>
Alan D. Hamberlin...................... 47 Chairman of the Board of Directors,
Director and Chief Executive Officer
Jay R. Hoffman......................... 42 Director, President, Secretary,
Treasurer and Chief Financial and
Accounting Officer
</TABLE>
ALAN D. HAMBERLIN has been a director and Chief Executive Officer of
Homeplex since its organization and Chairman of the Board of Directors since
January 1990. Mr. Hamberlin has been President of Courtland Homes, Inc. since
July 1983. Mr. Hamberlin has served as a director of American Southwest
Financial Corporation and American Southwest Finance Co., Inc. since their
organization in September 1982. Mr. Hamberlin also has served as a director of
American Southeast Affiliated Companies since its organization in March 1995 and
of American Southwest Holdings, Inc. since August 1994.
JAY R. HOFFMAN has been the President and a Director of Homeplex since
September 1995 and the Secretary, Treasurer and Chief Financial and Accounting
Officer of Homeplex since July 1988. Mr. Hoffman also served as the Vice
President of Homeplex from July 1988 to September 1995. Mr. Hoffman, a certified
public accountant, engaged in the practice of public accounting with Kenneth
Leventhal & Company from March 1987 through June 1988 and with Arthur Andersen &
Co. from June 1976 through March 1987.
All officers serve at the discretion of the Board of Directors. A condition
precedent to the Merger is the resignation of the current executive officers of
Homeplex.
EXECUTIVE COMPENSATION
The following table sets forth compensation received by Homeplex's
executive officers for the last three fiscal years ending December 31, 1995.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION -------------------------------------------
-------------------------------------- RESTRICTED SHARES UNDERLYING ALL
NAME YEAR SALARY BONUS OTHER STOCK AWARDS OPTIONS/PSRS(#) OTHER
- -------------------- ---- -------- ------- ------- ------------ ----------------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Alan D. Hamberlin... 1995 $240,000 $ -- $ -- -- 820,014 $ --
1994 250,000 2,100 -- -- 4,642 --
1993 250,000 4,100 -- -- 5,439 --
Jay R. Hoffman...... 1995 $183,000 $25,000 $ -- -- 1,240 $ --
1994 175,000 15,000 -- -- 1,216 --
1993 175,000 -- -- -- 1,425 --
</TABLE>
The Hamberlin Employment Agreement provides for Mr. Hamberlin to receive an
annual base salary of $1.00. In lieu of the annual base salary, Homeplex granted
the Hamberlin Stock Options and the Hamberlin PSRs. A corporation owned by Mr.
Hamberlin also is entitled to payment of $15,000 annually as reimbursement for
expenses incurred by such company and providing support to Mr. Hamberlin in
connection with the performance of his duties.
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HAMBERLIN AGREEMENTS AND OTHER EMPLOYMENT AGREEMENTS
HAMBERLIN EMPLOYMENT AGREEMENT. Homeplex entered into an Employment
Agreement with Alan D. Hamberlin on December 21, 1995 (the "Hamberlin Employment
Agreement"), with a term ending on December 20, 1998 and providing for the
employment of Mr. Hamberlin as the Chief Executive Officer of Homeplex. Mr.
Hamberlin will receive an annual base salary of $1.00 and will not be entitled
to any bonuses except as granted by the Board of Directors in its absolute sole
discretion. The Hamberlin Employment Agreement terminates (a) upon the death or
disability of Mr. Hamberlin, (b) by Homeplex for "Cause," (c) by mutual
agreement following a change in control of Homeplex that is unanimously approved
by the Board of Directors (a "Consented Termination") and (d) upon the request
of Mr. Hamberlin. "Cause" shall mean an act or acts of dishonesty by Mr.
Hamberlin constituting a felony and resulting or intended to result directly or
indirectly in substantial gain or personal enrichment at the expense of
Homeplex. The Hamberlin Employment Agreement also provides that if a change in
control occurs on or before December 20, 1998 that has not been unanimously
approved by the Board of Directors (a "Non-Approved Change in Control") and if
Mr. Hamberlin's employment has not been previously terminated, Homeplex will pay
$500,000 to Mr. Hamberlin within 10 days of such change in control as well as
maintain in full force and effect until December 20, 1998 all plans, programs or
benefits provided to employees, including those plans, programs or benefits in
which Mr. Hamberlin was entitled to participate immediately prior to the change
in control. A condition precedent to the Merger is an amendment to the Hamberlin
Employment Agreement to delete the $500,000 cash payment that might be required
to be paid upon consummation of the Merger. Such amendment has been executed.
HAMBERLIN STOCK OPTIONS. In lieu of an annual base salary in cash, Homeplex
and Mr. Hamberlin entered into a Stock Option Agreement dated December 21, 1995
(the "Hamberlin Stock Option Agreement") pursuant to which Homeplex granted
(subject to stockholder approval) an option to Mr. Hamberlin to purchase 750,000
shares of Homeplex Common Stock at $1.50 per share, which was the fair market
value per share on December 21, 1995 (the "Hamberlin Stock Options"). The
Hamberlin Stock Options vest as follows: (i) 200,000 on December 21, 1995, (ii)
275,000 on December 21, 1996 and (iii) 275,000 on December 21, 1997; provided,
however, all options will vest in full upon a Non-Approved Change in Control or
upon a termination of Mr. Hamberlin's employment (without his consent) by
Homeplex for any reason other than death, disability or Cause. In addition, the
Hamberlin Stock Options will vest in their entirety prior to any merger or
consolidation in which Homeplex is not the surviving entity or any reverse
merger in which Homeplex is the surviving entity. A condition precedent to the
Merger is an amendment to the Hamberlin Stock Option Agreement to eliminate the
acceleration of vesting of the Hamberlin Stock Options that may result upon
consummation of the Merger. If approved at the Annual Meeting, upon consummation
of the Merger options covering 500,000 shares of Homeplex Common Stock will be
exercisable. The Hamberlin Stock Options are exercisable until December 21,
2000. The Hamberlin Employment Agreement and the Hamberlin Stock Option
Agreement are collectively referred to as the "Hamberlin Agreements." The forms
of the Hamberlin Agreements are attached to this Proxy Statement/Prospectus as
Appendix D. All stockholders are urged to read the Hamberlin Agreements in their
entirety.
HAMBERLIN PSRS. Pursuant to the Hamberlin Employment Agreement, Mr.
Hamberlin also was conditionally granted 750,000 phantom stock rights ("PSRs").
If approval of the Hamberlin Stock Options is not obtained at the Annual
Meeting, then the Hamberlin Stock Options will terminate and only then will the
PSRs granted to Mr. Hamberlin become effective. PSRs vest as follows: (i)
200,000 on December 21, 1995, (ii) 275,000 on December 21, 1996 and (iii)
275,000 on December 21, 1997; provided, however, all PSRs will vest upon a
Non-Approved Change in Control or upon a termination of Mr. Hamberlin's
employment (without his consent) by Homeplex for any reason other than death,
disability or Cause. In general, after a Consented Termination the PSRs remain
outstanding as if Mr. Hamberlin was still employed. The PSRs are exercisable
until December 21, 2000. Upon exercise of a PSR, Homeplex will pay Mr. Hamberlin
cash equal to the excess of the fair market value of Homeplex Common Stock on
the date of exercise over $1.50. The main economic difference to Homeplex, is
that upon exercise the Hamberlin PSRs will require a cash payment versus the
Hamberlin Stock Options which require only the issuance of stock. In addition,
if the Hamberlin Stock Options are not approved at the Annual Meeting and the
Hamberlin PSRs become effective,
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they will have a material adverse effect on the future earnings of Homeplex
because on the date of effectiveness, the excess of the fair market value of
Homeplex Common Stock over $1.50 will be required to be charged to Homeplex's
earnings, with additional future charges required if the trading price continues
to increase.
HOFFMAN SEVERANCE AGREEMENT. On July 1, 1996 Homeplex entered into a
Severance Agreement with Jay R. Hoffman (the "Severance Agreement"), which
superseded the previous severance agreement which was to expire on August 30,
1996. The Severance Agreement provides that if a "Change in Control" (as defined
in the Severance Agreement) occurs prior to August 30, 1997, Mr. Hoffman will be
entitled to receive a severance payment in an amount equal to Mr. Hoffman's
annual salary as of the date of the Change in Control. A condition precedent to
the Merger is the amendment of the Severance Agreement to provide that the
Merger will result in a termination of Mr. Hoffman without cause thereunder.
Such amendment has been executed. If the Merger Agreement is effected, Mr.
Hoffman will be entitled to such severance payment.
STOCK OPTION PLAN
In May 1988, Homeplex's Board of Directors adopted a stock option plan (the
"Existing Stock Option Plan"), under the terms of which qualified incentive
stock options and non-qualified stock option may be granted to the directors,
officers and key personnel of Homeplex. The purpose of the Existing Stock Option
Plan is to provide a means of performance-based compensation in order to attract
and retain qualified personnel and to provide an incentive to others whose
performance affects Homeplex.
The maximum number of shares of Homeplex Common Stock which may be covered
by options granted under the Existing Stock Option Plan is limited to 437,500,
all of which have been granted. The exercise price for any option granted under
the Existing Stock Option Plan may not be less than 100% of the fair market
value of the shares of Homeplex Common Stock at the time the option is granted.
Currently, no option may be granted under the Existing Stock Option Plan to any
person who, assuming exercise of all options held by such person, would own
directly or indirectly more than 9.8% of the total outstanding shares of
Homeplex Common Stock. An optionholder also will receive dividend equivalent
rights to the extent that dividends are declared on the outstanding shares of
Homeplex Common Stock on the record dates during the period between the date an
option is granted and the date such option is exercised.
Under the Existing Stock Option Plan, an exercising optionholder has the
right to require Homeplex to purchase some or all of the optionholder's shares
of the Homeplex Common Stock. That redemption right is exercisable by the
optionholder only with respect to shares (including the related dividend
equivalent rights) that he has acquired by exercise of an option under the
Existing Stock Option Plan. Furthermore, the optionholder can only exercise his
redemption rights within six months from the last to expire of (i) the two year
period commencing with the grant date of an option, (ii) the one year period
commencing with the exercise date of an option, or (iii) any restriction period
on the optionholder's transfer of the shares of Homeplex Common Stock he
acquires through exercise of his option.
The Existing Stock Option Plan is administered by the Board of Directors.
Each option granted must terminate no more than ten years from the date it is
granted. Unless previously terminated by the Board of Directors, the Existing
Stock Option Plan will terminate in May 1998.
The Existing Stock Option Plan currently provides that the exercise period
after an optionee ceases to be a director or employee of Homeplex is three
months. The stockholders of Homeplex are being asked to approve the Stock Option
Extension to extend such exercise period to two years for existing stock option
agreements.
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<PAGE> 120
The following table provides information on outstanding stock options and
phantom stock rights ("PSRs") granted to Homeplex's executive directors,
officers and key personnel.
STOCK OPTIONS AND PSRS GRANTED IN 1995
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
SHARES PERCENT OF APPRECIATION FOR TERM
UNDERLYING TOTAL EXERCISE EXPIRATION ------------------------------
NAME OPTIONS/PSRS GUARANTEED PRICE DATE 0% 5% 10%
- ------------------------------ ------------ ---------- -------- ---------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Alan D. Hamberlin............. 750,000(1) 91.3% $ 1.50 12/21/00 $ -- $310,000 $686,000
64,000(2) 7.8% $ 1.50 12/13/00(4) $ -- $ 26,000 $ 59,000
6,014(2) 0.7% --(3) --(3)(4) $9,000 $ 12,000 $ 15,000
Jay R. Hoffman................ 1,240(2) 0.1% --(3) --(3)(4) $1,180 $ 2,000 $ 3,000
</TABLE>
- ------------------------------------------------------------------------
(1) Granted in lieu of cash compensation pursuant to the terms of the Hamberlin
Agreements.
(2) All of such options are currently exercisable.
(3) Represent dividend equivalent rights earned in 1995. Such rights expire at
the same time as the options on which they were earned, which expire at
various dates between July 26, 1999 and February 6, 2002.
(4) Options are currently subject to earlier expiration upon an optionee's
termination for cause or three months after any termination of employment.
The following table provides information on stock options and PSRs
exercised in 1995 by Homeplex's executive officers and the value of such stock
officer's unexercised options and PSRs at December 31, 1995.
VALUE OF STOCK OPTIONS AND PSRS AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
VALUE OF IN-THE-MONEY
OPTIONS/PSRS OUTSTANDING OPTIONS/PSRS(1)
SHARES VALUE AT ---------------------------- ----------------------------
NAME ACQUIRED EXERCISE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Alan D. Hoffman................. -- $ -- 306,723 750,000 $ 159,000 $ --
Jay R. Hoffman.................. -- $ -- 63,269 -- $ -- $ --
</TABLE>
- ------------------------------------------------------------------------
(1) Calculated based on the closing price at December 31, 1995 of $1.50
multiplied by the number of applicable shares in the money (including
dividend equivalent rights), less the total exercise price per share.
RETIREMENT ACCOUNT
On June 27, 1991, Homeplex established a simplified employee
pension -- individual retirement account pursuant to Section 408(k) of the Code
(the "SEP-IRA"). Annual contributions may be made by Homeplex under the SEP-IRA
to employees. Such contributions will be excluded from each employee's gross
income and will not exceed the lesser of 15% of such employee's compensation or
$30,000. Homeplex did not make any contributions to the SEP-IRA in 1995.
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PRINCIPAL STOCKHOLDERS
At November 6, 1996, there were 9,716,517 shares of Homeplex Common Stock
outstanding. The table below sets forth, as of November 6, 1996, those persons
known by Homeplex to own beneficially five percent or more of the outstanding
shares of Homeplex Common Stock, the number of shares of Homeplex Common Stock
beneficially owned by each director and executive officer of Homeplex and the
number of shares beneficially owned by all of Homeplex's executive officers and
directors as a group, which information as to beneficial ownership is based upon
statements furnished to Homeplex by such persons. See "Election of Board of
Directors -- Nominees for Board of Directors."
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES PERCENT OF HOMEPLEX
OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) COMMON STOCK(2)
---------------------------------------------- --------------------- -------------------
<S> <C> <C>
Alan D. Hamberlin*............................ 344,623(3) 3.44%
Jay R. Hoffman*............................... 78,269(4) **
Mark A. McKinley*............................. 47,507(5) **
Gregory K. Norris*............................ 11,651(5) **
Larry E. Cox*................................. 3,400(5) **
All directors and executive officers as a
group (five persons)........................ 485,450(6) 4.78%
5% Stockholder:
The InterGroup Corporation and
Mr. John V. Winfield
2121 Avenue of the Stars, Ste. 2020
Los Angeles, California 90067............... 859,000(7) 8.84%
</TABLE>
- ---------------
* Each director and executive officer of Homeplex may be reached through
Homeplex at 5333 North Seventh Street, Suite 219, Phoenix, Arizona 85014.
** Less than 1% of the outstanding shares of Homeplex Common Stock.
(1) Includes, where applicable, shares of Homeplex Common Stock owned of record
by such person's minor children and spouse and by other related individuals
and entities over whose shares of Homeplex Common Stock such person has
custody, voting control or the power of disposition.
(2) The percentages shown include the shares of Homeplex Common Stock actually
owned as of November 6, 1996 and the share of Homeplex Common Stock which
the person or group had the right to acquire within 60 days of such date. In
calculating the percentage of ownership, all shares of Homeplex Common Stock
which the identified person or group had the right to acquire within 60 days
of November 6, 1996 upon the exercise of options are deemed to be
outstanding for the purpose of computing the percentage of the shares of
Homeplex Common Stock owned by such person or group, but are not deemed to
be outstanding for the purpose of compute the percentage of the shares of
Homeplex Common Stock owned by any other person. The Hamberlin Stock Options
are not included as these will not be approved prior to the Annual Meeting.
If approved at the Annual Meeting, options covering 500,000 shares of
Homeplex Common Stock will be exercisable.
(3) Includes 37,900 shares of Homeplex Common Stock indirectly beneficially
owned by Mr. Hamberlin through a partnership and 306,723 shares of Homeplex
Common Stock which Mr. Hamberlin had the right to acquire within 60 days of
November 6, 1996 by the exercise of stock options (including dividend
equivalent rights). The Hamberlin Stock Options are not included as these
will not be approved prior to the Annual Meeting. If approved at the Annual
Meeting, options covering 500,000 shares of Homeplex Common Stock will be
exercisable.
(4) Includes 15,000 shares of Homeplex Common Stock owned by Mr. Hoffman and
63,269 shares of Homeplex Common Stock which Mr. Hoffman had the right to
acquire within 60 days of November 6, 1996 by the exercise of stock options
(including dividend equivalent rights).
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<PAGE> 122
(5) All of such shares of Homeplex Common Stock are shares which Mr. McKinley,
Mr. Norris and Mr. Cox had the right to acquire within 60 days of November
6, 1996 by the exercise of stock options (including dividend equivalent
rights).
(6) Includes 432,550 shares of Homeplex Common Stock which such persons had the
right to acquire within 60 days of November 6, 1996 by the exercise of stock
options (including dividend equivalent rights). The Hamberlin Stock Options
are not included as these will not be approved prior to the Annual Meeting.
If approved at the Annual Meeting, options covering 500,000 shares of
Homeplex Common Stock will be exercisable.
(7) The nature of beneficial ownership of the 859,000 shares is 459,000 shares
are owned by the InterGroup Corporation and 400,000 shares are owned by John
V. Winfield. Mr. Winfield is Chairman of the Board and President of The
InterGroup Corporation. As of November 6, 1996, 427,406 shares of InterGroup
common stock, constituting 46% of the outstanding InterGroup shares, were
owned directly or beneficially by Mr. Winfield.
Other than options and dividend equivalent rights granted under the Stock
Option Plan or under the Hamberlin Agreements, there are no outstanding
warrants, options or rights to purchase any shares of Homeplex Common Stock, and
no outstanding securities convertible into Homeplex Common Stock. See "The
Merger and Related Transactions -- Operations and Executive Officers of Homeplex
After the Merger; Future Stock Option Plan."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Alan D. Hamberlin, the Chairman of the Board of Directors, and Chief
Executive Officer of Homeplex, also is a director of American Southwest
Financial Corporation, American Southwest Finance Co., Inc., American Southwest
Affiliated Companies and American Southwest Holdings, Inc. and a member of the
management committee of American Southwest Financial Group, L.L.C. ("ASFG").
Mr. Hamberlin directly and indirectly owns a total of 25% of the voting
stock of American Southwest Holdings, Inc., American Southwest Holdings, Inc.
directly or indirectly owns 100% of the voting stock of, among other entities,
American Southwest Financial Services, Inc. ("ASFS"), American Southwest
Financial Corporation and Westam Mortgage Financial Corporation. Mr. Hamberlin
also directly and indirectly owns up to 25% of the capital interest held by the
common members of ASFG and indirectly owns up to 25% of the capital interest of
the preferred members of ASFG.
Homeplex is a party to a Subcontractor Agreement pursuant to which ASFG, as
assignee of ASFS, performs certain services for Homeplex in exchange for
administration fees. ASFS received administration fees of approximately $201,000
during 1993, $165,000 during 1994 and $144,000 during 1995. The Subcontractor
Agreement renews on an annual basis and Homeplex has the right to terminate the
Subcontractor Agreement upon the happening of certain events.
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<PAGE> 123
MONTEREY BUSINESS DESCRIPTION
OVERVIEW
Monterey designs, builds, and sells single-family, move-up and semi-custom
luxury homes primarily in the areas of Scottsdale and Tucson, Arizona. Monterey
achieved revenue growth from $20.4 million in 1991 to $71.5 million in 1995,
representing a compound annual growth rate of 28%, and achieved pre-tax income
of $6.4 million in 1995. Monterey attributes this growth principally to the
market knowledge and experience of its management team and strong economic
conditions in the Scottsdale market. Through June 30, 1996, Monterey had closed
125 homes generating revenues of $31.5 million and as of that date had a backlog
of 152 homes under contract.
INDUSTRY
The homebuilding industry is highly competitive and extremely fragmented.
The National Association of Homebuilders confirms that 94% of homebuilders start
fewer than 100 homes annually and 81% of homebuilders start fewer than 25 homes
each year.
The homebuilding industry is greatly affected by a number of factors, on
both a national and regional level. Among the most vital factors on a national
level are interest rates and the influence of the Federal Reserve Board on
interest rates. The homebuilding industry's sensitivity to interest rate
fluctuations is two-pronged: an increase or decrease in interest rates affects
(i) the homebuilding company directly in connection with its cost of borrowed
funds for land and project development and working capital and (ii) home buyers'
ability and desire to obtain long-term mortgages at rates favorable enough to
service a long-term mortgage obligation. Monterey believes that the availability
of less expensive mortgage financing vehicles such as variable rate mortgage
loans have encouraged potential home buyers moving to high growth areas to be
more willing to purchase a new home now and refinance at a later date.
BUSINESS STRATEGY
Monterey's business strategy is to provide its customers with quality,
move-up and semi-custom, luxury homes in prime locations while catering to
customers' desires to customize Monterey's offered floor plans. Monterey seeks
to distinguish itself from other production homebuilders by offering homes that
it believes have more distinctive designs and by offering custom home features
at more affordable prices than are generally available.
Monterey's business strategy focuses on the following elements:
QUALITY PRODUCT -- DISTINCTIVE DESIGN FEATURES. Monterey seeks to maximize
customer satisfaction by offering homes that are built with quality materials
and craftsmanship, exhibit distinctive design, and are situated in premium
locations. Its competitive edge in the selling process focuses on the home's
features, design, and available custom options. Monterey believes that its homes
generally offer higher quality and a more distinctive design within a defined
price range or category than those built by its competitors.
SERVICE. Monterey strives to inform and involve the customer in every phase
of the building process. Monterey holds a pre-construction conference with the
customer, sales person, and construction superintendent to review the house
plans and design features selected by the customer. A second conference is held
at the completion of the framing of the house to review the progress and answer
any questions the customer may have. Upon completion of the house, the customer
care representative meets with the customer for a new home orientation. This
process is designed to give the customer the opportunity to add custom design
features and monitor development of the home, giving the customer a feeling of
participation in and control over the end product.
PRODUCT BREADTH. Monterey has two major product lines: luxury and move-up.
The luxury market segment is characterized by distinctive communities in which
Monterey builds semi-custom homes. Monterey rarely duplicates its semi-custom
floor plans from one community to another, providing customers within each
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<PAGE> 124
specific community distinctive luxury homes. The move-up market segment is
characterized by lower-priced production homes for which floor plans can be used
from community to community. Monterey's expansion into the move-up buyer segment
of the market, reflects its desire to increase its market share of the overall
housing market in the Phoenix metropolitan area.
TARGET MARKET. Particularly in its luxury home operations, Monterey focuses
on the affluent buyer, including professionals and those purchasing second homes
and who may live in the Phoenix or Tucson metropolitan areas on a parttime
basis. For the year ended December 31, 1995, 12% of Monterey's home closings
were derived from home buyers who paid all cash and did not utilize mortgage
financing. Because of its customer profile and the nature of the semi-custom,
luxury segment of the market, Monterey believes that the demand for this product
is less cyclical and less sensitive to the adverse effects of interest rate
fluctuation than other segments of the homebuilding industry and somewhat less
affected by economic downturns. For the six months ended June 30, 1996,
approximately 45% and 55% of Monterey's revenues were derived from the sale of
move-up and semi-custom, luxury homes, respectively. For the year ended December
31, 1995, approximately 32% and 68% of Monterey's revenues were derived from the
sale of its move-up and semi-custom, luxury homes, respectively. For the year
ended December 31, 1994, approximately 15% and 85% of Monterey's revenues were
derived from the sale of move-up and semi-custom, luxury homes, respectively. In
1993, 100% of the Monterey's revenues were derived from the semi-custom, luxury
market.
SCOTTSDALE, ARIZONA MARKET. Historically Monterey has generally operated in
Scottsdale, Arizona which is an affluent city within the Phoenix metropolitan
area. The growth of Scottsdale in recent years has been significant; its
population increased from 107,900 in 1985 to 166,500 in 1995, a 54% increase.
Further, Scottsdale has developed detailed master planning and zoning
regulations and the area has typically attracted affluent buyers who Monterey
generally targets. Monterey intends to maintain its position as one of the
largest homebuilders in the Scottsdale market for homes priced over $200,000 by
continuing to focus on product design, quality, superior locations, and service.
TUCSON, ARIZONA MARKET. In April 1996, Monterey began operations in Tucson,
Arizona. Tucson has increased its population significantly, from 531,000 in 1980
to 751,000 in 1995, a 41% increase. Monterey intends to develop a position as a
significant builder in the move-up and semi-custom, luxury markets in Tucson.
There is no assurance, however, that Monterey's Tucson operations will be
successful. See "Risk Factors -- Risk Factors of Monterey -- Expansion Into
Tucson Market."
PENETRATION OF NEW MARKETS. Depending on existing market conditions,
Monterey may explore expansion opportunities in other parts of the Western and
Southwestern United States. Its strategy in this regard will be to expand first
into similar market niches in areas where it perceives an ability to exploit a
competitive advantage. See "Risk Factors -- Risk Factors of Monterey -- Planned
Expansion" and "Risk Factors -- Risk Factors of Monterey -- Future
Acquisitions."
CONSERVATIVE LAND ACQUISITION POLICY. Monterey has historically pursued,
and will continue to pursue, a conservative land acquisition policy. It
generally purchases land subject to complete entitlement, including zoning and
utilities services, focusing on development sites which it expects will have
less than a three-year inventory of lots. These strategies reduce the risks
associated with investments in land. Moreover, it controls lots on a
non-recourse, rolling option basis in those circumstances in which it is
economically advantageous to do so. To date, Monterey has not speculated in raw
land held for investment.
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<PAGE> 125
MARKETS AND PRODUCTS
OVERVIEW. Monterey's operations primarily service Scottsdale, Arizona and
beginning in the first half of 1996, Tucson, Arizona. Monterey believes that
both of these areas represent attractive homebuilding markets with significant
opportunity for growth. Monterey also believes that its operations in Scottsdale
are well established and that it has developed a reputation for building
quality, move-up and semi-custom, luxury homes with distinctive designs.
Monterey's semi-custom, luxury homes are generally single-story, two,
three, four, or five bedroom homes, ranging in base price from approximately
$291,200 to $450,000. These homes vary in size from 1,900 square feet to 4,300
square feet and are constructed on lots ranging from 5,500 square feet to one
acre.
Monterey also builds single-family, move-up homes on subdivided lots. These
are one and two-story detached homes, with two to five bedrooms, currently
ranging in base price from approximately $144,700 to $201,500. The homes range
from 1,850 square feet to 3,000 square feet and are constructed on lots ranging
from 6,500 square feet to 10,000 square feet.
The average sales price for all homes closed during 1995 and through June
30, 1996, was $284,200 and $251,900, respectively. At December 31, 1995,
Monterey had a total of 144 home purchase contracts in backlog totaling $38
million, with an average sales price of $263,100, while at June 30, 1996,
Monterey had 152 home purchase contracts in backlog totaling $46 million, with
an average sales price of $302,500.
SCOTTSDALE, ARIZONA. For 1995 and prior years, Monterey derived
approximately 100% of its revenue from operations in Scottsdale, Northeast
Phoenix, and Fountain Hills, Arizona. Scottsdale is a relatively affluent city
within the Phoenix metropolitan area. The growth of Scottsdale in recent years
has been significant with its population increasing 54% from 107,900 in 1985 to
166,500 in 1995. In addition, Scottsdale has developed detailed master planning
and zoning regulations and the Scottsdale area has typically appealed to the
type of buyer which Monterey generally targets.
The Scottsdale area has proven to be more resilient to changes in the
economy than the general metropolitan Phoenix market. From 1986 to 1990 there
was a decline in single family housing permits in the Phoenix metropolitan area
of 56.2%, compared to a 46.1% decline in permits for this same period in
Scottsdale. From 1990 to 1995, single-family housing permits in the Phoenix
metropolitan area have increased 158% from 10,600 to 27,300. In comparison,
single-family housing permits in Scottsdale have increased 191% from 1,100 to
3,200 during the same period.
Income, home values, education levels, and unemployment rates are
substantially better in the Scottsdale area than in metropolitan Phoenix, as
shown in the table below as of the years indicated:
<TABLE>
<CAPTION>
METROPOLITAN
SCOTTSDALE PHOENIX
---------- ------------
<S> <C> <C>
Homes with values in excess of $200,000 (1990)................ 19.0% 6.5%
Households with incomes in excess of $50,000 (1990)........... 38.1% 24.5%
High school graduates (1995).................................. 82.0% 73.0%
1990 -- 1995 population growth................................ 29.0% 20.0%
1990 -- 1995 job growth....................................... 33.0% 24.0%
1995 unemployment rate........................................ 2.5% 3.5%
Median annual household income (1995)......................... $ 57,000 $ 41,800
</TABLE>
The information contained in the above table was provided by the Economic
Development office for the City of Scottsdale.
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<PAGE> 126
The following table presents information relating to the current
communities in the Scottsdale Area served by Monterey.
<TABLE>
<CAPTION>
NUMBER OF
HOMES NUMBER OF NUMBER OF NUMBER OF
SOLD AS HOMES HOMES IN LOTS ESTIMATED
TOTAL OF CLOSED BACKLOG REMAINING AVERAGE
NUMBER OF JUNE 30, AT JUNE 30, AT JUNE 30, AT JUNE 30, SALES
COMMUNITY HOME SITES 1996 1996 1996 1996(1) PRICE(2)
- ----------------------------------------------- ---------- --------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
LUXURY:
Canada Vistas.................................. 41 15 0 15 26 $291,200
Eagle Mountain................................. 52 4 0 4 48 $379,900
Lincoln Place.................................. 56 0 0 0 56 $450,000
Portales....................................... 72 64 45 19 8 $357,900
Scottsdale Country Club (Estates).............. 23 17 10 7 6 $379,900
Scottsdale Country Club (Fairway).............. 43 38 28 10 5 $307,567
Scottsdale Mountain............................ 41 41 39 2 0 $379,900
SunRidge Canyon................................ 86 5 0 5 81 $295,100
Tierra Bella................................... 35 7 0 7 28 $371,900
LUXURY SUBTOTAL:............................. 449 191 122 69 258
--- --- --- --- ---
MOVE-UP:
Canada Hills................................... 61 61 59 2 0 $186,500
Costa Verde.................................... 120 120 117 3 0 $185,100
Grayhawk....................................... 147 36 3 33 111 $201,500
Palos Verdes................................... 72 18 0 18 54 $189,900
The Vintage.................................... 96 96 88 8 0 $144,700
MOVE UP SUBTOTAL:............................ 496 331 267 64 165
--- --- --- --- ---
TOTAL SCOTTSDALE AREA:......................... 945 522 389 133 423
=== === === === ===
</TABLE>
- ---------------
(1) The "Number of Homes Remaining" is the number of homes that could be built
on both the remaining lots available for sale and land to be developed into
lots as estimated by Monterey.
(2) "Estimated Average Sales Price" is the current average base sales price,
excluding upgrades and premiums, of homes offered for sale in each
respective community.
TUCSON, ARIZONA. Monterey began operations in the area of Tucson, Arizona
in April 1996. Annual building permits issued for single-family residential
units in the Tucson area increased from approximately 2,200 in 1990 to
approximately 4,900 in 1995. According to the U.S. Census Bureau 1995 estimates,
the population of the Tucson area is approximately 751,000 people, up from
approximately 667,000 people in 1990, an increase of 12.6%. Additionally, the
Tucson area unemployment rate has declined from 6.0% in 1992 to 3.0% as of
December 1995 (compared to the national unemployment rate of 5.2% as of December
1995 (seasonably adjusted to 5.6%)). The unemployment rate in Pima County (the
county in which Tucson is located) regularly runs much lower than the national
average. Over the 1990-1994 time period, Pima County's unemployment rate
averaged 2.2% below the national average.
Job growth in Tucson during 1994 was 6.8%, ranking it second (Phoenix was
ranked third) in markets with work forces over 250,000 in the U.S. Over the last
ten years, Tucson's labor force has grown by 33%. Personal income was up 48%
during the 1989 to 1995 period. Median household income was $31,700 in 1995.
Households with incomes above $50,000 approximate 28% of total households.
Demographic data for Tucson contained in the prior two paragraphs was obtained
from publications of The Arizona Daily Star, a newspaper of general circulation
in Tucson, Arizona.
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The following table presents information relating to the current
communities in the Tucson Area served by Monterey.
<TABLE>
<CAPTION>
NUMBER NUMBER OF NUMBER OF NUMBER OF
TOTAL OF HOMES HOMES HOMES IN HOMES ESTIMATED
NUMBER OF SOLD AS OF CLOSED BACKLOG REMAINING AVERAGE
HOMES AT JUNE 30, AT JUNE 30, AT JUNE 30, AT JUNE 30, SALES
COMMUNITY COMPLETION 1996 1996 1996 1996(1) PRICE(2)
- ----------------------------------- --------- ---------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
The Lakes at Castle Rock
(The Estates).................... 46 3 1 3 42 $ 354,333
The Lakes at Castle Rock
(The Park)....................... 66 11 0 11 55 $ 290,743
The Lakes at Castle Rock
(The Retreat).................... 56 5 0 5 51 $ 191,300
Rancho Vistoso..................... 144 0 0 0 144 $ 158,800
-- - --
--- ---
TOTAL TUCSON AREA:................. 312 19 1 19 292
=== == = == ===
</TABLE>
- ---------------
(1) The "Number of Homes Remaining" is the number of homes that could be built
on both the remaining lots available for sale and land to be developed into
lots as estimated by Monterey.
(2) "Estimated Average Sales Price" is the current average base sales price of
homes offered for sale in each respective community.
LAND ACQUISITION AND DEVELOPMENT
Most of the land acquired by Monterey is purchased only after necessary
entitlements have been obtained so that Monterey has certain rights to begin
development or construction as market conditions dictate. In certain situations
in the future, Monterey may consider purchasing untitled property where it
perceives an opportunity to build on such property in a manner consistent with
its business strategy. The term "entitlements" refers to development agreements,
tentative maps or recorded plats, depending on the jurisdiction within which the
land is located. Entitlements generally give the developer the right to obtain
building permits upon compliance with conditions that are usually within the
developer's control. Even after entitlements are obtained, Monterey is still
required to obtain a variety of other governmental approvals and permits during
the development process. The process of obtaining such governmental approvals
and permits can substantially delay the development process.
Monterey selects land for development based upon a variety of factors,
including (i) internal and external demographic and marketing studies; (ii)
suitability of the projects, which generally are developments with fewer than
150 lots; (iii) suitability for development within a one to three year time
period from the beginning of the development process to the delivery of the last
house; (iv) financial review as to the feasibility of the proposed project,
including projected profit margins, return on capital employed and the capital
payback period; (v) the ability to secure governmental approvals and
entitlements; (vi) results of environmental and legal due diligence; (vii)
proximity to local traffic corridors and amenities; and (viii) management's
judgment as to the real estate market, economic trends and experience in a
particular market. Monterey may consider purchasing larger properties consisting
of 200 to 500 lots or more if it deems the situation to have an attractive
profit potential and acceptable risk limitation.
Monterey effects its land acquisition through purchases and rolling option
contracts. Purchases are financed through traditional bank financing or through
working capital. To control its investment in land and land acquisition costs,
Monterey often utilizes non-recourse, rolling option contracts. Under the terms
of such rolling option contracts, Monterey generally pays a non-refundable
deposit each time it purchases lots in a particular subdivision in the form of
lot purchase price premiums above the contractual lot purchase price for a
certain number of the lots in the development. Under all of its option
contracts, Monterey is required to purchase a certain number of lots on a
monthly or quarterly basis. In this way, Monterey pays the non-refundable
deposit over time as it purchases lots under its option. As a result, Monterey's
risk is limited to having paid a higher price in the form of an additional
deposit for the lots which it has purchased if it determines not to exercise its
option to purchase the remaining lots subject to the option agreement.
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<PAGE> 128
Monterey's failure to purchase the lots as required under such agreements would
result only in Monterey having paid a lot premium in the form of an additional
deposit for those lots purchased as of the date of the contract's termination.
At June 30, 1996, Monterey was buying lots under six rolling option contracts
totaling 343 lots and was current on all required minimum lot purchases. Such
option contracts have expiration dates ranging from June 30, 1997 to August 9,
1999.
Once the land is acquired, Monterey undertakes, where required, development
activities, through contractual arrangements with subcontractors, that include
site planning and engineering, as well as constructing road, sewer, water,
utilities, drainage and recreational facilities, and other amenities.
Monterey's strategy focuses on building in masterplanned communities with
homesites that are along, or close in proximity to a major amenity, such as a
golf course. These masterplanned communities are designed and developed by a
major land developer who develops groups of lots commonly referred to as "super
pads" which are sold to a single homebuilder. Monterey typically purchases super
pads which contain between 60 and 100 fully entitled lots which are roughly
graded and have all utilities and paving brought up to the boundaries of the
super pad. Monterey completes the development of each super pad by completing
paving, final grading, and installing all utilities.
Monterey has occasionally used partnerships or joint ventures to purchase
and develop land where such arrangements were necessary to acquire the land or
appeared to be otherwise economically advantageous to Monterey. Monterey may
continue to consider such arrangements where management perceives an opportunity
to acquire land upon favorable terms, minimize risk, and exploit opportunities
through seller financing.
Monterey strives to develop a design and marketing concept for each of its
projects, which includes determination of size, style, and price range of the
homes, layout of streets, size and layout of individual lots, and overall
community design. The product line offered in a particular project depends upon
many factors, including the housing generally available in the area, the needs
of a particular market and Monterey's cost of lots in the project. Monterey has
utilized an extensive number of floor plans throughout the years, but has
offered only about 30 plans in any past year.
At June 30, 1996, Monterey owned 265 finished lots and 56 lots under
development in the Scottsdale market. At June 30, 1996, Monterey also had under
contract or subject to the satisfaction of purchase contingencies, 75 finished
lots and 162 lots under development in Scottsdale.
At June 30, 1996, Monterey owned 61 finished lots and 144 lots under
development in the Tucson market. At June 30, 1996, Monterey also had under
contract or subject to the satisfaction of purchase contingencies, 106 finished
lots in Tucson.
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<PAGE> 129
The following table sets forth by project Monterey's land inventory as of
June 30, 1996.
<TABLE>
<CAPTION>
LAND UNDER
LAND OWNED CONTRACT OR OPTION
----------------------- -----------------------
LOTS UNDER LAND UNDER
FINISHED DEVELOPMENT FINISHED DEVELOPMENT
PROJECTS LOTS (ESTIMATE) LOTS (ESTIMATE) TOTAL
- --------------------------------------------- -------- ----------- -------- ----------- -----
<S> <C> <C> <C> <C> <C>
SCOTTSDALE AREA:
Canada Hills................................. 2 -- -- -- 2
Canada Vistas................................ 41 -- -- -- 41
Costa Verde.................................. 3 -- -- -- 3
Eagle Mountain............................... 4 -- 25 23 52
Grayhawk..................................... 47 -- -- 97 144
Lincoln Place................................ -- 56 -- -- 56
Palos Verdes................................. 72 -- -- -- 72
Portales..................................... 19 -- 8 -- 27
Scottsdale Country Club (Estates)............ 13 -- -- -- 13
Scottsdale Country Club (Fairway)............ 15 -- -- -- 15
Scottsdale Mountain.......................... 2 -- -- -- 2
SunRidge Canyon.............................. 4 -- 42 42 88
Tierra Bella................................. 35 -- -- -- 35
The Vintage.................................. 8 -- -- -- 8
--- --- --- --- ---
TOTAL SCOTTSDALE AREA:............. 265 56 75 162 558
=== === === === ===
TUCSON AREA:
The Lakes at Castle Rock (The Estates)....... 45 -- -- -- 45
The Lakes at Castle Rock (The Park).......... 6 -- 60 -- 66
The Lakes at Castle Rock (The Retreat)....... 10 -- 46 -- 56
Rancho Vistoso............................... -- 144 -- -- 144
--- --- --- --- ---
TOTAL TUCSON AREA:................. 61 144 106 -- 311
--- --- --- --- ---
TOTAL:............................. 326 200 181 162 869
=== === === === ===
</TABLE>
CONSTRUCTION
Monterey acts as the general contractor for the construction of its
projects. Subcontractors typically are retained on a subdivision-by-subdivision
basis to complete construction at a fixed price. Agreements with subcontractors
and materials suppliers are generally entered into after competitive bidding on
an individual basis. Monterey obtains information from prospective
subcontractors and suppliers with respect to their financial condition and
ability to perform their agreements prior to commencement of the formal bidding
process. From time to time, Monterey enters into longer term contracts with
subcontractors and suppliers (usually from 6 months to 1 year) if management
believes that more favorable terms can be secured.
Contracts are awarded to subcontractors who are supervised by Monterey's
project managers and field superintendents. Such project managers and field
superintendents coordinate the activities of subcontractors and suppliers,
subject their work to quality and cost controls and assure compliance with
zoning and building codes.
Monterey specifies that quality, durable materials be used in constructing
its homes. Monterey does not maintain significant inventory of construction
materials. When possible, Monterey negotiates price and volume discounts with
manufacturers and suppliers on behalf of subcontractors to take advantage of its
volume of production. Generally, access to Monterey's principal subcontracting
trades, materials, and supplies continue to be readily available in each of its
markets; however, prices for these goods and services may fluctuate due to
various factors, including supply and demand shortages which may be beyond the
control of Monterey or its vendors. Monterey believes that its relations with
its suppliers and subcontractors are good.
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<PAGE> 130
Monterey generally clusters the homes sold within a project, which
management believes creates efficiencies in land development and construction
and improves customer satisfaction by reducing the number of vacant lots
surrounding a completed home. Typically, the construction of a home by Monterey
is completed within four to eight months from commencement of construction,
although construction schedules may vary depending on the availability of labor,
materials and supplies, product type and location. Monterey strives to design
homes which promote efficient use of space and materials, and to minimize
construction costs and time.
Monterey generally provides a one-year limited warranty of workmanship and
materials with each of its homes. Monterey's subcontractors generally provide an
indemnity and a certificate of insurance prior to receiving payments for their
work and, therefore, claims relating to workmanship and materials are usually
the primary responsibility of Monterey's subcontractors. Historically, Monterey
has not incurred any material costs relating to any warranty claims or defects
in construction.
MARKETING AND SALES
Monterey believes that it has an established reputation for developing high
quality homes, which helps generate interest in each new project. In addition,
Monterey makes extensive use of advertising and other promotional activities,
including magazine and newspaper advertisements, brochures, direct mail, and the
placement of strategically located sign boards in the immediate areas of its
developments.
Monterey believes that the effective use of model homes plays an integral
part in demonstrating the competitive advantages of its home designs and
features to prospective home buyers. Monterey generally builds between one and
four model homes for each active community depending upon the number of homes to
be built within each community and the product to be offered. At June 30, 1996,
Monterey owned 8 model homes in Scottsdale, with 5 additional model homes under
construction, and 2 model homes in Tucson, with 7 additional models under
construction. Monterey generally employs, or contracts with, interior designers
who are responsible for creating an attractive model home for each product line
within a project which is designed to appeal to the preferences of potential
home buyers. Monterey attempts, to the extent possible, to sell its model homes
and to lease them back from purchasers who do not intend to live in the home
immediately, either because they are moving from out of state or for other
reasons. At June 30, 1996, Monterey had sold and was leasing back five model
homes at a total monthly lease amount of $12,525.
Monterey tailors its product offerings, including size, style, amenities,
and price, to attract higher income home buyers. Monterey offers a broad array
of options and distinctive designs and provides a home buyer with the option of
customizing many features of their new home.
Most of Monterey's homes are sold by full-time, commissioned sales
employees, who typically work from the sales office located in the model homes
for each project. Monterey's goal is to ensure that its sales force has
extensive knowledge of Monterey's operating policies and housing products. To
achieve this goal, all sales personnel are trained and attend periodic meetings
to be updated on sales techniques, competitive products in the area, the
availability of financing, construction schedules, marketing and advertising
plans, and the available product lines, pricing, options, and warranties offered
by Monterey. Monterey also requires its sales personnel to be licensed real
estate agents where required by law. Further, Monterey utilizes independent
brokers to sell its homes and generally pay approximately a 3% sales commission
on the base price of the home.
From time to time, Monterey offers various sales incentives, such as
landscaping and certain interior home improvements, in order to attract buyers.
The use and type of incentives depends largely on prevailing economic conditions
and competitive market conditions.
BACKLOG
Although Monterey generally constructs one or two homes per project in
advance of obtaining a sales contract, Monterey's homes are generally offered
for sale in advance of their construction. The majority of the
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homes sold but not closed in fiscal year 1995 were sold pursuant to standard
sales contracts entered into prior to commencement of construction. Such sales
contracts are usually subject to certain contingencies such as the buyer's
ability to qualify for financing. Homes covered by such sales contracts are
considered as "backlog." For a detailed itemization of Monterey's backlog at
June 30, 1996, see "Monterey Business Description -- Markets and
Products -- Scottsdale, Arizona" and "Monterey Business Description -- Markets
and Products -- Tucson, Arizona." Monterey does not recognize revenue on homes
covered by such contracts until the sales are closed and the risk of ownership
has been legally transferred to the buyer.
CUSTOMER FINANCING
With respect to those purchasers requiring financing, Monterey seeks to
assist home buyers in obtaining such financing from unaffiliated mortgage
lenders offering qualified buyers a variety of financing options. Monterey may
pay a portion of the closing costs and discount mortgage points to assist home
buyers with financing. Since many home buyers utilize long-term mortgage
financing to purchase a home, adverse economic conditions, increases in
unemployment, and high mortgage interest rates may deter and/or reduce the
number of potential home buyers. See "Risk Factors -- Risk Factors of
Monterey -- Interest Rates and Mortgage Financing."
CUSTOMER RELATIONS AND QUALITY CONTROL
Management believes that strong customer relations and an adherence to
stringent quality control standards are fundamental to Monterey's continued
success. Monterey believes that its commitment to customer relations and quality
control have significantly contributed to its reputation as a high quality
builder.
Generally, for each development, representatives of Monterey, who may be a
project manager or project superintendent, and a customer relations
representative, oversee compliance with Monterey's quality control standards.
These representatives allocate responsibility for (i) overseeing home
construction; (ii) overseeing performance by subcontractors and suppliers; (iii)
reviewing the progress of each home and conducting formal inspections as
specific stages of construction are completed; and (iv) regularly updating each
buyer on the progress of his or her home.
Monterey strives to inform and involve the customer in every phase of the
building process. Monterey holds a pre-construction conference with the
customer, sales person, and construction superintendent to review the house
plans and design features selected by the customer. A second conference is held
at the completion of the framing of the house to review the progress and answer
any questions the customer may have. Upon completion of the house, the customer
care representative meets with the customer for a new home orientation. This
process is designed to give the customer the opportunity to add custom design
features and monitor development of the home, thereby giving the customer a
feeling of participation in and control over the end product.
On occasion, Monterey will develop its own subdivisions by purchasing
entitled property and commencing site planning and development activities. In
such cases, its employees supervise the land development process.
COMPETITION AND MARKET FACTORS
The development and sale of residential property is highly competitive and
fragmented. Monterey competes for residential sales with national, regional, and
local developers and homebuilders, resales of existing homes, and, to a lesser
extent, condominiums and available rental housing. Some of the homebuilders with
whom Monterey competes have significantly greater financial resources and/or
lower costs than Monterey. Competition among both small and large residential
homebuilders are based on a number of interrelated factors, including location,
reputation, amenities, design, quality, and price. Monterey believes that it
compares favorably to other homebuilders in the markets in which it operates due
primarily to (i) in the case of the Scottsdale area, its experience within its
specific geographic markets which allows it to develop and
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offer new products to potential home buyers which reflect, and adapt to,
changing market conditions; (ii) its ability, from a capital and resource
perspective, to respond to market conditions and to exploit opportunities to
acquire land upon favorable terms; and (iii) its reputation for outstanding
service and quality products.
The homebuilding industry is cyclical and affected by consumer confidence
levels, prevailing economic conditions in general, and by job availability and
interest rate levels in particular. A variety of other factors affect the
homebuilding industry and demand for new homes, including changes in costs
associated with home ownership such as increases in property taxes and energy
costs, changes in consumer preferences, demographic trends, and the availability
of and changes in mortgage financing programs. See "Risk Factors -- Risk Factors
of Monterey."
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
Most of Monterey's land is purchased with entitlements, providing for
zoning and utility service to project sites and giving it the right to obtain
building permits and begin construction almost immediately upon compliance with
specified conditions, which generally are within Monterey's control. The length
of time necessary to obtain such permits and approvals affects the carrying
costs of unimproved property acquired for the purpose of development and
construction. In addition, the continued effectiveness of permits already
granted is subject to factors such as changes in policies, rules, and
regulations, and their interpretation and application. To date, the government
approval processes discussed above have not had a material adverse effect on the
development activities of Monterey. There can be no assurance, however, that
these and other restrictions will not adversely affect Monterey in the future.
See "Risk Factors -- Risk Factors of Monterey -- Government Regulations;
Environmental Considerations."
Because most of Monterey's land is entitled, construction moratoriums
generally would only adversely affect Monterey if they arose from health,
safety, and welfare issues, such as insufficient water or sewage facilities.
Local and state governments also have broad discretion regarding the imposition
of development fees for projects in their jurisdiction. These are normally
established, however, when Monterey receives recorded final maps and building
permits. However, as Monterey expands it may also become increasingly subject to
periodic delays or may be precluded entirely from developing communities due to
building moratoriums or "slow-growth" initiatives or building permit allocation
ordinances which could be implemented in the future in the states and markets in
which Monterey may then operate.
Monterey is also subject to a variety of local, state, and federal
statutes, ordinances, rules, and regulations concerning the protection of health
and the environment. In the principal market of Scottsdale, Monterey is subject
to several environmentally sensitive land ordinances which mandate open space
areas with public easements in housing developments. Monterey must also comply
with flood plain concerns in certain desert wash areas, native plant
regulations, and view restrictions. These and similar laws may result in delays,
cause Monterey to incur substantial compliance and other costs, and prohibit or
severely restrict development in certain environmentally sensitive regions or
areas. To date, however, compliance with such ordinances has not materially
affected Monterey's operations. No assurance can be given that such a material
adverse effect will not occur in the future.
BONDS AND OTHER OBLIGATIONS
Monterey generally is not required, in connection with the development of
its projects, to obtain letters of credit and performance, maintenance, and
other bonds in support of its related obligations with respect to such
development. Such bonds are usually provided by subcontractors.
EMPLOYEES AND SUBCONTRACTORS
As of June 30, 1996, Monterey had 92 employees, of which 11 were in
management and administration, 25 in sales and marketing, and 56 in construction
operations. The employees are not unionized, and Monterey believes that its
relations with its employees are good. Monterey acts solely as a general
contractor and all of
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its construction operations are conducted through project managers and field
superintendents who manage third party subcontractors. Monterey utilizes
independent contractors for construction and architectural services and
advertising services.
PROPERTIES
Monterey leases approximately 11,000 square feet of office space for its
corporate headquarters from a limited liability company ("LLC") owned by Messrs.
Cleverly and Hilton in an office building containing approximately 14,000 square
feet in Scottsdale, Arizona. Monterey leases the space on a five-year lease
(ending September 1, 1999), net of taxes, insurance and utilities, at an annual
rate which management believes is competitive with lease rates for comparable
space in the Scottsdale area. Rents paid to the LLC totaled $164,394 and $53,244
during fiscal years 1995 and 1994, respectively. Monterey has an option to
expand its space in the building and to renew the lease for additional terms at
rates which are competitive with those in the market at such time. Monterey
believes that the terms of the lease are no less favorable than those which it
could obtain in an arm's length negotiated transaction. Monterey leases
approximately 1,500 square feet of office space in Tucson, Arizona. The lease
term is for 37 months commencing on October 1, 1995 at an initial annual rent of
$13.74 per square foot, increasing during the term of the lease to an ending
rate of $15.74 per square foot.
Monterey also leases, on a triple net basis, five model homes. Such leases
are for terms of one year with three month renewal options. The lease rates are
typically equal to 7% of the value of the homes.
LITIGATION
Monterey is involved in various routine legal proceedings incidental to its
business. Management believes that none of these legal proceedings, certain of
which are covered by insurance, will have a material adverse impact on the
financial condition or results of operations of Monterey.
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MONTEREY MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Information concerning the names, ages, terms, positions with Monterey, and
business experience of Monterey's current directors and executive officers is
set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH MONTEREY
- ----------------------------------- --- ----------------------------------------
<S> <C> <C>
William W. Cleverly................ 40 Director and President
Steven J. Hilton................... 35 Director, Treasurer and Secretary
Larry W. Seay...................... 40 Vice President -- Finance and Chief
Financial Offer
Anthony C. Dinnell................. 44 Vice President -- Marketing and Sales
Irene Carroll...................... 40 Vice President -- Land Acquisition and
Development
Christopher T. Graham.............. 32 Vice President -- Construction
Operations
Jeffrey R. Grobstein............... 36 Vice President -- Tucson Division
Steven Peskoff..................... 53 Director
Timothy White...................... 35 Director
</TABLE>
WILLIAM W. CLEVERLY co-founded Monterey in 1985 and currently serves as
President and a director of Monterey. Mr. Cleverly's primary operating
responsibilities are land acquisition, development financing, and marketing.
From 1983 to 1985, Mr. Cleverly was the President and founder of a real estate
development company which developed and marketed multi-family projects. Mr.
Cleverly received his undergraduate degree from the University of Arizona, and
is a member of the Central Arizona Homebuilders' Association of Arizona and the
National Homebuilders' Association.
STEVEN J. HILTON co-founded Monterey in 1985 and currently serves as
Treasurer, Secretary, and a director of Monterey. Mr. Hilton's primary operating
responsibilities include land acquisition, development financing, and
construction. From 1985 to 1986, Mr. Hilton served as a project manager for
Premier Community Homes, a residential homebuilder. From 1984 to 1985, Mr.
Hilton served as a project manager for Mr. Cleverly's real estate development
company. Mr. Hilton received his undergraduate degree from the University of
Arizona, and is a member of the Central Arizona Homebuilders' Association, the
National Homebuilders' Association, and the National Board of Realtors and the
Scottsdale Board of Realtors.
LARRY W. SEAY was appointed Vice President -- Finance and Chief Financial
Officer of Monterey in April 1996. From 1990 to 1996, Mr. Seay served as the
Vice President -- Treasurer of UDC Homes, Inc., a homebuilding company based in
Phoenix, Arizona. In May 1995, while Mr. Seay served as Vice President --
Treasurer, UDC Homes, Inc. filed for bankruptcy protection under Chapter 11 of
the U.S. Bankruptcy Code. UDC Homes, Inc. emerged from reorganization
proceedings in November 1995. From 1986 to 1990, Mr. Seay served as Treasurer
and Chief Financial Officer of Emerald Homes, Inc., also a Phoenix, Arizona-
based homebuilding company. Prior to 1986, Mr. Seay worked as a staff accountant
and audit manager at Deloitte & Touche LLP. Mr. Seay graduated with
undergraduate degrees in finance and accounting and with a Masters in Business
Administration from Arizona State University, Mr. Seay is a certified public
accountant and a member of the American Institute of Certified Public
Accountants.
ANTHONY C. DINNELL has served as the Vice President -- Marketing and Sales
of Monterey since 1992. From 1991 to 1992, Mr. Dinnell was Regional Sales
Manager for M/I Schottenstein Homes and from 1988 to 1991 he was Division
Manager for NV Homes, both of which are Maryland-based, national homebuilding
companies. Prior to 1988, Mr. Dinnell served as Vice President of Sales and
Marketing with Coscan Homes, a residential homebuilder in Phoenix, Arizona, and
as Director of Marketing for Dell Trailer Homes, a builder of manufactured
housing, also in Phoenix, Arizona. He is on the Sales and Marketing Council for
the Central Arizona Homebuilders' Association and a member of the National
Homebuilders' Association.
IRENE CARROLL has served as the Vice President -- Land Acquisition and
Development of Monterey since 1994. From 1992 to 1994, Ms. Carroll served as a
Division Manager for Richmond American Homes, a
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residential homebuilder, in Phoenix, Arizona. From 1983 to 1994, Ms. Carroll
held a number of other positions with Richmond American Homes and its
predecessor, Wood Brothers Homes, including Vice President of Operations
(1992-1994), Vice President of Finance (1987-1992), Division Controller (1984-
1987), and Corporate Cash Manager (1983-1984). Ms. Carroll graduated from the
University of Texas, is a certified public accountant, and is a member of the
Central Arizona Homebuilders' Association and the National Homebuilders'
Association.
CHRISTOPHER T. GRAHAM was appointed Vice President -- Construction
Operations of Monterey in 1996. From 1993 to 1996, Mr. Graham served as a
Project Manager, in Phoenix, Arizona, and as Director of Construction in Salt
Lake City, Utah, for Pulte Home Corporation, a residential homebuilder. Prior to
1993, Mr. Graham worked in various positions of increasing responsibility with
Continental Homes, a residential homebuilder, most recently as Purchasing
Manager. Mr. Graham is a member of the Greater Salt Lake Homebuilders'
Association.
JEFFREY R. GROBSTEIN joined Monterey in 1988 as Community Manager in
Monterey's Sales and Marketing Department. From 1995 to 1996, Mr. Grobstein
served as Vice President-Marketing and Sales for Monterey's Tucson Division, and
in 1996 was promoted to Vice President -- Tucson Division. From 1984 to 1988,
Mr. Grobstein was employed in the sales and marketing department of the Dix
Corporation, a residential homebuilder. Mr. Grobstein is a member of the
Southern Arizona Homebuilders' Association, the Tucson Association of Realtors
and the National Homebuilders' Association.
STEVEN D. PESKOFF has served as a director of MMI and MHC since February
1995, and of MHC-II and MHA-II since April 1996. Mr. Peskoff has been President
of Underhill Investment Corporation, an investment banking firm, since 1990.
From 1989 through 1990, he was Vice President of Drexel Burnham Lambert, an
investment banking firm, and from 1978 through 1988 was Managing Partner of
Investment Capital Associations, an investment banking firm. Mr. Peskoff
graduated from the University of Rhode Island and his Masters in Business
Administration from the University of Toledo.
C. TIMOTHY WHITE has served as a director of Monterey since February 1995.
Since 1989, Mr. White has been an attorney with the law firm of Tiffany & Bosco,
P.A. in Phoenix, Arizona. During 1995 and the first six months of 1996, Monterey
paid Tiffany & Bosco, P.A. $206,000 and $54,000, respectively, for legal
services rendered. Mr. White received his undergraduate degree from the
University of Arizona and his law degree from Arizona State University.
EXECUTIVE COMPENSATION
The table below sets forth information concerning the annual compensation
for services rendered in all capacities to Monterey during the fiscal year ended
December 31, 1995, of those persons who were, at December 31, 1995: (i) the
chief executive officer of Monterey; and (ii) the other executive officers of
Monterey whose total annual salary and bonus exceeded $100,000 (collectively,
the "Named Executive Officers").
<TABLE>
<CAPTION>
ALL OTHER
NAME PRINCIPAL POSITION SALARY BONUS(1) COMPENSATION(2)
- ---------------------------- ------------------------------------------------ -------- -------- ---------------
<S> <C> <C> <C> <C>
William W. Cleverly......... President and Director $175,000 $ -- $24,548
Steve J. Hilton............. Treasurer, Secretary and Director 175,000 -- 27,073
David A. Walls(3)........... Vice President -- Finance and Chief Financial
Officer 90,000 108,768 6,600
Anthony C. Dinnell.......... Vice President -- Marketing and Sales 82,000 168,085 6,600
Irene Carroll............... Vice President -- Land Acquisition and
Development 78,542 104,874 8,400
</TABLE>
- ---------------
(1) Amounts in this column include deferred bonuses to be paid to the following
persons in the following amounts: Mr. Dinnell -- $59,317, and Ms.
Carroll -- $32,864.
(2) The amounts in this column include, as to each named individual, the
following amounts for the indicated purposes: Mr. Cleverly (vehicle
allowance: $5,775; life insurance: $16,549); Mr. Hilton (vehicle allowance:
$5,039; life insurance: $14,810); Mr. Walls (vehicle allowance: $4,200); Mr.
Dinnell (vehicle allowance: $4,200); Ms. Carroll (vehicle allowance:
$6,000). The amounts also include for each of
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Messrs. Cleverly and Hilton payments from R.L. Ronson Security, Inc. for
referral fees on security system monitoring controls of $7,224.
(3) Mr. Walls joined Monterey and became Vice President -- Finance and Chief
Financial Officer in 1991. Mr. Walls resigned his positions effective
February 1996.
COMPENSATION AND DIRECTOR FEES
Monterey does not have separate compensation committees and all
compensation decisions are made by the full Board of Directors. For the fiscal
year ended December 31, 1995, the directors of Monterey received no fees for the
performance of their services as such.
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of November 6, 1996, the percentage of
outstanding shares of Monterey Common Stock beneficially owned by: (i) each
director of Monterey; (ii) the Named Executive Officers of Monterey; (iii) all
directors and executive officers of Monterey as a group; and (iv) each
beneficial owner of more than 5% of the outstanding Monterey Common Stock. To
the knowledge of Monterey, all persons listed below have sole voting and
investment power with respect to their shares, except to the extent that
authority is shared by their respective spouses under applicable law. The table
below represents the stock ownership of Monterey without giving effect to the
warrants for Monterey's common stock.
<TABLE>
<CAPTION>
PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED(2)
------------------------------------------------------------------- --------
<S> <C>
William W. Cleverly................................................ 50.0%
Steven J. Hilton................................................... 50.0%
All directors and executive officers as a group (nine
persons)(3)...................................................... 100.0%
</TABLE>
- ---------------
(1) The address of Messrs. Cleverly and Hilton is 6613 North Scottsdale Road,
Suite 200, Phoenix, Arizona 85250.
(2) Messrs. Cleverly and Hilton together own 100% of the outstanding common
stock of each of MHC-II and MHA-II, as follows: MHC-II (Mr.
Cleverly -- 577,916 shares: Mr. Hilton -- 577,916 shares) and MHA-II (Mr.
Cleverly -- 435,972 shares; Mr. Hilton 435,972 shares).
(3) No other director or executive officer of Monterey, including any Named
Executive Officers, owns any shares of the Monterey Common Stock.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since September 1994, Monterey has leased approximately 11,000 square feet
of office space in an office building from a limited liability company owned by
Messrs. Cleverly and Hilton. The lease has a five-year term, and Monterey has an
option to expand its space in the building and renew the lease for additional
terms at rates that are competitive with those in the market at such time. Rents
paid to the limited liability company totaled $164,394 and $53,244 during fiscal
years 1995 and 1994, respectively. Monterey believes that the terms of the lease
are no less favorable than those which could be obtained in an arm's length
negotiated transaction.
During 1995 and the first half of 1996, Monterey incurred fees for legal
services to Tiffany & Bosco, P.A. in the amount of $206,000 and $54,000,
respectively. C. Timothy White, a director of Monterey, is a member of Tiffany &
Bosco, P.A.
In March 1995, Jeffrey R. Grobstein purchased a home from Monterey for
$428,000. In connection with Mr. Grobstein's purchase, Monterey loaned Mr.
Grobstein $20,000, which loan is secured by a deed of trust on such property and
bears interest at a rate of 9% per annum. The loan matures in March 1997.
In June 1995, a partnership in which Robert G. Sarver owned a substantial
interest sold a parcel of real property to Monterey for $1,500,000.
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Other than the foregoing, Monterey and its management are not parties to
any material relationships or transactions with affiliates. It is the policy of
Monterey that transactions with affiliates, if any, will be on terms no less
favorable than can be obtained from unaffiliated parties and such transactions
will be first approved by a majority of the independent or disinterested
directors.
COMPARATIVE RIGHTS OF STOCKHOLDERS OF HOMEPLEX AND MONTEREY
Homeplex is incorporated in the State of Maryland and is subject to the
provisions of the Maryland General Corporation Law (the "MGCL"). Monterey is
incorporated in the State of Arizona and is subject to the provisions of the
Arizona Business Corporation Act ("ABCA"). Following the consummation of the
Merger, the Monterey Stockholders and Warrantholders will hold Homeplex Common
Stock and Homeplex Warrants rather than common stock and warrants of Monterey
and, therefore, the rights of such stockholders will be governed by the MGCL and
Homeplex's Articles of Incorporation and Bylaws.
There are many similarities between the MGCL and the ABCA, as well as
between the Articles of Incorporation and bylaws of Homeplex and Monterey,
however, a number of differences do exist. The following is a summary comparison
of certain differences affecting stockholder rights in the provisions of the
MGCL and the ABCA and in the Articles of Incorporation and Bylaws of Homeplex
and Monterey. This summary does not purport to be a complete discussion of, and
is qualified in its entirety by reference to, the corporate statutes of Maryland
and Arizona, and the Articles of Incorporation of Homeplex (the "Homeplex
Charter"), the Articles of Incorporation of Monterey (the "Monterey Charter")
the Bylaws of Homeplex (the "Homeplex Bylaws") and the Bylaws of Monterey (the
"Bylaws").
STOCKHOLDER POWER TO CALL SPECIAL STOCKHOLDERS' MEETINGS
Under the MGCL, a special meeting of stockholders may be called by (i) the
president; (ii) the board of directors; (iii) written request of stockholders
entitled to cast at least 25 percent of all votes entitled to be cast at the
meeting; or (iv) any other person specified in the charter or bylaws. The
Homeplex Bylaws state the same four categories. Under the ABCA, a special
meeting of stockholders may be called by the board of directors or any other
person specified in the articles or bylaws. The Monterey Bylaws specify that a
special meeting may be called also by the president or by the request of
one-tenth of all the outstanding shares of the corporation entitled to vote.
SIZE OF BOARD OF DIRECTORS
Under the MGCL, each corporation shall have at least three directors,
unless changed by the bylaws. The Homeplex Bylaws provide that the number of
directors shall be three, unless altered by a majority vote of the entire board
of directors; but, the number may neither exceed fifteen nor be less than three.
Currently, the number of directors for Homeplex is five. The ABCA provides that
the board of directors shall consist of one or more individuals, with the number
specified or fixed in accordance with the articles of incorporation or bylaws.
The Monterey Charter and the Monterey Bylaws specify a board of not less than
one nor more than twenty-five persons.
CLASSIFIED BOARD OF DIRECTORS
The MGCL and the ABCA each provide that a corporation's board of directors
may be divided into various classes with staggered terms of office. In the case
of the MGCL, the term of office may not be longer than five years, and the term
of office of at least one class shall expire each year. The ABCA requires that
the board of directors must consist of nine or more members in order to be
classified. The ABCA provides that the term of office of directors of the first
class shall expire at the first annual meeting of stockholders after their
election, the term of the second class shall expire at the second annual meeting
after their election, and the term of the third class, if any, shall expire at
the third annual meeting after their election. Neither the Homeplex Bylaws or
Charter nor Monterey Bylaws or Charter currently provide for a classified board.
The
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proposed Charter Amendment does, however, provide for a classified board of
directors consisting of the Class I and Class II Directors.
REMOVAL OF DIRECTORS
Under both the MGCL and the ABCA, unless the charter of the corporation
provides otherwise, the stockholders of a corporation may remove any director or
the entire board of directors, with or without cause, by the affirmative vote of
a majority of all the votes entitled to be cast for the election of directors.
Neither the Homeplex Charter or Bylaws nor the Monterey Charter or Bylaws alter
this rule.
FILLING VACANCIES ON THE BOARD OF DIRECTORS
Under the MGCL, the stockholders may elect a successor to fill a vacancy on
the board of directors which results from the removal of a director. Moreover,
except as provided in the articles or bylaws, a majority of the remaining
directors, whether or not sufficient to constitute a quorum, may fill a vacancy
on the board of directors which results from any cause except an increase in the
number of directors; however, a majority of the entire board of directors may
fill a vacancy which results from an increase in the number of directors. A
director elected by the board of directors to fill a vacancy serves until the
next annual meeting of stockholders and until his successor is elected and
qualified. The Homeplex Charter and Bylaws do not currently alter this rule.
Under the ABCA, any vacancy occurring in the board of directors may be
filled by the affirmative vote of a majority of the remaining directors though
not less than a quorum, or by a sole remaining director, and any director so
chosen shall hold office until the next election of directors when his or her
successor is elected and qualified. Furthermore, unless otherwise provided in
the articles of incorporation or the bylaws, when one or more directors shall
resign from the board, effective at a future time, a majority of the directors
then in office, including those who have so resigned, shall have the power to
fill such vacancy or vacancies, the vote thereon to take effect when such
resignation or resignations shall become effective, and each director so chosen
shall hold office as provided in the filling of other vacancies. The Monterey
Bylaws provide that a vacancy shall be filled by a majority vote of the
remaining directors; however, prior to such action, the stockholders shall have
the right, at any special meeting called for that purpose, to fill any vacancy
occurring on the board.
AMENDMENTS TO THE CORPORATE CHARTER
Under both the MGCL and the ABCA, a corporation with stock outstanding or
subscribed ordinarily may amend its charter provided that the amendment is
adopted by board resolution and approved by a majority of the shares entitled to
vote thereon.
The MGCL also provides that if an amendment alters the contract rights of
any outstanding stock, and the charter does not reserve the right to make the
amendment, any objecting stockholder whose rights are substantially adversely
affected has the right to receive the fair value of his stock as an objecting
stockholder. The Homeplex Charter reserves the right to amend a stockholder's
contractual rights. Thus, a Homeplex stockholder would not have rights as an
objecting stockholder in this instance.
The ABCA permits the holders of the outstanding shares of a class,
including any series thereof, to vote as a class upon a proposed amendment,
whether or not entitled to vote thereon, if the amendment would increase or
decrease the aggregate number of authorized shares of such class, increase or
decrease the par value of the shares of such class, or would alter the
preferences, powers, or special rights of any class so as to affect them
adversely. Neither the Monterey Charter nor the Monterey Bylaws contain any
provisions relating to Charter Amendments.
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AMENDMENTS TO THE BYLAWS
Under the MGCL, the power to adopt, alter and repeal the bylaws is vested
in the stockholders, except to the extent the charter or bylaws vest it in the
board of directors. The Homeplex Bylaws provides that the bylaws may be amended
or replaced, or new bylaws may be adopted, either by the vote of a majority of
the shares entitled to vote thereon or, with respect to those matters which are
not by statute reserved exclusively to the stockholders, by vote of a majority
of the board of directors.
Under the ABCA, the board of directors may amend or repeal the
corporation's bylaws unless either the articles of incorporation reserve this
power exclusively to the stockholders, in whole or in part, or the stockholders
specifically provide that the board of directors shall not amend or repeal that
bylaw. The Monterey Bylaws provide that the bylaws may be amended by a majority
vote of the stockholders or by a two-thirds vote of the board.
RIGHTS OF DISSENTING STOCKHOLDERS
Under the MGCL, a stockholder has the right to demand and receive payment
of the fair value of his or her shares if the corporation consolidates or
merges, the stock is to be acquired in a share exchange, or the corporation
transfers its assets in a manner requiring corporate action, unless (i) the
stock is listed on a national securities exchange; or (ii) the stock is that of
the successor in a merger, unless the merger alters the contract rights of the
stock as expressly set forth in the charter, and the charter does not reserve
the right to do so, or the stock is to be changed or converted in whole or in
part in the merger into something other than either stock in the successor or
cash, scrip, or other rights or interests, arising out of provisions for the
treatment of fractional shares of stock in the successor. Because Homeplex
Common Stock is listed on the NYSE and the Homeplex Charter reserves the right
to alter stockholder contract rights, Homeplex stockholders do not have
dissenting rights in connection with the Merger.
Under the ABCA, a stockholder has the right to receive payment of the fair
value of his or her shares if the corporation consolidates or merges, or sells
or exchanges all or substantially all of the property and assets of the
corporation not made in the usual and regular course of its business, unless (a)
the shares are registered on a national securities exchange, or (b) were held of
record by not less than two thousand stockholders on the date fixed to determine
the stockholders entitled to vote at the meeting of stockholders at which a plan
of merger or consolidation or a proposed sale or exchange of property and assets
is to be acted upon. The Monterey Stockholders do not have dissenting rights in
connection with the Merger because the shares are unlisted and there are only
two stockholders of record.
INSPECTION OF BOOKS AND RECORDS
Under the MGCL, any stockholder has the right to inspect and copy bylaws,
minutes of stockholder proceedings, annual statements of affairs, voting trust
agreements on file, and statements showing all stock and securities issued by
the corporation during a specified period of not more than twelve months before
the date of the request. In addition, one or more persons who together are and
for at least six months have been stockholders of record of at least 5% of the
outstanding stock of any class may inspect and copy the corporation's books of
account and its stock ledger. The Homeplex Charter provides that, except as
provided by statute, no stockholder shall have any right to inspect any book,
account or document of Homeplex unless authorized to do so by resolution of the
Board of Directors.
Under the ABCA, a stockholder for at least six months, or who holds at
least five percent of all the shares of stock, is entitled to inspect and copy a
corporation's books and records. The Monterey Bylaws state that the books of
account and stock records of the corporation shall be available for inspection
at reasonable times by any stockholder.
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DIVIDEND SOURCES
Under the MGCL, a board of directors may authorize a distribution unless,
after giving effect to such distribution, (i) the corporation would not be able
to pay its indebtedness as it becomes due, or (ii) the corporation's total
assets would be less than total liabilities. The Homeplex Charter states that
the board of directors shall have the power to pay dividends in stock, cash, or
other securities or property out of surplus or any other funds or amounts
legally available therefor, at such time and to the stockholders of record on
such date as it may, from time to time determine.
Under the ABCA, the board of directors of a corporation may, from time to
time, declare and the corporation may pay dividends in cash, property, or its
own shares, except when the corporation is insolvent or when the payment thereof
would render the corporation insolvent or when the declaration or payment
thereof would be contrary to any restriction contained in the articles of
incorporation, subject to (a) dividends may be declared and paid in cash or
property only out of the unreserved and unrestricted earned surplus of the
corporation, or out of the unreserved and unrestricted net earnings of the
current fiscal year and the next preceding fiscal year taken as a single period;
(b) dividends may be declared and paid in its own treasury shares; and (c)
dividends may be declared and paid in its own authorized but unissued shares out
of any unreserved and unrestricted surplus of the corporation, subject to some
restrictions.
The Monterey Bylaws state that the board may declare dividends as provided
for by the state laws.
PREEMPTIVE RIGHTS
Under the MGCL, except with respect to certain specifically enumerated
circumstances, stockholders have preemptive rights unless such rights are
specifically denied in the articles. The Homeplex Charter expressly denies
preemptive rights, except as the Board of Directors, in its sole discretion, may
later allow. Conversely, the ABCA specifically denies preemptive rights, unless
expressly provided for in the articles. The Monterey Charter expressly grants
its stockholders preemptive rights.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS
Under the MGCL, a corporation's articles may, with certain exceptions,
include any provision expanding or limiting the liability of its directors and
officers to the corporation or its stockholders for money damages, but may not
include any provision that restricts or limits the liability of its directors or
officers to the corporation or its stockholders to the extent that (i) it is
proved that the person actually received an improper benefit or profit in money,
property, or services for the amount of the benefit or profit in money,
property, or services actually received; or (ii) a judgment or other final
adjudication adverse to the person is entered in a proceeding based on a finding
in the proceeding that the person's action, or failure to act, was the result of
active and deliberate dishonesty and was material to the cause of action
adjudicated in the proceeding. The Homeplex Charter contains a provision
limiting the personal liability of officers and directors to Homeplex and its
stockholders to the fullest extent permitted under Maryland law.
In addition, the MGCL permits a corporation to indemnify its present and
former directors and officers, among others, against liability incurred, unless
it is established that (i) the act or omission of the director or officer was
material to the matter giving rise to the proceeding and was committed in bad
faith or was the result of active and deliberate dishonesty, or (ii) the
director or officer actually received an improper personal benefit in money,
property, or services or (iii) in the case of any criminal proceeding, the
director or officer had reasonable cause to believe that the act or omission was
unlawful. The Homeplex Charter provides that it will indemnify its directors,
officers, and others so designated by the Board to the full extent allowed under
Maryland law.
The ABCA contains no specific provision with respect to expanding or
limiting the liability of directors or officers to the corporation or its
stockholders. As far as indemnification is concerned, however, the ABCA states
that a corporation may indemnify a director or officer against liability
incurred if all of the following conditions exist: (a) the individual's conduct
was in good faith; (b) the individual reasonably believed that the conduct was
in the best interests of the corporation; and (c) in the case of any criminal
proceedings, the individual had no reasonable cause to believe the conduct was
unlawful. A corporation may not indemnify a
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<PAGE> 141
director or officer if either (i) in connection with a proceeding by or in the
right of the corporation in which the director or officer was adjudged liable to
the corporation; or (ii) in connection with any other proceeding charging
improper personal benefit to the director or officer in which the director or
officer was adjudged liable on the basis that personal benefit was improperly
received by the director or officer. The Monterey Charter and Bylaws
specifically eliminate director or officer liability for corporation debts or
other liabilities to the fullest extent permitted under Arizona law, and the
Bylaws provide for indemnification of officers and directors, except in
instances where the officer or director is adjudged to be liable for gross
negligence or misconduct.
REDEMPTIONS
Under the MGCL, a corporation may purchase or redeem its own shares, unless
(i) the corporation would not be able to pay its debts as they become due in the
usual course of business or (ii) the corporation's total assets would be less
than the sum of the corporation's total liabilities plus, unless the charter
provides otherwise, the amount that would be needed, if the corporation were to
be dissolved at the time of the purchase or redemption, to satisfy the
preferential rights upon dissolution of stockholders whose rights upon
dissolution are superior to those whose shares are purchased or redeemed.
Neither the Homeplex Charter nor the Homeplex Bylaws contain any provision
relating to the redemption of Homeplex capital stock.
The ABCA prohibits the redemption of shares by a corporation when it is
insolvent or when such redemption or purchase would render it insolvent, or
which would reduce the net assets below the aggregate amount payable to the
holders of shares having prior or equal rights to the assets of the corporation
upon involuntary dissolution. Neither the Monterey Charter nor the Monterey
Bylaws contain any provision relating to the redemption of Monterey capital
stock.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR NOMINATIONS
The Homeplex Bylaws establish advance notice procedures with regard to
stockholder proposals and the nomination, other than by or at the direction of
the Board of Directors or a committee thereof, of candidates for election as
directors. These procedures provide that the notice of stockholder proposals and
stockholder nominations for the election of directors at any meeting of
stockholders must be in writing and received by the Secretary of the Company not
less than 20 nor more than 30 days prior to the meeting (or if less than 30
days' notice or prior public disclosure of the date of the meeting is given or
made by Homeplex, the notice of stockholder proposals or nominations must be in
writing and received by the Secretary of the Company no later than the close of
business on the tenth day following the earlier of the day on which Homeplex's
notice of the date of the annual meeting was mailed or the day on which
Homeplex's first public disclosure of the date of the annual meeting was made).
Homeplex may reject a stockholder proposal or nomination that is not made in
accordance with such procedures.
CONFLICT OF INTEREST TRANSACTIONS
Under the MGCL and the Homeplex Charter, a contract or other transaction
between a corporation and a director or any entity of which any director is a
director or in which any director has a material financial interest is neither
void nor voidable if either (i) the fact of the common directorship or interest
is known or disclosed either (a) to the Board of Directors or a committee
thereof and a majority of disinterested directors on the Board of Directors or
such committee approve the contract or transaction, or (b) to the stockholders
entitled to vote and the contract or transaction is approved by a majority of
the votes cast by the stockholders entitled to vote, other than shares owned of
record or beneficially by the interested director or entity, or (ii) the
contract or transaction is fair and reasonable to the corporation. If the
contract or transaction is not approved as described above, the person asserting
the validity of the contract or transaction bears the burden of proving it was
fair and reasonable to the corporation when authorized, ratified or approved.
Any procedures permitted by the MGCL to cause the corporation to indemnify
officers or directors, including contracts or other arrangements, shall be
deemed to satisfy clause (i)(a) above. The MGCL permits a corporation to
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make loans to or guarantee obligations of officers and employees, including
officers or employees who are directors of the corporation, where the directors
determine that such loan or guarantee may reasonably be expected to benefit the
corporation.
BUSINESS COMBINATIONS
The MGCL prohibits certain "business combinations" (including a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and an Interested Stockholder. "Interested Stockholders" are all
persons (a) who beneficially own 10% or more of the voting power of the
corporation's shares, or (b) an affiliate or associate of the corporation, who,
at any time within the two-year period prior to the date in question, was an
Interested Stockholder or an affiliate or an associate thereof. Such business
combinations are prohibited for five years after the most recent date on which
the Interested Stockholder became an Interested Stockholder. Thereafter, any
such business combination must be recommended by the Board of Directors and
approved by the affirmative vote of at least (a) 80% of the votes entitled to be
cast by all holders of voting shares of the corporation, and (b) 66 2/3% of the
votes entitled to be cast by the holders of voting shares of the corporation,
other than voting shares held by the Interested Stockholder, or an affiliate or
associate of the Interested Stockholder, with whom the business combination is
to be effected, unless, among other things, the corporation's stockholders
receive a Minimum Price (as defined under the MGCL) for their shares and the
consideration is received in cash or in the same form as previously paid by the
Interested Stockholder for its shares. These provisions of the MGCL would not
apply, however, to business combinations that are approved or exempted by the
Homeplex Board of Directors prior to the time that any other Interested
Stockholder becomes an Interested Stockholder. A Maryland corporation also may
adopt an amendment to its charter electing not to be subject to the special
voting requirements of the foregoing legislation. Any such amendment would have
to be approved by the affirmative vote of at least 80% of the votes entitled to
be cast by all holders of outstanding shares of voting stock who are not
Interested Stockholders. No such amendment to the Charter has been effected.
However, prior to the execution of the Merger Agreement, the Homeplex Board of
Directors adopted a resolution exempting the Merger and the transactions
contemplated by the Merger Agreement from the section of the MGCL respecting
certain "business combinations" with Interested Stockholders.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares of stock owned by the acquiror or by officers or directors who
are employees of the corporation. "Control shares" are voting shares of stock
which, if aggregated with all other shares of stock previously acquired by such
a person, would entitle the acquiror to exercise voting power in electing
directors within one of the following ranges of voting power: (a) 20% or more
but less than 33 1/3%; (b) 33 1/3% or more but less than a majority; or (c) a
majority of all voting power. Control shares do not include shares of stock an
acquiring person is entitled to vote as a result of having previously obtained
stockholder approval. A control share acquisition means, subject to certain
exceptions, the acquisition of, ownership of, or the power to direct the
exercise of voting power with respect to, control shares.
A person who has made or proposed to make a "control share acquisition,"
upon satisfaction of certain conditions (including an undertaking to pay
expenses), may compel the Board of Directors to call a special meeting of
stockholder to be held within 50 days of demand therefor to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any stockholders' meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as permitted by the statute,
then, subject to certain conditions and limitations, the corporation may redeem
any or all of the control shares (except those for which voting rights have
previously been approved) for fair value determined, without regard to voting
rights, as of the date of the last control
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share acquisition or of any meeting of stockholders at which the rights of such
shares are considered and not approved. If voting rights for "control shares"
are approved at a stockholders' meeting and the acquiror becomes entitled to
vote a majority of the shares entitled to vote, all other stockholders may
exercise appraisal rights. The fair value of the stock as determined for
purposes of such appraisal rights may not be less than the highest price per
share paid in the control share acquisition, and certain limitations and
restrictions otherwise applicable to the exercise of dissenters' rights do not
apply in the context of a "control share acquisition."
The control share acquisition statute does not apply to stock acquired in a
merger, consolidation or stock exchange if the corporation is a party to the
transaction, or to acquisitions previously approved or excepted by a provision
in the charter or bylaws of the corporation. Neither the Homeplex Charter nor
the Homeplex Bylaws has provisions exempting any control share acquisitions. As
Homeplex is a party to the Merger, the shares issued pursuant thereto are not
deemed to constitute a control share acquisition by Monterey.
AFFILIATES' RESTRICTION ON SALE OF HOMEPLEX COMMON STOCK
The shares of Homeplex Common Stock to be issued pursuant to the Merger
will be registered under the Securities Act by a Registration Statement on Form
S-4, thereby allowing such securities to be traded without restriction by any
former holder who is not deemed to be an "affiliate" of Monterey prior to the
consummation of the Merger, as "affiliate" is defined for purposes of Rule 145
under the Securities Act, and who does not become an "affiliate" of Homeplex
after the consummation of the Merger.
Shares of Homeplex Common Stock received by persons who are deemed to be
affiliates of Monterey prior to the Merger may be resold by them only in
transactions permitted by the resale provisions of Rule 145 promulgated under
the Securities Act or as otherwise permitted under the Securities Act. Rule 145,
as currently in effect, imposes restrictions in the manner in which such
affiliates, and others with whom they might act in concert, may sell Homeplex
Common Stock within any three-month period. Persons who may be deemed to be
affiliates of Monterey generally include individuals or entities that control,
are controlled by or are under common control with Monterey and may include
certain officers and directors as well as principal stockholders of Monterey.
Monterey stockholders who are identified as affiliates will be so advised by
Monterey prior to the Effective Date.
Each of Homeplex and Monterey will use its best efforts to cause each and
any Monterey stockholder who is an affiliate to agree not to make any public
sale of any Homeplex Common Stock received upon consummation of the Merger
except in compliance with Rule 145 under the Securities Act or otherwise in
compliance with the Securities Act. In general, Rule 145, as currently in
effect, imposes restrictions on the manner in which such affiliates may make
resales of Homeplex Common Stock and also on the quantity of resales that such
stockholders, and others with whom they may act in concert, may make within any
three-month period for a period of two (2) years after consummation of the
Merger. In addition, officers and directors of Homeplex following the Merger
will be subject to the resale restrictions of Rule 144 as it applies to
affiliates of an issuer.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Homeplex Common
Stock to be issued in connection with the Merger and with respect to certain
federal income tax consequences of the Merger are being passed upon for Homeplex
by Hughes & Luce, L.L.P., Dallas, Texas.
EXPERTS
The consolidated financial statements of Homeplex Mortgage Investments
Corporation at December 31, 1995 and 1994, and for each of the years in the
three-year period ended December 31, 1995 appearing in this Proxy
Statement/Prospectus have been audited by Ernst & Young, LLP, independent
auditors, as set forth in their report thereon appearing elsewhere in this Proxy
Statement/Prospectus, and are included in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
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The combined financial statements of Monterey Homes Corporation, Monterey
Management, Inc., Monterey Homes-Tucson Corporation and Management-Tucson, Inc.
(collectively, "Monterey Homes") as of December 31, 1994 and 1995 and for each
of the years in the three-year period ended December 31, 1995, have been
included in this Proxy Statement/Prospectus in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, included in this
Proxy Statement/Prospectus, and upon the authority of said firm as experts in
accounting and auditing.
INDEPENDENT AUDITORS
Representatives of Ernst & Young, LLP, who were Homeplex's independent
auditors for the year 1995, are expected to be present at the Annual Meeting.
They will have the opportunity to make a statement if they desire to do so and
will be available to respond to appropriate questions.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 of the Exchange Act requires Homeplex's directors and officers,
and persons who own more than 10% of Homeplex Common Stock to file initial
reports of ownership and reports of changes in ownership with the Commission and
the NYSE. Such persons are required by securities regulations to furnish
Homeplex with copies of all Section 16(a) forms that they file.
Based solely on Homeplex's review of the copies of such forms furnished to
it and written representations from the executive officers and directors,
Homeplex believes that all Section 16(a) filing requirements were met.
STOCKHOLDER PROPOSALS FOR 1997 ANNUAL MEETING
Any proposals that stockholders of Homeplex desire to have presented at the
1997 Annual Meeting must be received by Homeplex at its principal executive
offices no later than February 28, 1997 for inclusion in Homeplex's proxy
materials.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HOMEPLEX
Annual Audited Consolidated Financial Statements
Report of Independent Auditors........................................................ F-2
Consolidated Balance Sheets as of December 31, 1995 and 1994.......................... F-3
Consolidated Statements of Net Income (Loss) for the Years Ended December 31, 1995,
1994 and 1993....................................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1995,
1994 and 1993....................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and
1993................................................................................ F-6
Notes To Consolidated Financial Statements, December 31, 1995......................... F-7
Unaudited Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 1996 and December 31, 1995................. F-
Consolidated Statements of Net Income for the Three and Six Months Ended June 30, 1996
and 1995............................................................................ F-
Consolidated Statement of Stockholders' Equity for the Six Months Ended June 30,
1996................................................................................ F-
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1996 and
1995................................................................................ F-
Notes to Consolidated Financial Statements, June 30, 1996............................. F-
MONTEREY
Annual Audited Combined Financial Statements
Independent Auditors' Report.......................................................... F-
Combined Balance Sheets, December 31, 1994 and 1995................................... F-
Combined Statements of Earnings Years ended December 31, 1993, 1994 and 1995.......... F-
Combined Statements of Shareholders' Equity for the Years Ended December 31, 1993,
1994 and 1995....................................................................... F-
Combined Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and
1995................................................................................ F-
Notes To Combined Financial Statements Years Ended December 31, 1995, 1994 and 1993... F-
Unaudited Combined Financial Statements
Combined Balance Sheets as of December 31, 1995 and June 30, 1996..................... F-
Combined Statements of Earnings for the Six Months Ended June 30, 1996 and 1995....... F-
Combined Statement of Shareholders' Equity for the Year Ended December 31, 1995 and
the Six Months Ended June 30, 1996.................................................. F-
Combined Statement of Cash Flows for the Six Months Ended June 30, 1996 and 1995...... F-
Notes to Interim Combined Financial Statements, June 30, 1996 and 1995................ F-
</TABLE>
F-1
<PAGE> 146
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Homeplex Mortgage Investments Corporation
We have audited the accompanying consolidated balance sheets of Homeplex
Mortgage Investments Corporation and subsidiaries as of December 31, 1995 and
1994, and the related consolidated statements of net income (loss),
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Homeplex Mortgage Investments Corporation and subsidiaries as of December 31,
1995 and 1994, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
As discussed in Note 4 to the consolidated financial statements, the
Company changed its method for accounting for residual interests as of December
31, 1993.
ERNST & YOUNG LLP
Phoenix, Arizona
February 13, 1996
F-2
<PAGE> 147
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND DECEMBER 31, 1994
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Real estate loans (Note 3)............................................. $ 4,048 $ 9,260
Short-term investments (Note 2)........................................ 8,969 --
Funds held by Trustee (Note 5)......................................... 5,638 6,720
Residual interests (Note 4)............................................ 5,457 7,654
Cash and cash equivalents.............................................. 3,347 6,666
Other assets (Note 5).................................................. 357 850
-------- --------
Total Assets................................................. $ 27,816 $ 31,150
======== ========
LIABILITIES
Long-term debt (Note 5)................................................ $ 7,819 $ 11,783
Accounts payable and other liabilities (Note 8)........................ 1,182 1,416
Dividend payable....................................................... 291 194
Accrued interest payable............................................... 76 115
-------- --------
Total Liabilities............................................ 9,368 13,508
-------- --------
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share; 50,000,000 shares authorized;
issued and outstanding -- 9,875,655 shares (Note 8).................. 99 99
Additional paid-in capital............................................. 84,046 84,046
Cumulative net loss.................................................... (23,757) (24,854)
Cumulative dividends................................................... (41,530) (41,239)
Treasury stock -- 159,138 shares....................................... (410) (410)
-------- --------
Total Stockholders' Equity................................... 18,448 17,642
-------- --------
Total Liabilities and Stockholders' Equity................... $ 27,816 $ 31,150
======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 148
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
CONSOLIDATED STATEMENTS OF NET INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
INCOME (LOSS) FROM MORTGAGE ASSETS
Interest income on real estate loans........................ $ 1,618 $ 1,113 $ 29
Income (loss) from residual interests (Note 4).............. 1,283 (2,664) (22,312)
Other income................................................ 663 348 469
--------- --------- ---------
3,564 (1,203) (21,814)
--------- --------- ---------
EXPENSES
Interest.................................................... 868 1,383 2,274
General, administration and other........................... 1,599 1,938 1,822
--------- --------- ---------
Total Expenses.................................... 2,467 3,321 4,096
--------- --------- ---------
Net Income (Loss) Before Cumulative Effect of
Accounting Change......................................... 1,097 (4,524) (25,910)
Cumulative Effect of Accounting Change (Note 4)............. -- -- (6,078)
--------- --------- ---------
Net Income (Loss)........................................... $ 1,097 $ (4,524) $ (31,988)
========= ========= =========
PER SHARE DATA
Net Income (Loss) Per Share Before Cumulative Effect of
Accounting Change......................................... $ .11 $ (.47) $ (2.66)
Cumulative Effect of Accounting Change Per Share............ -- -- (.63)
--------- --------- ---------
Net Income (Loss) Per Share................................. $ .11 $ (.47) $ (3.29)
========= ========= =========
Dividends Declared Per Share................................ $ .03 $ .02 $ .03
========= ========= =========
Weighted Average Number of Shares of Common Stock and Common
Stock Equivalents Outstanding............................. 9,737,302 9,720,612 9,732,056
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 149
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE
NUMBER OF PAID-IN NET INCOME CUMULATIVE TREASURY
SHARES PAR VALUE CAPITAL (LOSS) DIVIDENDS STOCK TOTAL
--------- --------- ---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992....... 9,875,655 $99 $ 84,046 $ 11,658 $(40,753) $ (344) $ 54,706
Treasury stock acquired -- 20,368
shares........................... -- -- -- -- -- (49) (49)
Net loss........................... -- -- -- (31,988) -- -- (31,988)
Dividend declared.................. -- -- -- -- (292) -- (292)
--------- --- -------- -------- -------- ------ -------
Balance at December 31, 1993....... 9,875,655 99 84,046 (20,330) (41,045) (393) 22,377
Treasury stock acquired -- 15,200
shares........................... -- -- -- -- -- (17) (17)
Net loss........................... -- -- -- (4,524) -- -- (4,524)
Dividend declared.................. -- -- -- -- (194) -- (194)
--------- --- -------- -------- -------- ------ -------
Balance at December 31, 1994....... 9,875,655 99 84,046 (24,854) (41,239) (410) 17,642
Net income......................... -- -- -- 1,097 -- -- 1,097
Dividend declared.................. -- -- -- -- (291) -- (291)
--------- --- -------- -------- -------- ------ -------
Balance at December 31, 1995....... 9,875,655 $99 $ 84,046 $(23,757) $(41,530) $ (410) $ 18,448
========= === ======== ======== ======== ====== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 150
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
INCREASE (DECREASE) IN CASH
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............................................ $ 1,097 $(4,524) $(31,988)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
(Increase) decrease in other assets........................ 390 (343) (169)
Increase (decrease) in accounts payable and other
liabilities............................................. (234) 323 (129)
Amortization of debt costs................................. 103 216 230
Increase (decrease) in accrued interest payable............ (39) (79) 59
Net write-downs and non-cash losses on residual
interests............................................... -- 3,343 22,312
Amortization of hedging costs.............................. -- 96 138
Cumulative effect of accounting change..................... -- -- 6,078
------- ------- --------
Net Cash Provided by (Used in) Operating Activities.......... 1,317 (968) (3,469)
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal payments received on real estate loans............. 9,114 670 --
Increase in short-term investments........................... (8,969) -- --
Real estate loans funded..................................... (3,902) (9,610) (320)
Amortization of residual interests........................... 2,197 6,738 20,643
(Increase) decrease in funds held by Trustee................. 1,082 2,041 (3,631)
------- ------- --------
Net Cash Provided (Used in) by Investing Activities.......... (478) (161) 16,692
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments made on long-term debt.................... (3,964) (8,143) (11,074)
Dividends paid............................................... (194) (292) --
Repurchases of common stock, net of common stock issuances... -- (17) (49)
Capitalized debt costs....................................... -- -- (25)
------- ------- --------
Net Cash Used in Financing Activities........................ (4,158) (8,452) (11,148)
------- ------- --------
Net Increase (Decrease) in Cash and Cash Equivalents......... (3,319) (9,581) 2,075
Cash and Cash Equivalents at Beginning of Period............. 6,666 16,247 14,172
------- ------- --------
Cash and Cash Equivalents at End of Period................... $ 3,347 $ 6,666 $ 16,247
======= ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest....................................... $ 804 $ 1,246 $ 2,103
======= ======= ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 151
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1 -- ORGANIZATION
Homeplex Mortgage Investments Corporation, a Maryland corporation, (the
Company) commenced operations in July 1988. As described in Note 4 the Company
has purchased interests in mortgage certificates securing collateralized
mortgage obligations (CMOs) and interests relating to mortgage participation
certificates (MPCs) (collectively residual interests). Since December 1993 the
Company has originated various loans secured by real estate (see Note 3).
NOTE 2 -- GENERAL AND SUMMARY OF ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Homeplex
Mortgage Investments Corporation and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Income Taxes
The Company has elected to be taxed as a real estate investment trust
(REIT) under the Internal Revenue Code. As a REIT, the Company must distribute
annually at least 95% of its taxable income to its stockholders. The $.03
dividend declared in 1993 consisted of $.0276 of ordinary income and $.0024 of
return of capital; the $.02 dividend declared in 1994 consisted of $.0142 of
ordinary income and $.0058 of return of capital, and the $.03 dividend declared
in 1995 was all ordinary income to the recipients for federal income tax
purposes.
At December 31, 1995, the Company has available, for income tax purposes, a
net operating loss carryforward of approximately $57,000,000. Such loss may be
carried forward, with certain restrictions, for up to 14 years to offset future
taxable income, if any. Until the tax loss carryforward is fully utilized or
expires, the Company will not be required to pay dividends to its stockholders
except for income that is deemed to be excess inclusion income.
The income (loss) reported in the accompanying financial statements is
different than taxable income (loss) because some income and expense items are
reported in different periods for income tax purposes. The principal differences
relate to the amortization of residual interests and the treatment of stock
option expense.
Residual Interests
Interests relating to mortgage participation certificates and residual
interest certificates are accounted for as described in Note 4.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits and certificates of
deposit with maturities of less than three months.
Amortization of Hedging
The cost of the Company's LIBOR ceiling rate agreements (see Note 7) was
amortized using the straight-line method over the life of the agreements. Other
expense includes $96,000 and $138,000, respectively, related to amortization of
hedging costs for the years ended December 31, 1994 and 1993.
F-7
<PAGE> 152
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995
Net Income (Loss) Per Share
Primary net income (loss) per share is calculated using the weighted
average shares of common stock outstanding and common stock equivalents. Common
stock equivalents consist of dilutive stock options. Net income (loss) per share
is the same for both primary and fully diluted calculations.
Short-Term Investments
At December 31, 1995, short-term investments consist of a Treasury Bill
with a face amount of $9,000,000, maturity date of January 25, 1996 and an
estimated yield to maturity of 5.30%.
Reclassification
Certain balances in the prior year have been reclassified to conform to the
current year's presentation.
NOTE 3 -- REAL ESTATE LOANS
The following is a summary of real estate loans at December 31, 1995:
<TABLE>
<CAPTION>
PRINCIPAL
AND PRINCIPAL AND
INTEREST CARRYING
DESCRIPTION RATE PAYMENT TERMS AMOUNT(1)
- ----------------------------------- --------- ----------------------------------- -------------
<S> <C> <C> <C>
First Deed of Trust on 41 acres of 16% Interest only monthly, principal
land in Gilbert, Arizona. due October 18, 1996; may be
extended for one year under certain
terms and conditions. $ 1,278,000
First Deed of Trust on 33 acres of 16% Interest only monthly, principal
land in Tempe, Arizona. due November 21, 1995; extended for
one year on November 21, 1995 under
the same terms and conditions. 2,272,000
First Deed of Trust on 21.4 acres 16% Interest only monthly, principal
of land in Tempe, Arizona. due January 6, 1996; extended for
six months on January 6, 1996 under
the same terms and conditions. 498,000
-----------
$ 4,048,000
===========
</TABLE>
- ---------------
(1) Also represents cost for federal income tax purposes.
Each of the preceding loans was current as of December 31, 1995. The
following summarizes real estate loan activity for 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
Balance at beginning of year............................... $ 9,260,000 $ 320,000
Real estate loans funded................................... 3,902,000 9,610,000
Principal repayments....................................... (9,114,000) (670,000)
----------- ----------
Balance at end of year..................................... $ 4,048,000 $9,260,000
=========== ==========
</TABLE>
At December 31, 1995, all of the Company's loans are secured by properties
located in Arizona. As a result of this geographic concentration, unfavorable
economic conditions in Arizona could increase the
F-8
<PAGE> 153
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995
likelihood of defaults on these loans and affect the Company's ability to
protect the principal and interest on such loans following foreclosures upon the
real properties securing such loans.
NOTE 4 -- RESIDUAL INTERESTS
The Company owns residual interests in collateralized mortgage obligations
(CMOs) and residual interests in mortgage participation certificates (MPCs)
(collectively residual interests) with respect to which elections to be treated
as a real estate mortgage investment conduit (REMIC) have been made.
Residual Interest Certificates
The Company owns 100% of the residual interest certificates representing
the residual interests in five series of CMOs secured by mortgage certificates
and cash funds held by trustee. The CMOs have been issued through Westam
Mortgage Financial Corporation (Westam) or American Southwest Financial
Corporation (ASW). The mortgage certificates securing the CMOs all have fixed
interest rates. Certain of the classes of CMOs have fixed interest rates and
certain have interest rates that are determined monthly based on the London
Interbank Offered Rates (LIBOR) for one month Eurodollar deposits, subject to
specified maximum interest rates.
Each series of CMOs consists of several serially maturing classes
collateralized by mortgage certificates. Generally, principal payments received
on the mortgage certificates, including prepayments on such mortgage
certificates, are applied to principal payments on the classes of CMOs in
accordance with the respective indentures. Scheduled payments of principal and
interest on the mortgage certificates securing each series of CMOs and
reinvestment earnings thereon are intended to be sufficient to make timely
payments of interest on such series and to retire each class of such series by
its stated maturity. Certain series of CMOs are subject to redemption according
to specific terms of the respective indentures.
The Company's residual interest certificates entitle the Company to receive
the excess, if any, of payments received from the pledged mortgage certificates
together with reinvestment income thereon over amounts required to make debt
service payments on the related CMOs and to pay related administrative expenses
of the REMICs. The Company also has the right, under certain conditions, to
cause an early redemption of the CMOs. Under the early redemption feature, the
mortgage certificates are sold at the then current market price and the CMOs
repaid at par value. The Company is entitled to any excess cash flow from such
early redemptions. The conditions under which such early redemptions may be
elected vary but generally cannot be done until the remaining outstanding CMO
balance is less than 10% of the original balance.
Prior to December 31, 1993, the Company accounted for its investment in
these five REMICs using the equity method of accounting. Accordingly, the
Company consolidated the financial statements of the REMICs in its financial
statements and included the respective REMICs income or loss in its consolidated
statement of net income (loss). In the event the undiscounted estimated future
net cash flows from the residual interest were less than the Company's financial
reporting basis, the residual interest was considered to be impaired and the
Company established a reserve for the difference. The reserves were then
amortized to income as the loss actually occurred.
F-9
<PAGE> 154
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995
Effective December 31, 1993, the Company adopted the prospective net level
yield method with respect to these investments. The cumulative effect of the
change of $6,078,000 was recorded as of December 31, 1993. Income for the years
ended December 31, 1995 and 1994 has been determined using the prospective net
level yield method. The following summarizes the Company's combined loss from
these five REMICs for the year ended December 31, 1993 (in thousands) prior to
the cumulative effect of the change in accounting principle:
<TABLE>
<S> <C>
Interest income, including amortization of mortgage premium or discount,
and reinvestment income from mortgage collateral........................ $ 57,029
CMO interest, including amortization of debt discount, and administration
expense................................................................. (69,076)
Write-down of investment to estimated undiscounted cash flows,
net of amortization..................................................... (2,320)
--------
Loss from residual interest certificates.................................. $(14,367)
========
</TABLE>
Interests In Mortgage Participation Certificates
The Company owns residual interests in REMICs with respect to three
separate series of Mortgage Participation Certificates (MPCs) issued by the
Federal Home Loan Mortgage Corporation (FHLMC) or by the Federal National
Mortgage Association (FNMA). The Company's MPC residual interests entitle the
Company to receive its proportionate share of the excess (if any) of payments
received from the mortgage certificates underlying the MPCs over principal and
interest required to be passed through to the holders of such MPCs. The Company
is not entitled to reinvestment income earned on the underlying mortgage
certificates, is not required to pay any administrative expenses related to the
MPCs and does not have the right to elect early termination of any of the MPC
classes. The mortgage certificates underlying the MPCs all have fixed interest
rates. Certain of the classes of the MPCs have fixed interest rates and certain
have interest rates that are determined monthly based on LIBOR or based on the
Monthly Weighted Average Cost of Funds (COFI) for Eleventh District Savings
Institutions as published by the Federal Home Loan Bank of San Francisco,
subject to specified maximum interest rates.
The following summarizes the Company's investment in residual interests at
December 31, 1995:
<TABLE>
<CAPTION>
COMPANY'S
AMORTIZED COST COMPANY'S PERCENTAGE
SERIES TYPE OF INVESTMENTS -------------- OWNERSHIP
--------------------- ------------------------------ (IN THOUSANDS) --------------------
<S> <C> <C> <C>
Westam 1............. Residual Interest Certificate $ 703 100.00%
Westam 3............. Residual Interest Certificate 30 100.00%
Westam 5............. Residual Interest Certificate 204 100.00%
Westam 6............. Residual Interest Certificate 12 100.00%
ASW 65............... Residual Interest Certificate 2,521 100.00%
FHLMC 17............. Interest in MPCs 140 100.00%
FNMA 1988-24......... Interest in MPCs 1,220 20.20%
FNMA 1988-25......... Interest in MPCs 627 45.07%
------
$5,457
======
</TABLE>
F-10
<PAGE> 155
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995
The following summarizes the Company's proportionate interest in the
aggregate assets and liabilities of the eight residual interests at December 31,
1995 (in thousands):
<TABLE>
<S> <C>
ASSETS:
Outstanding Principal Balance of Mortgage Certificates................ $357,084
Funds Held By Trustee and Accrued Interest Receivable................. 9,913
--------
$366,997
========
Range of Stated Coupon of Mortgage Certificates....................... 9.0%-10.5%
LIABILITIES:
Outstanding Principal Balance of CMOs and MPCs:
Fixed Rate......................................................... $320,238
Floating Rate -- LIBOR Based....................................... 36,550
Floating Rate -- COFI Based........................................ 4,427
--------
Total......................................................... 361,215
Accrued Interest Payable.............................................. 2,441
--------
$363,656
========
Range of Stated Interest Rates on CMOs and MPCs....................... 0% to 9.9%
</TABLE>
The average LIBOR and COFI rates used to determine income from residual
interests were as follows:
<TABLE>
<CAPTION>
AT DEC. 31,
1995 1994 1993 1995
---- ---- ---- -----------
<S> <C> <C> <C> <C>
LIBOR........................................ 6.00% 4.33% 3.22% 6.00%
COFI......................................... 4.96% 3.83% 4.16% 5.12%
</TABLE>
The Company accounts for residual interests using the prospective net level
yield method. Under this method, a residual interest is recorded at cost and
amortized over the life of the related CMO or MPC issuance. The total expected
cash flow is allocated between principal and interest as follows:
1. An effective yield is calculated as of the date of purchase based
on the purchase price and anticipated future cash flows.
2. In the initial accounting period, interest income is accrued on the
investment balance using the effective yield calculated as of the date of
purchase.
3. Cash received on the investment is first applied to accrued
interest with any excess reducing the recorded principal balance of the
investment.
4. At each reporting date, the effective yield is recalculated based
on the amortized cost of the investment and the then-current estimate of
the remaining future cash flows.
5. The recalculated effective yield is then used to accrue interest
income on the investment balance in the subsequent accounting period.
6. The above procedure continues until all cash flows from the
investment have been received.
At the end of each period, the amortized balance of the investment should
equal the present value of the estimated cash flows discounted at the
newly-calculated effective yield.
In May 1993 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity
F-11
<PAGE> 156
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995
Securities". SFAS No. 115 is applicable to debt securities including investments
in REMIC residual interests and requires all investments to be classified into
one of three categories: held to maturity, available for sale, or trading. The
Company acquired its residual interests without the intention to resell the
assets. The Company has both the intent and ability to hold these investments to
maturity and believes these investments meet the "held to maturity" criteria of
SFAS No. 115. Under SFAS No. 115, if a residual interest is determined to have
other than temporary impairment, the residual interest is written down to fair
value. For the years ended December 31, 1994 and 1993, the Company incurred net
charges of $3,343,000 and $22,312,000, respectively, to write down its residual
interests. There were no charges for the year ended December 31, 1995.
At December 31, 1995, the estimated prospective net level yield of the
Company's residual interests, in the aggregate, is 23% without early redemptions
or terminations being considered and 57% if early redemptions or terminations
are considered. At December 31, 1995, the estimated fair value of the Company's
residual interests, in the aggregate, approximates the Company's aggregate
carrying value.
The projected yield and estimated fair value of the Company's residual
interests are based on prepayment and interest rate assumptions at December 31,
1995. There will be differences, which may be material, between the projected
yield and the actual yield and the fair value of the residual interests may
change significantly over time.
NOTE 5 -- LONG-TERM DEBT
On December 17, 1992, a wholly owned, limited purpose subsidiary of the
Company issued $31,000,000 of Secured Notes under an Indenture to a group of
institutional investors. The Notes bear interest at 7.81% and require quarterly
payments of principal and interest with the balance due on February 15, 1998. In
connection with the financing, the Company paid fees of $635,000 which are
included in other assets in the accompanying consolidated balance sheet and are
being amortized to interest expense over the life of the financing. The Notes
are secured by the Company's residual interests in Westam 1, Westam 3, Westam 5,
Westam 6, ASW 65, FNMA 1988-24 and FNMA 1988-25 (see Note 4), and by Funds held
by the Note Trustee. The Company used $3,100,000 of the proceeds to establish a
reserve fund. The reserve fund, which has a specified maximum balance of
$7,750,000, is to be used to make the scheduled principal and interest payments
on the Notes if the cash flow available from the collateral is not sufficient to
make the scheduled payments. Depending on the level of certain specified
financial ratios relating to the collateral, the cash flow from the collateral
is required to either prepay the Notes at par, increase the reserve fund up to
its $7,750,000 maximum or is remitted to the Company. At December 31, 1995,
Funds held by Trustee consists of $5,122,000 in the reserve fund and $516,000 of
other funds pledged under the Indenture.
NOTE 6 -- SHORT-TERM BORROWINGS
Under a revolving line of credit agreement with a bank, the Company may
borrow up to $5,000,000, upon payment of a 1/2% commitment fee with interest
payable monthly at prime plus 1/2%. Such advances are to be secured by certain
of the Company's real estate loans with the amount advanced equal to between 40%
to 60% of the principal amount of the real estate loans pledged. Only real
estate loans approved by the bank are eligible for advances. The agreement
contains certain financial covenants and expires on May 5, 1996. Through
December 31, 1995, the Company has not drawn upon the line of credit.
NOTE 7 -- HEDGING
On May 12, 1992, the Company entered into a LIBOR ceiling rate agreement
with a bank for a fee of $245,000. The agreement, which had a term of two years
beginning July 1, 1992, required the bank to pay a monthly amount to the Company
equal to the product of $175,000,000 multiplied by the percentage, if any, by
which actual one-month LIBOR (measured on the first business day of each month)
exceeded 9.0%.
F-12
<PAGE> 157
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995
Through the expiration of the agreement on July 1, 1994, LIBOR remained under
9.0% and, accordingly, no amounts were paid under the agreement.
NOTE 8 -- COMMON STOCK AND STOCK OPTIONS
The Company has a Stock Option Plan which is administered by the Board of
Directors. The plan provides for qualified stock options which may be granted to
key personnel of the Company and non-qualified stock options which may be
granted to the Directors and key personnel of the Company. The purpose of the
plan is to provide a means of performance-based compensation in order to attract
and retain qualified personnel whose job performance affects the Company.
Options to acquire a maximum (excluding dividend equivalent rights) of
437,500 shares of the Company's common stock may be granted under the plan. The
exercise price may not be less than the fair market value of the common stock at
the date of grant. The options expire ten years after date of grant.
Optionholders also receive, at no additional cost, dividend equivalent
rights which entitle them to receive, upon exercise of the options, additional
shares calculated based on the dividends declared during the period from the
grant date to the exercise date. At December 31, 1995 accounts payable and other
liabilities in the accompanying consolidated balance sheets, include
approximately $850,000 related to the Company's granting of dividend equivalent
rights. This liability will remain in the accompanying consolidated balance
sheets until the options to which the dividend equivalent rights relate are
exercised, canceled or expire.
Under the plan, an exercising optionholder also has the right to require
the Company to purchase some or all of the optionholder's shares of the
Company's common stock. That redemption right is exercisable by the optionholder
only with respect to shares (including the related dividend equivalent rights)
that the optionholder has acquired by exercise of an option under the Plan.
Furthermore, the optionholder can only exercise his redemption rights within six
months from the last to expire of (i) the two year period commencing with the
grant date of an option, (ii) the one year period commencing with the exercise
date of an option, or (iii) any restriction period on the optionholder's
transfer of the shares of common stock he acquires through exercise of his
option. The price for any shares repurchased as a result of an optionholder's
exercise of his redemption right is the lesser of the book value of those shares
at the time of redemption or the fair market value of the shares on the original
date the options were exercised. During 1993, 20,368 shares were repurchased by
the Company in connection with this provision of the plan. For the year ended
December 31, 1993 approximately $66,000 related to the repurchase of the shares
is included in general and administrative expenses in the accompanying
consolidated statements of net income (loss).
The following summarizes stock option activity under the Stock Option Plan:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1995 1994 1993
---------------------------------------------------- ------- -------- --------
<S> <C> <C> <C>
Options granted..................................... 74,000 -- --
Exercise price per share of options granted......... $ 1.50 $ -- $ --
Dividend equivalent rights granted.................. 8,728 7,779 9,115
Options canceled (including dividend equivalent
rights)........................................... 34,273 -- --
Options exercised (including dividend equivalent
rights)........................................... -- -- --
Exercise price per share of options exercised
(excluding dividend equivalent rights)............ $ -- $ -- $ --
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995 1994
--------------------------------------------------------------- -------- --------
<S> <C> <C>
Options outstanding............................................ 285,769 231,769
Dividend equivalent rights outstanding......................... 159,408 164,953
-------- --------
Total options and dividend equivalent rights outstanding....... 445,177 396,722
======== ========
</TABLE>
F-13
<PAGE> 158
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995
At December 31, 1995, 438,376 of the options, including dividend equivalent
rights, were exercisable at effective exercise prices ranging from $1.22 per
share to $4.48 per share. At December 31, 1995 and 1994, 357 and 54,357 common
shares, respectively, were reserved for future grants.
Additionally, in December 1995, in connection with the renegotiation of the
Chief Executive Officer's Employment Agreement, the Company replaced his annual
salary of $250,000 plus bonus with 750,000 of non-qualified stock options which
vest over the three year term of the new Employment Agreement. The exercise
price of the options is $1.50 per share which was equal to the closing market
price of the common stock on grant date. As of December 31, 1995, 200,000 of the
options were vested, with 275,000 vesting in 1996 and the remaining 275,000
vesting in 1997. The options will immediately vest upon a change in control, as
defined. The options will expire in December 2000. These stock options are
subject to stockholder approval. In the event the stock options are not approved
by the stockholders, the Employment Agreement provides that the options will be
converted into phantom stock rights (PSRs). Such PSRs have the same vesting
provisions, exercise price and expiration date as the related stock options,
except that upon exercise of a PSR no stock is actually issued. Instead, the
Company will make a cash payment to the holder equal to the difference between
the market value of the stock on the exercise date and the exercise price of
$1.50 per share. The PSRs, also, provide that the holder will receive payments
equal to the product of the per share dividend amount times the number of PSRs
outstanding.
NOTE 9 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with requirements of SFAS No. 107,
"Disclosures about Fair Values of Financial Instruments". Although management
uses its best judgment in estimating the fair value of these instruments, there
are inherent limitations in any estimation technique and the estimates are thus
not necessarily indicative of the amounts which the Company could realize on a
current transaction.
The following describes the significant assumptions underlying the
estimates of fair value.
(a) REAL ESTATE LOANS -- The Company's real estate loans are all
short-term (one year or less) and considered to be fully collectible. The
terms and conditions of such loans are the same as would be used by the
Company to fund similar type loans at December 31, 1995. As such, fair
value approximates cost.
(b) SHORT-TERM INVESTMENTS -- Short-Term Investments consist of a
Treasury Bill with a fair value that approximates cost.
(c) CASH AND CASH EQUIVALENTS/FUNDS HELD BY TRUSTEE -- Cash and cash
equivalents and funds held by Trustee consist of demand deposits and liquid
money market funds with fair value approximating cost.
(d) RESIDUAL INTERESTS -- Residual Interests and their fair value are
described in Note 4 to the financial statements.
(e) FAIR VALUE/LONG TERM DEBT -- The estimated fair value of the
Company's long-term debt is estimated to be its carrying value at December
31, 1995 plus the prepayment penalty the Company would be required to make
to repay the debt in its entirety prior to its scheduled maturity.
F-14
<PAGE> 159
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995
Based on these assumptions the Company estimates the fair value of its
financial instruments at December 31, 1995 to be as follows (in thousands):
<TABLE>
<CAPTION>
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
Real Estate Loans............................................... $ 4,048 $ 4,048
Short-term Investments.......................................... 8,969 8,969
Funds held by Trustee........................................... 5,638 5,638
Residual Interests.............................................. 5,457 5,457
Cash and Cash Equivalents....................................... 3,347 3,347
Long-term Debt.................................................. (7,819) (8,001)
</TABLE>
NOTE 10 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NET INCOME
NET (LOSS) DIVIDENDS
INCOME (LOSS) PER SHARE PER SHARE
------------- ---------- ---------
<S> <C> <C> <C>
1993
First............................................ $ (10,824) $(1.11) $ --
Second........................................... (8,148) (.84) --
Third............................................ (4,050) (.42) --
Fourth(1)........................................ (8,966) (.93) .03
1994
First............................................ $ (675) $ (.07) $ --
Second........................................... (1,094) (.11) --
Third............................................ 409 .04 --
Fourth(2)........................................ (3,164) (.33) .02
1995
First............................................ $ 462 $ .05 $ --
Second........................................... 335 .03 --
Third............................................ 58 .01 --
Fourth........................................... 242 .02 .03
</TABLE>
- ---------------
(1) Net loss in the fourth quarter of 1993 includes a charge of $6,078,000 or
$.63 per share, for the cumulative effect of an accounting change.
(2) Net loss in the fourth quarter of 1994 includes a charge of $3,212,000, or
$.33 per share, to record impaired residual interests at fair market value.
F-15
<PAGE> 160
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1996 AND DECEMBER 31, 1995
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DEC. 31,
1996 1995
-------- ------------
<S> <C> <C>
ASSETS
Short-term investments............................................... $ 8,988 $ 8,969
Residual interests................................................... 4,625 5,457
Real estate loans.................................................... 3,852 4,048
Cash and cash equivalents............................................ 1,865 3,347
Other assets......................................................... 422 357
Funds held by Trustee................................................ -- 5,638
-------- --------
Total Assets............................................... $ 19,752 $ 27,816
======== ========
LIABILITIES
Accounts payable and other liabilities............................... $ 1,072 $ 1,182
Long-term debt....................................................... -- 7,819
Dividend payable..................................................... -- 291
Accrued interest payable............................................. -- 76
-------- --------
Total Liabilities.......................................... 1,072 9,368
-------- --------
Contingencies
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share; 50,000,000 shares authorized;
issued and outstanding -- 9,875,655 shares......................... 99 99
Additional paid-in capital........................................... 84,046 84,046
Cumulative net loss.................................................. (23,525) (23,757)
Cumulative dividends................................................. (41,530) (41,530)
Treasury stock -- 159,138 shares..................................... (410) (410)
-------- --------
Total Stockholders' Equity................................. 18,680 18,448
-------- --------
Total Liabilities and Stockholders' Equity................. $ 19,752 $ 27,816
======== ========
</TABLE>
See notes to consolidated financial statements.
F-16
<PAGE> 161
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
CONSOLIDATED STATEMENTS OF NET INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------- -----------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
INCOME
Interest income on real estate loans.......... $ 175 $ 622 $ 366 $ 1,197
Income from residual interests................ 277 335 525 750
Other income.................................. 183 121 379 234
--------- --------- --------- ---------
Total Income.................................. 635 1,078 1,270 2,181
--------- --------- --------- ---------
EXPENSES
Interest...................................... 75 228 238 478
General, administrative and other............. 263 515 651 905
--------- --------- --------- ---------
Total Expenses................................ 338 743 889 1,383
--------- --------- --------- ---------
Income Before Extraordinary Loss From Early
Extinguishment of debt...................... 297 335 381 798
Extraordinary loss from early extinguishment
of debt..................................... (149) -- (149) --
--------- --------- --------- ---------
Net Income.................................... $ 148 $ 335 $ 232 $ 798
========= ========= ========= =========
SHARE DATA
Income before extraordinary loss from early
extinguishment of debt per share............ $ .03 $ .03 $ .04 $ .08
Extraordinary loss from early extinguishment
of debt per share........................... (.02) -- (.02) --
--------- --------- --------- ---------
Net income per share.......................... $ .01 $ .03 $ .02 $ .08
========= ========= ========= =========
Weighted average number of shares of common
stock and common stock equivalents
outstanding................................. 9,951,894 9,736,320 9,885,624 9,730,905
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-17
<PAGE> 162
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE
NUMBER PAR PAID-IN NET INCOME CUMULATIVE TREASURY
OF SHARES VALUE CAPITAL (LOSS) DIVIDENDS STOCK TOTAL
--------- ----- ---------- ---------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995............ 9,875,655 $99 $ 84,046 $(23,757) $(41,530) $ (410) $18,448
Net income.............................. -- -- -- 232 -- -- 232
--------- --- -------- -------- -------- ------ -------
Balance at June 30, 1996................ 9,875,655 $99 $ 84,046 $(23,525) $(41,530) $ (410) $18,680
========= === ======== ======== ======== ====== =======
</TABLE>
See notes to consolidated financial statements.
F-18
<PAGE> 163
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
INCREASE (DECREASE) IN CASH
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................................... $ 232 $ 798
Adjustments to reconcile net income to net cash provided by operating
activities:
Extraordinary loss from early extinguishment of debt................... 149 --
(Increase) decrease in other assets.................................... (147) 250
Decrease in accounts payable and other liabilities..................... (111) (122)
Decrease in accrued interest payable................................... (76) (19)
Amortization of debt costs............................................. 28 57
------- -------
Net Cash Provided By Operating Activities................................ 75 964
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease in funds held by Trustee........................................ 5,638 474
Amortization of residual interests....................................... 832 1,100
Principal payments received on real estate loans......................... 499 5,790
Real estate loans funded................................................. (303) (2,625)
Increase in short-term investments....................................... (19) --
------- -------
Net Cash Provided By Investing Activities................................ 6,647 4,739
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments, including prepayment penalty of $94 in 1996, made on
long-term debt......................................................... (7,913) (1,982)
Dividends paid........................................................... (291) (194)
------- -------
Net Cash Used In Financing Activities.................................... (8,204) (2,176)
------- -------
Net Increase (Decrease) In Cash.......................................... (1,482) 3,527
Cash And Cash Equivalents At Beginning Of Period......................... 3,347 6,666
------- -------
Cash And Cash Equivalents At End Of Period............................... $ 1,865 $10,193
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest................................................... $ 286 $ 440
======= =======
</TABLE>
See notes to consolidated financial statements.
F-19
<PAGE> 164
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
NOTE 1 -- ORGANIZATION
Homeplex Mortgage Investments Corporation, a Maryland corporation, (the
Company) commenced operations in July 1988. As described in Note 4 the Company
has purchased interests in mortgage certificates securing collateralized
mortgage obligations (CMOs) and interests relating to mortgage participation
certificates (MPCs) (collectively residual interests). Since December 1993 the
Company has originated various loans secured by real estate (see Note 3). In
June 1996, the Company announced that it had signed a letter of intent to merge
with Monterey Homes (see Note 8).
The accompanying interim financial statements do not include all of the
information and disclosures generally required for annual financial statements.
In the opinion of management, however, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the three and six months ended June 30, 1996 and
1995 are not necessarily indicative of the results that may be expected for the
entire year. These financial statements should be read in conjunction with the
December 31, 1995 financial statements and notes thereto.
NOTE 2 -- GENERAL AND SUMMARY OF ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Homeplex
Mortgage Investments Corporation and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Income Taxes
The Company has elected to be taxed as a real estate investment trust
(REIT) under the Internal Revenue Code. As a REIT, the Company must distribute
annually at least 95% of its taxable income to its stockholders.
At December 31, 1995, the Company has available, for income tax purposes, a
net operating loss carryforward of approximately $57,000,000. Such loss may be
carried forward, with certain restrictions, for up to 14 years to offset future
taxable income, if any. Until the tax loss carryforward is fully utilized or
expires, the Company will not be required to pay dividends to its stockholders
except for income that is deemed to be excess inclusion income.
The income reported in the accompanying financial statements is different
than taxable income because some income and expense items are reported in
different periods for income tax purposes. The principal differences relate to
the amortization of residual interests and the treatment of stock option
expense.
Residual Interests
Interests relating to mortgage participation certificates and residual
interest certificates are accounted for as described in Note 4.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits and certificates of
deposit with maturities of less than three months.
F-20
<PAGE> 165
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1996
(UNAUDITED)
Net Income Per Share
Primary net income per share is calculated using the weighted average
shares of common stock outstanding and common stock equivalents. Common stock
equivalents consist of dilutive stock options. Net income per share is the same
for both primary and fully diluted calculations.
Short-Term Investments
At June 30, 1996, short-term investments consist of a Treasury Bill with a
face amount of $9,000,000, maturity date of July 11, 1996 and an estimated yield
to maturity of 4.92%.
NOTE 3 -- REAL ESTATE LOANS
The following is a summary of real estate loans at June 30, 1996:
<TABLE>
<CAPTION>
PRINCIPAL AND
INTEREST PAYMENT CARRYING
DESCRIPTION RATE TERMS AMOUNT(1)
- ------------------------------------ -------- ------------------------------------ -------------
<S> <C> <C> <C>
First Deed of Trust on 41 acres of 16% Interest only monthly, principal due
land in Gilbert, Arizona. October 18, 1996; may be extended
for one year under certain terms and
conditions. $ 1,580,000
First Deed of Trust on 33 acres of 16% Interest only monthly, principal due
land in Tempe, Arizona. November 21, 1995; extended for one
year on November 21, 1995 under the
same terms and conditions. 2,272,000
-----------
$ 3,852,000
===========
</TABLE>
- ---------------
(1) Also represents cost for federal income tax purposes.
At June 30, 1996, both of the Company's loans are secured by properties
located in Arizona. As a result of this geographic concentration, unfavorable
economic conditions in Arizona could increase the likelihood of defaults on
these loans and affect the Company's ability to protect the principal and
interest on such loans following foreclosures upon the real properties securing
such loans.
NOTE 4 -- RESIDUAL INTERESTS
The Company owns residual interests in collateralized mortgage obligations
(CMOs) and residual interests in mortgage participation certificates (MPCs)
(collectively residual interests) with respect to which elections to be treated
as a real estate mortgage investment conduit (REMIC) have been made.
Residual Interest Certificates
The Company owns 100% of the residual interest certificates representing
the residual interests in five series of CMOs secured by mortgage certificates
and cash funds held by trustee. The CMOs have been issued through Westam
Mortgage Financial Corporation (Westam) or American Southwest Financial
Corporation (ASW). The mortgage certificates securing the CMOs all have fixed
interest rates. Certain of the classes of CMOs have fixed interest rates and
certain have interest rates that are determined monthly based on the London
Interbank Offered Rates (LIBOR) for one month Eurodollar deposits, subject to
specified maximum interest rates.
F-21
<PAGE> 166
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1996
(UNAUDITED)
Each series of CMOs consists of several serially maturing classes
collateralized by mortgage certificates. Generally, principal payments received
on the mortgage certificates, including prepayments on such mortgage
certificates, are applied to principal payments on the classes of CMOs in
accordance with the respective indentures. Scheduled payments of principal and
interest on the mortgage certificates securing each series of CMOs and
reinvestment earnings thereon are intended to be sufficient to make timely
payments of interest on such series and to retire each class of such series by
its stated maturity. Certain series of CMOs are subject to redemption according
to specific terms of the respective indentures.
The Company's residual interest certificates entitle the Company to receive
the excess, if any, of payments received from the pledged mortgage certificates
together with reinvestment income thereon over amounts required to make debt
service payments on the related CMOs and to pay related administrative expenses
of the REMICs. The Company also has the right, under certain conditions, to
cause an early redemption of the CMOs. Under the early redemption feature, the
mortgage certificates are sold at the then current market price and the CMOs
repaid at par value. The Company is entitled to any excess cash flow from such
early redemptions. The conditions under which such early redemptions may be
elected vary but generally cannot be done until the remaining outstanding CMO
balance is less than 10% of the original balance.
Interests In Mortgage Participation Certificates
The Company owns residual interests in REMICs with respect to three
separate series of Mortgage Participation Certificates (MPCs) issued by the
Federal Home Loan Mortgage Corporation (FHLMC) or by the Federal National
Mortgage Association (FNMA). The Company's MPC residual interests entitle the
Company to receive its proportionate share of the excess (if any) of payments
received from the mortgage certificates underlying the MPCs over principal and
interest required to be passed through to the holders of such MPCs. The Company
is not entitled to reinvestment income earned on the underlying mortgage
certificates, is not required to pay any administrative expenses related to the
MPCs and does not have the right to elect early termination of any of the MPC
classes. The mortgage certificates underlying the MPCs all have fixed interest
rates. Certain of the classes of the MPCs have fixed interest rates and certain
have interest rates that are determined monthly based on LIBOR or based on the
Monthly Weighted Average Cost of Funds (COFI) for Eleventh District Savings
Institutions as published by the Federal Home Loan Bank of San Francisco,
subject to specified maximum interest rates.
The following summarizes the Company's investment in residual interests at
June 30, 1996:
<TABLE>
<CAPTION>
COMPANY'S
TYPE OF COMPANY'S PERCENTAGE
SERIES INVESTMENTS AMORTIZED COST OWNERSHIP
------------------------------- ------------------------------ -------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Westam 1....................... Residual Interest Certificate $ 508 100.00%
Westam 3....................... Residual Interest Certificate 27 100.00%
Westam 5....................... Residual Interest Certificate 171 100.00%
Westam 6....................... Residual Interest Certificate 2 100.00%
ASW 65......................... Residual Interest Certificate 2,224 100.00%
FHLMC 17....................... Interest in MPCs 112 100.00%
FNMA 1988-24................... Interest in MPCs 1,015 20.20%
FNMA 1988-25................... Interest in MPCs 566 45.07%
------
$4,625
======
</TABLE>
F-22
<PAGE> 167
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1996
(UNAUDITED)
The following summarizes the Company's proportionate interest in the
aggregate assets and liabilities of the eight residual interests at June 30,
1996 (in thousands):
<TABLE>
<S> <C>
ASSETS:
Outstanding Principal Balance of Mortgage Certificates................. $313,305
Funds Held By Trustee and Accrued Interest Receivable.................. 11,063
--------
$324,368
========
Range of Stated Coupon of Mortgage Certificates........................ 9.0%-10.5%
LIABILITIES:
Outstanding Principal Balance of CMOs and MPCs:
Fixed Rate.......................................................... $286,003
Floating Rate - LIBOR Based......................................... 29,225
Floating Rate - COFI Based.......................................... 3,787
--------
Total.......................................................... 319,015
========
Accrued Interest Payable............................................... 2,159
--------
$321,174
========
Range of Stated Interest Rates on CMOs and MPCs........................ 0% to 9.9%
</TABLE>
The average LIBOR and COFI rates used to determine income from residual
interests were as follows:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------- ---------------
1996 1995 1996 1995 AT JUNE 30, 1996
---- ---- ---- ---- ----------------
<S> <C> <C> <C> <C> <C>
LIBOR............................. 5.44% 6.08% 5.47% 6.07% 5.44%
COFI.............................. 4.90% 5.00% 4.98% 4.78% 4.84%
</TABLE>
The Company accounts for residual interests using the prospective net level
yield method. Under this method, a residual interest is recorded at cost and
amortized over the life of the related CMO or MPC issuance. The total expected
cash flow is allocated between principal and interest as follows:
1. An effective yield is calculated as of the date of purchase based
on the purchase price and anticipated future cash flows.
2. In the initial accounting period, interest income is accrued on the
investment balance using the effective yield calculated as of the
date of purchase.
3. Cash received on the investment is first applied to accrued
interest with any excess reducing the recorded principal balance of
the investment.
4. At each reporting date, the effective yield is recalculated based
on the amortized cost of the investment and the then-current
estimate of the remaining future cash flows.
5. The recalculated effective yield is then used to accrue interest
income on the investment balance in the subsequent accounting
period.
6. The above procedure continues until all cash flows from the
investment have been received.
F-23
<PAGE> 168
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1996
(UNAUDITED)
At the end of each period, the amortized balance of the investment should
equal the present value of the estimated cash flows discounted at the
newly-calculated effective yield. If a residual interest is determined to have
other than temporary impairment, the residual interest is written down to fair
value.
At June 30, 1996, the estimated prospective net level yield of the
Company's residual interests, in the aggregate, is 30% without early redemptions
or terminations being considered and 77% if early redemptions or terminations
are considered. At June 30, 1996, the estimated fair value of the Company's
residual interests, in the aggregate, is estimated to be between $5 million and
$7 million.
The projected yield and estimated fair value of the Company's residual
interests are based on prepayment and interest rate assumptions at June 30,
1996. There will be differences, which may be material, between the projected
yield and the actual yield and the fair value of the residual interests may
change significantly over time.
NOTE 5 -- LONG-TERM DEBT
On December 17, 1992, a wholly owned, limited purpose subsidiary of the
Company issued $31,000,000 of Secured Notes under an Indenture to a group of
institutional investors. The Notes bore interest at 7.81% and required quarterly
payments of principal and interest with the balance due on February 15, 1998. In
connection with the financing, the Company paid fees of $635,000 which were
included in other assets in the accompanying consolidated balance sheet and were
amortized to interest expense over the life of the financing. The Notes were
secured by the Company's residual interests in Westam 1, Westam 3, Westam 5,
Westam 6, ASW 65, FNMA 1988-24 and FNMA 1988-25 (see Note 4), and by Funds held
by the Note Trustee. The Company used $3,100,000 of the proceeds to establish a
reserve fund. The reserve fund, which had a specified maximum balance of
$7,750,000, was to be used to make the scheduled principal and interest payments
on the Notes if the cash flow available from the collateral was not sufficient
to make the scheduled payments. Depending on the level of certain specified
financial ratios relating to the collateral, the cash flow from the collateral
was required to either prepay the Notes at par, increase the reserve fund up to
its $7,750,000 maximum or was remitted to the Company.
On May 15, 1996 the Company repaid the remaining outstanding Note balance
of $6,828,000 plus accrued interest. The Company paid prepayment penalty fees of
$94,000 and wrote off the remaining unamortized balance of $55,000 of
capitalized debt costs in connection with such repayment resulting in an
extraordinary loss of $149,000 from the early extinguishment of debt.
NOTE 6 -- COMMON STOCK AND STOCK OPTIONS
The Company has a Stock Option Plan which is administered by the Board of
Directors. The plan provides for qualified stock options which may be granted to
key personnel of the Company and non-qualified stock options which may be
granted to the Directors and key personnel of the Company. The purpose of the
plan is to provide a means of performance-based compensation in order to attract
and retain qualified personnel whose job performance affects the Company.
Options to acquire a maximum (excluding dividend equivalent rights) of
437,500 shares of the Company's common stock may be granted under the plan. The
exercise price may not be less than the fair market value of the common stock at
the date of grant. The options expire ten years after date of grant.
Optionholders also receive, at no additional cost, dividend equivalent
rights which entitle them to receive, upon exercise of the options, additional
shares calculated based on the dividends declared during the period from the
grant date to the exercise date. At June 30, 1996 accounts payable and other
liabilities in the accompanying consolidated balance sheets, include
approximately $850,000 related to the Company's granting
F-24
<PAGE> 169
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1996
(UNAUDITED)
of dividend equivalent rights. This liability will remain in the accompanying
consolidated balance sheets until the options to which the dividend equivalent
rights relate are exercised, canceled or expire.
Under the plan, an exercising optionholder also has the right to require
the Company to purchase some or all of the optionholder's shares of the
Company's common stock. That redemption right is exercisable by the optionholder
only with respect to shares (including the related dividend equivalent rights)
that the optionholder has acquired by exercise of an option under the Plan.
Furthermore, the optionholder can only exercise his redemption rights within six
months from the last to expire of (i) the two year period commencing with the
grant date of an option, (ii) the one year period commencing with the exercise
date of an option, or (iii) any restriction period on the optionholder's
transfer of the shares of common stock he acquires through exercise of his
option. The price for any shares repurchased as a result of an optionholder's
exercise of his redemption right is the lesser of the book value of those shares
at the time of redemption or the fair market value of the shares on the original
date the options were exercised.
At June 30, 1996, there were 445,177 of options (including dividend
equivalent rights) outstanding of which 438,376 were currently exercisable at
effective exercise prices ranging from $1.22 per share to $4.48 per share.
Additionally, in December 1995, in connection with the renegotiation of the
Chief Executive Officer's Employment Agreement, the Company replaced his annual
salary of $250,000 plus bonus with 750,000 non-qualified stock options which
vest over the three year term of the new Employment Agreement. The exercise
price of the options is $1.50 per share which is equal to the closing market
price of the common stock on grant date. As of June 30, 1996, 200,000 of the
options were vested, with 275,000 vesting in December 1996 and the remaining
275,000 vesting in December 1997. The options will immediately vest upon a
change in control, as defined. The options will expire in December 2000. These
stock options are subject to stockholder approval. In the event the stock
options are not approved by the stockholders, the Employment Agreement provides
that the options will be converted into phantom stock rights (PSRs). Such PSRs
have the same vesting provisions, exercise price and expiration date as the
related stock options, except that upon exercise of a PSR no stock is actually
issued. Instead, the Company will make a cash payment to the holder equal to the
difference between the market value of the stock on the exercise date and the
exercise price of $1.50 per share. The PSRs, also, provide that the holder will
receive payments equal to the product of the per share dividend amount times the
number of PSRs outstanding.
NOTE 7 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with requirements of SFAS No. 107,
"Disclosures about Fair Values of Financial Instruments". Although management
uses its best judgment in estimating the fair value of these instruments, there
are inherent limitations in any estimation technique and the estimates are thus
not necessarily indicative of the amounts which the Company could realize on a
current transaction.
The following describes the significant assumptions underlying the
estimates of fair value:
(a) REAL ESTATE LOANS -- The Company's real estate loans are both
short-term (one year or less) and considered to be fully collectible. The
terms and conditions of such loans are the same as would be used by the
Company to fund similar type loans at June 30, 1996. As such, fair value
approximates cost.
(b) SHORT-TERM INVESTMENTS -- Short-term investments consist of a
Treasury Bill with a fair value that approximates cost.
F-25
<PAGE> 170
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1996
(UNAUDITED)
(c) CASH AND CASH EQUIVALENTS -- Cash and cash equivalents consist of
demand deposits and liquid money market funds with fair value approximating
cost.
(d) RESIDUAL INTERESTS -- Residual interests and their fair value are
described in Note 4 to the financial statements.
Based on these assumptions the Company estimates the fair value of its
financial instruments at June 30, 1996 to be as follows (in thousands):
<TABLE>
<CAPTION>
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- --------------
<S> <C> <C>
Real Estate Loans........................................... $ 3,852 $3,852
Short-term Investments...................................... 8,988 8,988
Residual Interests.......................................... 4,625 5,000 to 7,000
Cash and Cash Equivalents................................... 1,865 1,865
</TABLE>
NOTE 8 -- PROPOSED MERGER
In June 1996 the Company announced that it had signed a letter of intent to
merge with Monterey Homes, a group of privately-held companies engaged in the
homebuilding business in Phoenix, Scottsdale and Tucson, Arizona. As currently
contemplated the merger would involve the issuance of approximately 3.6 million
to 4.0 million shares of Homeplex common stock, depending on the relative book
values of the respective companies, in exchange for 100% of the outstanding
stock of Monterey Homes. Additionally, up to 800,000 additional shares of
Homeplex common stock will be issued in the event that (i) the stock price of
Homeplex reaches certain targeted levels of between $1.75 to $3.50 in the five
years following the merger and (ii) the two current stockholders of Monterey
Homes are still employed by the post-merger company when the stock price reaches
the targeted levels. Prior to closing, Monterey Homes, a group of subchapter S
corporations, will distribute to their stockholders a significant portion of
their previously taxed retained earnings which will reduce the net worth of
Monterey Homes to between $2.275 and $2.500 million.
It is also currently contemplated that William W. Cleverly and Steven J.
Hilton, the current stockholders of Monterey Homes, will become the Chairman and
the President, respectively, and co-chief executive officers of the combined
company after the closing, and each will enter into a five-year employment
agreement providing for additional options to purchase 500,000 shares each of
Homeplex common stock at $1.75 per share. Messrs. Cleverly and Hilton will serve
on the new Board of Directors along with two new outside directors and one
current Homeplex director.
Monterey Homes had combined revenue of approximately $61 million and $71
million and pre-tax earnings of approximately $6.3 million and $6.4 million for
the years ended December 31, 1994 and 1995, respectively. After the merger, the
combined entities would continue with Monterey Homes' building operations as its
main line of business. Upon consummation of the merger, it is anticipated that
the combined entities will have total assets of approximately $60 million. It is
anticipated that Homeplex's $57 million net operating-loss carryforward for
income tax purposes would be available to the combined company, and the
transaction would require Homeplex to terminate its tax status as a real estate
investment trust (REIT).
The letter of intent is subject to the due diligence of both parties,
negotiation and execution of a definitive agreement, the receipt of an
independent fairness opinion, the approval of the Boards of Directors and
stockholders of both companies and the consent of various lenders and other
third parties, as well as other customary conditions.
F-26
<PAGE> 171
INDEPENDENT AUDITORS' REPORT
The Boards of Directors
Monterey Homes Corporation
Monterey Management, Inc.
Monterey Homes -- Tucson Corporation and
Monterey Management -- Tucson, Inc.:
We have audited the accompanying combined balance sheets of Monterey Homes
Corporation, Monterey Management, Inc., Monterey Homes -- Tucson Corporation and
Monterey Management -- Tucson, Inc. (collectively Monterey Homes) as of December
31, 1994 and 1995 and the related combined statements of earnings, shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1995. These combined financial statements are the responsibility of
the management of Monterey Homes. Our responsibility is to express an opinion on
these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Monterey Homes
Corporation, Monterey Management, Inc., Monterey Homes -- Tucson Corporation and
Monterey Management -- Tucson, Inc. as of December 31, 1994 and 1995, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1995 in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Phoenix, Arizona
January 26, 1996
F-27
<PAGE> 172
MONTEREY HOMES
COMBINED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
ASSETS
Real estate under development (notes 2 and 4).................... $17,917,832 $33,929,278
Receivables...................................................... 539,596 860,807
Cash and cash equivalents........................................ 7,398,414 4,889,947
Option deposits.................................................. 984,762 1,694,908
Preacquisition costs............................................. 754,183 14,297
Deferred subordinated debt costs................................. 945,897 887,784
Property and equipment, net (note 3)............................. 212,339 244,484
Other assets..................................................... 67,242 132,579
----------- -----------
$28,820,265 $42,654,084
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts and subcontractors payable (note 7)..................... $ 3,660,529 $ 4,589,325
Accrued liabilities.............................................. 683,073 824,055
Home sale deposits............................................... 5,324,072 3,816,659
Notes payable (note 4)........................................... 12,255,058 24,315,568
----------- -----------
Total liabilities...................................... 21,922,732 33,545,607
----------- -----------
Shareholders' equity (note 6):
Common stock of Monterey Homes Corporation, no par value;
10,000,000 shares authorized; $.00017 stated value;
1,155,832 shares issued and outstanding..................... 200 200
Preferred stock of Monterey Homes Corporation, $.01 par value;
1,000,000 shares authorized, none outstanding............... -- --
Common stock of Monterey Management, Inc., no par value;
10,000,000 shares authorized; $.0007 stated value; 871,944
shares issued and outstanding............................... 610 610
Preferred stock of Monterey Management, Inc., $.01 par value;
1,000,000 shares authorized; none outstanding............... -- --
Common stock of Monterey Homes -- Tucson Corporation, $1 par
value; 1,000,000 shares authorized; 2,000 shares issued and
outstanding................................................. -- 2,000
Common stock of Monterey Management -- Tucson, Inc., $1 par
value; 1,000,000 shares authorized; 2,000 shares issued and
outstanding................................................. -- 2,000
Additional paid-in capital..................................... 8,517 8,517
Retained earnings.............................................. 6,888,206 9,095,150
----------- -----------
Total shareholders' equity............................. 6,897,533 9,108,477
Commitments and contingencies (notes 4, 5 and 8)
----------- -----------
$28,820,265 $42,654,084
=========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-28
<PAGE> 173
MONTEREY HOMES
COMBINED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues............................................ $40,543,168 $60,941,390 $71,490,561
Cost of sales....................................... 34,663,827 50,654,526 60,332,436
----------- ----------- -----------
Gross margin...................................... 5,879,341 10,286,864 11,158,125
Selling, general and administrative expenses........ 3,267,125 4,123,696 4,897,794
----------- ----------- -----------
Operating earnings................................ 2,612,216 6,163,168 6,260,331
Other income (expense):
Minority interest................................. (225,524) -- --
Miscellaneous net................................. 132,869 101,636 140,613
----------- ----------- -----------
Net earnings................................... $ 2,519,561 $ 6,264,804 $ 6,400,944
=========== =========== ===========
Net earnings per common share.................. $ 1.24 $ 3.09 $ 3.15
=========== =========== ===========
Weighted average common shares outstanding..... 2,027,776 2,027,776 2,029,776
=========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-29
<PAGE> 174
MONTEREY HOMES
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
MONTEREY
MONTEREY MONTEREY MONTEREY MANAGEMENT-
HOMES MANAGEMENT, HOMES-TUCSON TUCSON,
CORPORATION INC. CORPORATION INC. ADDITIONAL
COMMON COMMON COMMON COMMON PAID-IN RETAINED
STOCK STOCK STOCK STOCK CAPITAL EARNINGS TOTAL
----------- ----------- ------------ ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1992........... $ 200 $ 610 $ -- $ -- $8,517 $2,183,531 $2,192,858
Net earnings.......................... -- -- -- -- -- 2,519,561 2,519,561
Distributions to shareholders......... -- -- -- -- -- (1,591,190) (1,591,190)
----- ----- ------ ------- ------ ---------- ----------
Balances, December 31, 1993........... 200 610 -- -- 8,517 3,111,902 3,121,229
Net earnings.......................... -- -- -- -- -- 6,264,804 6,264,804
Distributions to shareholders......... -- -- -- -- -- (2,488,500) (2,488,500)
----- ----- ------ ------- ------ ---------- ----------
Balances, December 31, 1994........... 200 610 -- -- 8,517 6,888,206 6,897,533
Proceeds from issuance of stock....... -- -- 2,000 2,000 -- -- 4,000
Net earnings.......................... -- -- -- -- -- 6,400,944 6,400,944
Distributions to shareholders......... -- -- -- -- -- (4,194,000) (4,194,000)
----- ----- ------ ------- ------ ---------- ----------
Balances, December 31, 1995........... $ 200 $ 610 $2,000 $ 2,000 $8,517 $9,095,150 $9,108,477
===== ===== ====== ======= ====== ========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-30
<PAGE> 175
MONTEREY HOMES
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings....................................... $ 2,519,561 $ 6,264,804 $ 6,400,944
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Minority interest in earnings................... 225,524 -- --
Depreciation and amortization................... 56,078 66,692 129,462
Net gain on sales of property and equipment..... -- (9,517) --
Increase in real estate under development....... (4,183,310) (4,181,682) (16,011,446)
Increase (decrease) in receivables.............. 297,519 (310,740) (321,211)
Increase in option deposits..................... (128,431) (344,753) (710,146)
Decrease in preacquisition costs................ -- -- 739,886
Increase in other assets........................ (77,190) (1,588,889) (67,534)
Increase (decrease) in accounts and
subcontractors
payable....................................... 215,534 (47,643) 928,796
Increase in accrued liabilities................. 135,948 279,050 140,982
Increase (decrease) in home sale deposits....... 1,297,184 1,151,261 (1,507,413)
------------ ------------ ------------
Net cash provided by (used in) operating
activities............................... 358,417 1,278,583 (10,277,680)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment................ (67,301) (106,850) (102,279)
Proceeds from sales of equipment................... -- 26,000 984
------------ ------------ ------------
Net cash used in investing activities...... (67,301) (80,850) (101,295)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock............. -- -- 4,000
Borrowings......................................... 18,425,166 30,531,668 37,270,591
Repayments of borrowings........................... (14,257,026) (25,908,200) (25,210,083)
Distributions to shareholders...................... (1,591,190) (2,488,500) (4,194,000)
Distributions to minority interests................ (109,375) (189,252) --
------------ ------------ ------------
Net cash provided by financing
activities............................... 2,467,575 1,945,716 7,870,508
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents........................................ 2,758,691 3,143,449 (2,508,467)
Cash and cash equivalents at beginning of year....... 1,496,274 4,254,965 7,398,414
------------ ------------ ------------
Cash and cash equivalents at end of year............. $ 4,254,965 $ 7,398,414 $ 4,889,947
============ ============ ============
</TABLE>
See accompanying notes to combined financial statements.
F-31
<PAGE> 176
MONTEREY HOMES
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The combined financial statements include the accounts of Monterey Homes
Corporation, Monterey Management, Inc., Monterey Homes -- Tucson Corporation,
Monterey Management -- Tucson, Inc., and Monterey at Mountain View collectively
Monterey Homes (the Company), which are subject to common ownership. Monterey at
Mountain View (the Partnership) was a limited partnership in which Monterey
Management, Inc. owned 82.5% and served as the general partner. The Partnership
sold all remaining homes during 1993 and was dissolved during 1994. All material
balances and transactions between the combined entities have been eliminated.
In June 1995, the Company began operations in Tucson, Arizona. Monterey
Management -- Tucson, Inc. was incorporated June 1, 1995 for the purpose of
performing all construction and development activity in Tucson. Monterey
Homes -- Tucson Corporation was incorporated June 1, 1995 for the purpose of
performing all sales and marketing activity in Tucson. Prior to January 9, 1992,
Monterey Management, Inc. conducted all phases of the home-building activities
from acquiring and developing real estate to the construction and sale of
finished homes. Effective with the incorporation of Monterey Homes Corporation
on January 9, 1992, the responsibility for all marketing and selling activity
was assumed by Monterey Homes Corporation.
The Company currently conducts home building operations solely in the
Phoenix and Tucson, Arizona markets, which is significantly impacted by the
strength of the surrounding real estate market and level of interest rates
offered on home mortgage loans. The Arizona real estate market is currently
experiencing strong growth and current home mortgage interest rates are
favorable for home buyers and sellers. However, a sudden decline in the Arizona
real estate market or an increase in interest rates could have a significant
impact on the Company's operating results and estimates made by management. The
Company utilizes various suppliers and subcontractors and is not dependent on
individual suppliers or subcontractors.
Real Estate Under Development
Real estate under development includes undeveloped land and developed lots,
homes under construction in various stages of completion and completed homes and
is stated at the lower of cost or net realizable value. Costs capitalized
include direct construction costs for homes, development period interest and
certain common costs which benefit the entire subdivision. Cost of sales include
land acquisition and development costs, direct construction costs of the home,
development period interest and closing costs, and an allocation of common
costs. Common costs are allocated on a subdivision by subdivision basis to
residential lots based on the number of lots to be built in the subdivision,
which approximates the relative sales value method. During the years ended
December 31, 1995, 1994 and 1993, the Company incurred interest costs of
$2,243,901, $1,131,880, and $728,274, respectively, of which $2,240,756,
$1,123,251, and $689,334, respectively, was capitalized. Interest paid amounted
to $2,242,956, $915,213 and $588,806 during 1995, 1994 and 1993 respectively.
Deposits paid related to options to purchase land are capitalized and
included in option deposits until the related land is purchased. Upon purchase
of the land, the related option deposits are transferred to real estate under
development.
Preacquisition Costs
Preacquisition costs include architecture, engineering, and feasibility
study costs incurred, as well as earnest money deposits on potential development
projects of the Company. These costs are capitalized until the related project
begins development or a decision is made not to pursue further development of
the project.
F-32
<PAGE> 177
MONTEREY HOMES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Upon commencement of development, the costs are transferred to real estate under
development. If a decision is made not to pursue development of the project, the
costs are expensed in the period in which the decision is made.
Deferred Subordinated Debt Costs
Deferred subordinated debt costs include legal, underwriting, accounting
and other related costs incurred in connection with the $8,000,000 subordinated
debt private placement offering issued on October 17, 1994. The costs are being
amortized on a straight-line basis over the term of the notes which mature
October 15, 2001.
Revenue Recognition
Revenues applicable to homes sold are recognized upon the close of escrow
and transfer of title. The Company requires an initial deposit with the signing
of a sales contract. All deposits are recorded as home sale deposits and, upon
close of escrow and transfer of title, the appropriate amount of revenue is
recorded.
Property and Equipment, Net
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets, which
range from three to five years.
Income Taxes
Monterey Homes Corporation, Monterey Management, Inc., Monterey
Homes -- Tucson Corporation, and Monterey Management -- Tucson, Inc. have
elected to be taxed as S Corporations for federal and state income tax purposes.
As such, the liability for taxes arising from the transactions of the respective
companies is the responsibility of the shareholders and no provision for income
taxes has been made in the accompanying financial statements.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
short-term investments purchased with a maturity of three months or less to be
cash equivalents.
Shareholders' Equity
The Company presents shareholders' equity on a combined basis. Actual
shareholders' equity by combining company is as follows:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Monterey Homes Corporation.................................. $5,197,505 $7,578,236
Monterey Management, Inc.................................... 1,700,028 1,755,363
Monterey Homes -- Tucson Corporation........................ -- (106,115)
Monterey Management -- Tucson, Inc.......................... -- (119,007)
---------- ----------
$6,897,533 $9,108,477
========== ==========
</TABLE>
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the combined financial
statements and the reported amount of revenues and expenses during the reporting
period to prepare
F-33
<PAGE> 178
MONTEREY HOMES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
these financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 Disclosures about Fair
Value of Financial Instruments(Statement 107), requires that a company disclose
the estimated fair values for its financial instruments. Statement 107 defined
the fair value of a financial instrument as the amount at which the instrument
could be exchanged in a current transaction between willing parties.
The carrying amounts of the Company's receivables, cash and cash
equivalents, option deposits, accounts payable, accrued liabilities and home
sale deposits approximate their estimated fair values because of the short
maturity of these assets and liabilities. The carrying amount of the Company's
notes payable approximates fair value because the notes are at interest rates
comparable to market rates based on the nature of the loans, their terms and the
remaining maturity. Considerable judgment is required in interpreting market
data to develop the estimates of fair value. Accordingly, these fair value
estimates are not necessarily indicative of the amounts the Company pay or
receive in actual market transactions.
(2) REAL ESTATE UNDER DEVELOPMENT
The components of real estate under development at December 31 are as
follows:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Homes in production............................... $14,715,223 $21,064,718
Land held for future development.................. 3,202,609 12,864,560
----------- -----------
$17,917,832 $33,929,278
=========== ===========
</TABLE>
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
Computer equipment..................................... $103,424 $147,811
Vehicles............................................... 88,594 88,594
Furniture and equipment................................ 173,126 229,423
-------- --------
- -
365,144 465,828
Less accumulated depreciation.......................... 152,805 221,344
-------- --------
- -
$212,339 $244,484
======== ========
</TABLE>
F-34
<PAGE> 179
MONTEREY HOMES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(4) NOTES PAYABLE
Notes payable consists of the following at December 31:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Various construction notes to banks, original maturities
of less than one year, interest approximating prime
(8.5% at December 31, 1995 and 1994) plus 1% and prime
plus .75%, payable at the earlier of close of escrow or
maturity date, secured by first deeds of trust on land
and personal guarantees of the shareholders and a spouse
of one of the shareholders.............................. 2,211,105 9,032,246
Senior subordinated notes payable to private investment
group, maturing October 15, 2001, annual interest of
13%, payable semi-annually, principal payable at
maturity date, unsecured................................ 8,000,000 8,000,000
Various acquisition and development notes to banks, and
the Arizona State Land Department, maturing on dates
from May 1997 to December 1999, interest ranging from
6 7/8% to prime (8.5% at December 31, 1995 and 1994)
plus 1%, payable at the earlier of funding of
construction financing or maturity date, secured by
first deeds of trust on land and personal guarantees of
the shareholders and a spouse of one of the
shareholders............................................ 1,997,201 7,012,737
Other..................................................... 46,752 270,585
----------- -----------
$12,255,058 $24,315,568
=========== ===========
</TABLE>
A provision of the senior subordinated debt agreement and related bond
indenture requires the Company to file a shelf registration statement for the
debt with the Securities and Exchange Commission by July 31, 1996. If the debt
is not registered by July 31, 1996, the Company will be required to pay
liquidated damages to the note holders in an amount equal to 1% of the
outstanding principal of the notes, which shall be payable at the same time and
manner as interest on such debt.
The principal payment requirements on notes payable at December 31, 1995
are as follows:
<TABLE>
<S> <C>
1996........................................... $ 9,319,726
1997........................................... 6,691,808
1998........................................... 9,969
1999........................................... 294,065
2000 and thereafter............................ 8,000,000
------------
$ 24,315,568
============
</TABLE>
Available unused commitments under lines of credit amounted to
approximately $11,569,000 at December 31, 1995.
(5) LEASES
The Company leases office facilities, model homes and equipment under
various operating lease agreements.
F-35
<PAGE> 180
MONTEREY HOMES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a schedule of approximate future minimum lease payments
for noncancelable operating leases as of December 31, 1995:
<TABLE>
<S> <C>
1996.............................................. $266,059
1997.............................................. 211,084
1998.............................................. 211,366
1999.............................................. 129,437
--------
$817,946
========
</TABLE>
Rental expense was $434,914, $335,805 and $204,919 for the years ended
December 31, 1995, 1994, and 1993, respectively.
On September 1, 1994, the Company entered into a lease agreement to lease
office space from a limited liability company with common ownership interest.
During the year ended December 31, 1995, 1994, and 1993 the Company paid rent to
the related party company of $162,394, $53,244, and $0, respectively.
(6) COMMON STOCK
Prior to 1994, shareholders' equity consisted of one class of common stock
of Monterey Management, Inc. and one class of common stock of Monterey Homes
Corporation. Each share of stock had an interest in the net assets of the
individual company that issued the stock. As of December 31, 1995 and 1994, the
same two shareholders each held the same amount of stock for both companies.
On August 9, 1994, the board of directors of Monterey Homes Corporation
approved an increase in the authorized shares of common stock from 1,000,000 to
10,000,000 and approved a 5,779.16-for-one stock split to shareholders of record
on August 11, 1994. In addition, the board of directors authorized the issuance
of one million shares of preferred stock, none of which is currently issued.
Concurrent with these transactions, the par value of common stock was changed
from $1 per share to no par value. However, the stated value of common shares
was reduced such that there was no impact on the book value of outstanding
common shares.
On August 9, 1994, the board of directors of Monterey Management, Inc.
approved an increase in the authorized shares of common stock from 200,000 to
10,000,000 and approved a 5,812.96-for-one stock split to shareholders of record
on August 11, 1994. In addition, the board of directors authorized the issuance
of one million shares of preferred stock at $.01 par value per share, none of
which is currently issued. Concurrent with these transactions, the stated value
of the common shares was reduced from $4.07 per share to $.0007 per share, such
that there was no effect on the book value of the outstanding common shares.
In connection with the $8,000,000 subordinated debt private placement
memorandum issued on October 11, 1994 by Monterey Management, Inc., 400,000
common stock purchase warrants were issued with each warrant being exercisable
to purchase one common share of Monterey Management, Inc. stock for $6.25 per
share. The warrants have no readily available public market and are exercisable
only upon an initial public offering of Monterey Management, Inc. or its
successor. As of December 31, 1995 management had no intentions to initiate or
complete an initial public offering and no public market existed for such
warrants. As a result no value was given to the common stock purchase warrants
as of December 31, 1995.
F-36
<PAGE> 181
MONTEREY HOMES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(7) RELATED PARTY TRANSACTIONS
A partner in the Monterey at Mountain View Partnership, which was dissolved
in 1994, was also a home-building subcontractor for the Company. The Company
owed this subcontractor a total of $205,885 and $280,213 at December 31, 1994
and 1993, respectively, which is included in accounts and subcontractors
payable.
(8) CONTINGENCIES
The Company is subject to legal proceedings and claims which arise in the
ordinary course of business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position or results of operations of the Company.
F-37
<PAGE> 182
MONTEREY HOMES
COMBINED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER
31, JUNE 30,
1995 1996
----------- -----------
<S> <C> <C>
ASSETS
Real estate under development..................................... $33,929,278 $43,773,571
Receivables....................................................... 790,823 819,650
Cash and cash equivalents......................................... 4,959,930 1,613,274
Option deposits................................................... 1,694,908 972,101
Property and equipment, net....................................... 244,484 225,746
Other assets...................................................... 1,034,661 1,046,145
----------- -----------
Total assets............................................ $42,654,084 $48,450,487
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable................................................ $ 4,589,325 $ 2,956,804
Accrued liabilities............................................. 824,055 495,650
Home sale deposits.............................................. 3,816,659 4,979,754
Notes payable:
Secured construction and A & D notes......................... 16,315,568 24,074,642
Subordinated debt............................................ 8,000,000 8,000,000
----------- -----------
Total liabilities....................................... 33,545,607 40,506,850
----------- -----------
Shareholders' Equity:
Common Stock.................................................... 4,810 4,810
Paid in Capital................................................. 8,517 8,517
Retained Earnings............................................... 9,095,150 7,930,310
----------- -----------
Total shareholders' equity.............................. 9,108,477 7,943,637
----------- -----------
Total liabilities and shareholders' equity.............. $42,654,084 $48,450,487
=========== ===========
</TABLE>
See accompanying notes to unaudited combined financial statements.
F-38
<PAGE> 183
MONTEREY HOMES
COMBINED STATEMENTS OF EARNINGS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Housing revenue.................................................. $31,491,641 $26,444,449
Land sale revenue................................................ 925,000 0
----------- -----------
Total Revenue.......................................... 32,416,641 26,444,449
----------- -----------
Housing cost of sales............................................ 27,318,874 23,050,154
Land cost of sales............................................... 418,980 0
----------- -----------
Total Cost of Sales............................................ 27,737,854 23,050,154
----------- -----------
Gross margin................................................... 4,678,787 3,394,295
----------- -----------
Selling, general and administrative expense...................... 2,737,022 2,205,573
----------- -----------
Operating earnings............................................. 1,941,765 1,188,722
Other income..................................................... 27,393 113,891
----------- -----------
Net earnings........................................... $ 1,969,158 $ 1,302,613
=========== ===========
Net earnings per common share.......................... $ 0.97 $ 0.64
=========== ===========
Weighted average common shares outstanding....................... 2,027,776 2,027,776
=========== ===========
</TABLE>
See accompanying notes to unaudited combined financial statements.
F-39
<PAGE> 184
MONTEREY HOMES
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1995 AND
THE SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
<TABLE>
<S> <C>
Balance at December 31, 1994.................................................. $ 6,897,533
Net earnings................................................................ 6,400,946
Issuance of common stock.................................................... 4,000
Distributions to shareholders............................................... (4,194,000)
----------
Balance at December 31, 1995.................................................. 9,108,479
Net earnings................................................................ 1,969,158
Distributions to shareholders............................................... (3,134,000)
----------
Balance at June 30, 1996...................................................... $ 7,943,637
==========
</TABLE>
See accompanying notes to unaudited combined financial statements.
F-40
<PAGE> 185
MONTEREY HOMES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings.................................................. $ 1,969,158 $ 1,302,613
Adjustments to reconcile net earnings to net cash used in
operating activities:
Depreciation and amortization.............................. 34,420 32,475
Increase in real estate under development.................. (9,844,293) (15,643,585)
Increase in receivables.................................... (28,827) (375,491)
(Increase) decrease in option deposits..................... 722,807 (674,914)
(Increase) decrease in other assets........................ (11,486) 534,608
Decrease in accounts payable............................... (1,632,521) (92,647)
Decrease in accrued liabilities............................ (328,405) (163,514)
Increase in home sale deposits............................. 1,163,095 1,270,940
------------ -----------
Net cash used in operating activities...................... (7,956,052) (13,809,515)
------------ -----------
Cash flows from investing activities:
Purchases of property and equipment........................... (15,678) (49,650)
------------ -----------
Net cash used by investing activities................. (15,678) (49,650)
------------ -----------
Cash flows from financing activities:
Borrowings.................................................... 24,210,441 16,137,339
Repayment of borrowings....................................... (16,451,367) (5,915,340)
Distributions to shareholders................................. (3,134,000) (3,194,000)
------------ -----------
Net cash provided by financing activities.................. 4,625,074 7,027,999
------------ -----------
Net decrease in cash and cash equivalents....................... (3,346,656) (6,831,166)
Cash and cash equivalents at beginning of period................ 4,959,930 7,398,414
------------ -----------
Cash and cash equivalents at end of period...................... $ 1,613,274 $ 567,248
============ ===========
</TABLE>
See accompanying notes to unaudited combined financial statements.
F-41
<PAGE> 186
MONTEREY HOMES
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The interim combined financial statements include the accounts of Monterey
Homes Corporation (MHC), Monterey Management, Inc. (MMI), Monterey
Homes -- Tucson Corporation (MH-TC), and Monterey Management -- Tucson, Inc.
(MM-TI) (collectively, the "Company"), which are subject to common ownership.
All material balances and transactions between the combined entities have been
eliminated.
The Company began operations during 1985 with MMI conducting all phases of
the home-building activities from acquiring and developing real estate to the
construction and sale of finished homes. Effective with the incorporation of MHC
on January 9, 1992, the responsibility for all marketing and selling activity
was assumed by MHC. In June 1995, the Company began operations in Tucson,
Arizona. MM-TI was incorporated June 1, 1995 for the purpose of performing all
construction and development activity in Tucson. MH-TC was incorporated June 1,
1995 for the purpose of performing all sales and marketing activity in Tucson.
The Company currently conducts home building operations solely in the
Phoenix and Tucson, Arizona markets, which is significantly impacted by the
strength of the surrounding real estate market and level of interest rates
offered on home mortgage loans. The Arizona real estate market is currently
experiencing strong growth and current home mortgage interest rates are
favorable for home buyers and sellers. However, a sudden decline in Arizona real
estate market or an increase in interest rates could have a significant impact
on the Company's operating results and estimates made by management. The Company
utilizes various suppliers and subcontractors and is not dependent on individual
suppliers or subcontractors.
In the opinion of management, the unaudited interim data reflects all
adjustments, consisting only of normal adjustments, necessary to fairly present
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.
Real Estate Under Development
Real estate under development includes undeveloped land and developed lots,
homes under construction in various stages of completion and completed homes and
is stated at historical cost unless expected future net cash flow (undiscounted
and without interest charges) are less than such cost; in which case, the
inventories would be written down to estimated fair value less costs to sell.
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standard No. 121, which had no material impact on the financial statements.
Costs capitalized include direct construction costs for homes, development
period interest and certain common costs which benefit the entire subdivision.
Cost of sales include land acquisition and development costs, direct
construction costs of the home, development period interest and closing costs,
and an allocation of common costs. Common costs are allocated on a subdivision
by subdivision basis to residential lots based on the number of lots to be built
in the subdivision, which approximates the relative sales value method. During
the six months ended June 30, 1995 and 1996, the Company incurred interest costs
of $728,000 and $1,595,000, respectively, of which approximately $725,000 and
$1,568,000, respectively, was capitalized. Capitalized interest expensed through
cost of sales was approximately $761,000 and $960,000 for the six months ended
June 30, 1995 and 1996, respectively. Interest paid amounted to approximately
$719,000 and $1,596,000 during the six months ended June 30, 1995 and 1996,
respectively.
F-42
<PAGE> 187
MONTEREY HOMES
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Deposits paid related to options to purchase land are capitalized and
included in option deposits until the related land is purchased. Upon purchase
of the land, the related option deposits are transferred to real estate under
development.
Deferred Subordinated Debt Costs
Deferred subordinated debt costs include legal, underwriting, accounting
and other related costs incurred in connection with the $8,000,000 subordinated
debt private placement offering issued on October 17, 1994. The costs are being
amortized on a straight line basis over the term of the notes which mature
October 15, 2001.
Revenue Recognition
Revenues applicable to homes sold are recognized upon the close of escrow
and transfer of title. The Company requires an initial deposit with the signing
of a sales contract. All deposits are recorded as home sales deposits and, upon
close of escrow and transfer of title, the appropriate amount of revenue is
recorded.
Property and Equipment, Net
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets, which
range from three to five years.
Income Taxes
The Company has elected to be taxed as an S Corporation for federal and
state income tax purposes. As such, the liability for taxes arising from the
transactions of the combined entities is the responsibility of the shareholders
and no provision for income taxes as been made in the accompanying financial
statements.
Cash and Cash Equivalents
For purposes of the combined statements of cash flows, the Company
considers all short-term investments purchased with a maturity of three months
or less to be cash equivalents.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the combined financial
statements and the reported amount of revenues and expenses during the reporting
period to prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from those
estimates.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 Disclosures about Fair
Value of Financial Instruments (Statement 107), requires that a company disclose
the estimated fair values for its financial instruments. Statement 107 defines
the fair value of a financial instrument as the amount at which the instrument
could be exchanged in a current transaction between willing parties.
The carrying amounts of the Company's receivables, cash and cash
equivalents, option deposits, accounts payable, accrued liabilities and home
sale deposits approximate their estimated fair values because of the short
maturity of these assets and liabilities. The carrying amount of the Company's
notes payable approximates fair value because the notes are at interest rates
comparable to market rates based on the nature of the loans, their terms and the
remaining maturity. Considerable judgment is required in interpreting market
data to develop
F-43
<PAGE> 188
MONTEREY HOMES
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the estimates of fair value. Accordingly, these fair value estimates are not
necessarily indicative of the amounts the Company pay or receive in actual
market transactions.
Reclassifications
Certain December 31, 1995 amounts have been reclassified to conform with
the June 30, 1996 financial statement presentation.
(2) REAL ESTATE UNDER DEVELOPMENT
The components of real estate under development at December 31, 1995 and
June 30, 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
----------- -----------
<S> <C> <C>
Homes in production....................................... $21,064,718 $25,034,619
Land held for future development.......................... 12,864,560 18,738,952
----------- -----------
$33,929,278 $43,773,571
=========== ===========
</TABLE>
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1995 and
June 30, 1996:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
----------- --------
<S> <C> <C>
Computer equipment............................................. $147,811 $165,139
Vehicles....................................................... 88,594 37,794
Furniture and equipment........................................ 229,423 252,907
-------- --------
- -
465,828 455,840
Less accumulated depreciation.................................. 221,343 230,094
-------- --------
- -
$244,485 $225,746
======== ========
</TABLE>
F-44
<PAGE> 189
MONTEREY HOMES
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(4) NOTES PAYABLE
Notes payable consist of the following at December 31, 1995 and June 30,
1996:
<TABLE>
<CAPTION>
DECEMBER
31, JUNE 30,
1995 1996
----------- -----------
<S> <C> <C>
Various construction notes to banks, original maturities of
less than one year, interest approximating prime (8.5% at
December 31, 1995 and 8.25% at June 30, 1996) plus .5% to
1.0%, payable at the earlier of close of escrow or
maturity date, secured by first deeds of trust on land and
personal guarantees of the shareholders and a spouse of
one of the shareholders................................... $ 9,032,246 $12,609,072
Various acquisition and development notes to banks maturing
on dates from May 1997 to December 1999, interest ranging
from prime (8.5% at December 31, 1995 and 8.25% at June
30, 1996) plus .5% to 1%, payable at the earlier of
funding of construction financing or maturity date,
secured by first deeds of trust on land and personal
guarantees of the shareholders and a spouse of one of the
shareholders.............................................. 7,012,737 11,356,742
Senior subordinated notes payable to private investment
group, maturing October 15, 2001, annual interest of 13%,
payable semi-annually, principal payable at maturity date,
unsecured................................................. 8,000,000 8,000,000
Other....................................................... 270,585 108,828
----------- -----------
$24,315,568 $32,074,642
=========== ===========
</TABLE>
The principal payment requirements on notes payable as of June 30, 1996 are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------------------------------------------
<S> <C>
1996............................................ $12,717,900
1997............................................ 7,367,220
1998............................................ 3,989,522
1999............................................ --
2000 and thereafter............................. 8,000,000
-----------
$32,074,642
===========
</TABLE>
A provision of the senior subordinated debt agreement and related bond
indenture required the Company to file a shelf registration statement with the
Securities and Exchange Commission by July 31, 1996. If the debt is not
registered by July 31, 1996, the Company may be required to pay liquidated
damages to the note holders in amount equal to 1% of the outstanding principal
of the notes, which shall be payable at the same time and manner as interest on
the notes.
Additionally, during the six months ended June 30, 1996, management of the
Company determined that certain defaults of the senior subordinated bond
indenture may exist relating to excessive distributions made to the shareholders
of the Company, intercompany loans made by MMI and MHC to MM-TC and MH-TC and
other matters relating to certain interpretations of the bond indenture
requirements. In addition, these defaults may have cross-defaulted substantially
all of the Company's other outstanding indebtedness, which could result in the
acceleration of such indebtedness. Subsequent to June 30, 1996 the Company
received a waiver of
F-45
<PAGE> 190
MONTEREY HOMES
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the liquidated damages and defaults from the note holders of the senior
subordinated notes through the issuance of a consent solicitation statement.
Available unused commitments under lines of credit, after the receipt of
waiver of defaults, amounted to approximately $24,509,719 at June 30, 1996.
(5) LEASES
The Company leases office facilities, model homes and equipment under
various operating lease agreements.
The following is a schedule of approximate future minimum lease payments
for noncancellable operating leases as of June 30, 1996:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C> <C>
1996............................................... $194,266
1997............................................... 233,832
1998............................................... 210,256
1999............................................... 145,048
--------
$783,402
========
</TABLE>
Rental expense was $81,174 and $94,665 for the six months ended June 30,
1995 and 1996, respectively.
The Company leases office space from a limited liability company with
common ownership interest. During the six months ended June 30, 1995 and 1996,
the Company paid rent to the related party of $81,966 and $83,859, respectively.
(6) COMMON STOCK
Prior to 1994, shareholders' equity consisted of one class of common stock
of MMI and one class of common stock of MHC. Each share of stock had an interest
in the net assets of the individual company that issued the stock.
On August 9, 1994, the board of directors of MHC approved an increase in
the authorized shares of common stock from 1,000,000 to 10,000,000 and approved
a 5,779.16-for-one stock split to shareholders of record on August 11, 1994. In
addition, the board of directors authorized the issuance of one million shares
of preferred stock, none of which is currently issued. Concurrent with these
transactions, the par value of common stock was changed from $1 per share to no
par value. However, the stated value of common shares was reduced such that
there was no impact on the book value of outstanding common shares.
On August 9, 1994, the board of directors of MMI approved an increase in
the authorized shares of common stock from 200,000 to 10,000,000 and approved a
5,812.96-for-one stock split to shareholders of record on August 11, 1994. In
addition, the board of directors authorized the issuance of one million shares
of preferred stock at $.01 par value per share, none of which is currently
issued. Concurrent with these transactions, the stated value of the common
shares was reduced from $4.07 per share to $.0007 per share, such that there was
no effect on the book value of the outstanding common shares.
Shareholders' equity of MH-TC and MM-TI each consist of one class of common
stock with 1,000,000 shares authorized and 2,000 shares issued at $1 par value.
As of December 31, 1995 and June 30, 1996, the same two shareholders each held
equal amounts of stock for each company.
In connection with the $8,000,000 subordinated debt private placement
memorandum issued on October 11, 1994 by MMI, 400,000 common stock purchase
warrants were issued with each warrant being
F-46
<PAGE> 191
MONTEREY HOMES
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
exercisable to purchase one common share of MMI stock for $6.25 per share. The
warrants have no readily available public market and are exercisable only upon
an initial public offering of MMI or its successor. As of June 30, 1996,
virtually no value has been given to the common stock purchase warrants because
no current public market exists for such warrants.
(7) CONTINGENCIES
The Company is subject to legal proceedings and claims which arise in the
ordinary course of business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position or results of operations of the Company.
(8) SUBSEQUENT EVENTS
On September 13, 1996, the Company entered into an Agreement and Plan of
Reorganization (the "Merger Agreement") pursuant to which the Company agreed to
merge with and into Homeplex Mortgage Investments Corporation ("HPX"), a
publicly traded real estate investment trust. Upon consummation of the merger,
the operations of the Company would continue and the Company shareholders would
enter into employment agreements with the merged entity. Additionally, the
on-going operations of the merged entity would be managed by the Company's
current management.
The Merger Agreement calls, among other things, for the Company's
shareholders to receive distributions out of the Company's equity at an amount
such that the remaining equity value of the Company would equal $2,500,000, as
adjusted for certain related costs, immediately prior to the consummation of the
merger. The Company's shareholders and warrantholders would then receive a
number of HPX common shares equal to three times the value of the Company's book
equity divided by the average recent trading value of the HPX common stock. The
16.5% of total shares that are issuable to the Company's warrantholders are to
be released upon exercise of such warrants, with all proceeds allocated to the
Company's shareholders. Additionally, another 131,840 shares of HPX common stock
will be issued to the Company's warrantholders upon exercise of the warrants.
The Company's shareholders may also receive an additional 668,160 shares of HPX
common stock, subject to (a) certain stock price objectives being met during the
five years following the merger and (b) the continued employment of the
Company's shareholders at the time of issuance. Also, the Company's shareholders
would receive stock options for an additional 1,000,000 shares of HPX common
stock which vest over three years.
The merger is subject to approval by the HPX shareholders.
In August 1996, the Company entered into a $7,500,000 unsecured credit
facility with one of its principal lenders. The proceeds from this credit
facility, along with available working capital, were used to make a $9,500,000
distribution to its shareholders in September 1996, prior to entering into the
Merger Agreement.
F-47
<PAGE> 192
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
<PAGE> 193
AGREEMENT AND
PLAN OF REORGANIZATION
DATED AS OF
SEPTEMBER 13, 1996
BY
AND
AMONG
HOMEPLEX MORTGAGE
INVESTMENTS CORPORATION,
MONTEREY HOMES CONSTRUCTION II, INC.,
MONTEREY HOMES ARIZONA II, INC.,
AND
THE SHAREHOLDERS OF MONTEREY
<PAGE> 194
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C> <C>
I. THE MERGER.........................................................................
1.1 Merger.......................................................................
1.2 Effect of the Merger.........................................................
1.3 Status and Conversion of Securities..........................................
(a) Conversion of Monterey Common Stock into HPX Common Stock..............
(b) Merger Consideration...................................................
(c) Substitution of HPX Common Stock with Cash.............................
(d) Indemnification Fund...................................................
(e) Warrants...............................................................
(f) Contingent Stock.......................................................
(g) Fractional Shares......................................................
(h) Exchange of Certificates...............................................
(i) Reverse Stock Split....................................................
1.4 HPX to Make Shares Available.................................................
1.5 Further Documents............................................................
1.6 Effective Date...............................................................
1.7 Closing of Transfer Books....................................................
II. SHAREHOLDER APPROVAL; PROXY AND REGISTRATION FILINGS...............................
2.1 Shareholder Approval.........................................................
2.2 Proxy and Registration Statements............................................
(a) Preparation of Proxy Statement.........................................
(b) Information Respecting HPX.............................................
(c) Information Respecting Monterey........................................
(d) Preparation of Registration Statement..................................
(e) Amendments to Proxy Statement and Registration Statement...............
III. REPRESENTATIONS AND WARRANTIES.....................................................
3.1 Representations and Warranties of Monterey...................................
(a) Due Incorporation, Good Standing and Qualification.....................
(b) Corporate Authority....................................................
(c) Capitalization.........................................................
(d) Options, Warrants and Rights...........................................
(e) Subsidiaries...........................................................
(f) Financial Statements...................................................
(g) No Material Change.....................................................
(h) Title to Properties; Home Inventory....................................
(i) Litigation.............................................................
(j) Intellectual Property Rights and Licenses..............................
(k) No Violation; Valid Consents...........................................
(l) Taxes..................................................................
(m) Contracts..............................................................
(n) Permits; Compliance with Law and Other Regulations.....................
(o) Insurance..............................................................
(p) Minute Books...........................................................
(q) Employees..............................................................
(r) Accuracy of Statements.................................................
(s) Agreements with Affiliates.............................................
(t) Environmental Matters..................................................
</TABLE>
TABLE OF CONTENTS
i
<PAGE> 195
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C> <C>
(u) Intent of Shareholders.................................................
(v) No Intent to Evade Tax Code............................................
(w) Ownership of HPX Common Stock after the Merger.........................
(x) Options to Acquire HPX Common Stock....................................
3.2 Representations and Warranties of HPX........................................
(a) Due Incorporation, Good Standing and Qualification.....................
(b) Corporate Authority....................................................
(c) Capitalization.........................................................
(d) Options, Warrants and Rights...........................................
(e) Subsidiaries...........................................................
(f) Financial Statements...................................................
(g) No Material Change.....................................................
(h) Title to Properties....................................................
(i) Litigation.............................................................
(j) Intellectual Property Rights and Licenses..............................
(k) No Violation...........................................................
(l) Taxes..................................................................
(m) Contracts..............................................................
(n) Permits; Compliance with Law and Other Regulations.....................
(o) Insurance..............................................................
(p) Minute Books...........................................................
(q) Employees..............................................................
(r) SEC Reports............................................................
(s) Accuracy of Statements.................................................
(t) Status of HPX Common Stock to be Issued................................
(u) Recommendation of HPX Board of Directors...............................
(v) Agreements with Affiliates.............................................
(w) Environmental Matters..................................................
(x) Certain Income Tax Matters.............................................
IV. COVENANTS..........................................................................
4.1 Covenants of Monterey........................................................
(a) Preservation of Business...............................................
(b) Ordinary Course........................................................
(c) Books and Records......................................................
(d) No Organic Change......................................................
(e) No Issuance of Shares, Options, or Other Securities....................
(f) Compensation...........................................................
(g) Dividends and Distributions............................................
(h) Consents and Approvals.................................................
(i) Distributions..........................................................
4.2 Covenants of HPX 24..........................................................
(a) Preservation of Business...............................................
(b) Ordinary Course........................................................
(c) Books and Records......................................................
(d) No Organic Change......................................................
(e) No Issuance of Shares, Options or Other Securities.....................
(f) Compensation...........................................................
(g) Dividends..............................................................
(h) Consents and Approvals.................................................
</TABLE>
TABLE OF CONTENTS
ii
<PAGE> 196
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C> <C>
(i) Board of Directors.....................................................
4.3 Additional Covenants of HPX..................................................
(a) Director Compensation..................................................
(b) Transactions with Affiliates...........................................
(c) Loans..................................................................
(d) Share Repurchases......................................................
(e) Independent Directors..................................................
(f) Registration of HPX Common Stock.......................................
(g) Residuals..............................................................
4.4 Officers' and Directors' Indemnification.....................................
4.5 Cooperation..................................................................
4.6 No Solicitation..............................................................
4.7 Reasonable Efforts; Access...................................................
4.8 Public Announcements.........................................................
V. CONDITIONS PRECEDENT TO OBLIGATIONS................................................
5.1 Conditions Precedent to the Obligations of HPX...............................
(a) Accuracy of Representations and Warranties.............................
(b) Performance of Agreements; Monterey Transactions; Consents.............
(c) Shareholder Approval...................................................
(d) Opinion of Counsel for Monterey........................................
(e) No Material Adverse Change.............................................
(f) Litigation.............................................................
(g) Hart-Scott-Rodino Act..................................................
(h) Opinion from Investment Banker.........................................
(i) Tax Opinion............................................................
(j) Employment Agreements..................................................
(k) Registration Rights Agreements.........................................
(l) Warrants and Contingent Stock Agreement................................
(m) Certificates...........................................................
(n) Proceedings Satisfactory to Counsel....................................
5.2 Conditions Precedent to the Obligations of Monterey..........................
(a) Accuracy of Representations and Warranties.............................
(b) Performance of Agreements; Consents....................................
(c) Opinion of Counsel for HPX.............................................
(d) No Material Adverse Change.............................................
(e) Litigation.............................................................
(f) Registration Under Securities Act of 1933 and Listing on Stock
Exchange...............................................................
(g) Hart-Scott-Rodino Act..................................................
(h) HPX Shareholder Approval...............................................
(i) Employment Agreements..................................................
(j) Registration Rights Agreements.........................................
(k) Warrants and Contingent Stock Agreement................................
(l) Resignations and Elections.............................................
(m) Tax Opinion............................................................
(n) Distributions..........................................................
(o) Certificates...........................................................
(p) Proceedings Satisfactory to Counsel....................................
(q) Change of Control Payments.............................................
(r) HPX Guaranty and Assumption............................................
</TABLE>
TABLE OF CONTENTS
iii
<PAGE> 197
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
VI. WAIVER, MODIFICATION, TERMINATION..................................................
6.1 Waivers......................................................................
6.2 Modification.................................................................
6.3 Termination..................................................................
6.4 Effect of Termination........................................................
6.5 Fees and Expenses............................................................
VII. INDEMNIFICATION....................................................................
7.1 Indemnification of HPX Interests.............................................
7.2 Indemnification of the Monterey Shareholder's Interests......................
7.3 HPX Committee................................................................
7.4 Notice.......................................................................
7.5 Indemnification Fund.........................................................
7.6 Procedures...................................................................
7.7 Arbitration..................................................................
7.8 Limitations on Indemnification...............................................
VIII. GENERAL............................................................................
8.1 No Brokers or Finders........................................................
8.2 Controlling Law..............................................................
8.3 Notices......................................................................
8.4 Binding Nature of Agreement; No Assignment...................................
8.5 Entire Agreement.............................................................
8.6 Paragraph Headings...........................................................
8.7 Gender.......................................................................
8.8 Survival of Representations and Warranties...................................
8.9 Certain Definitions..........................................................
</TABLE>
INDEX TO ANNEXES
Annex A Opinion of Monterey Counsel
Annex B Opinion of HPX Counsel
INDEX TO EXHIBITS
Exhibit A Articles of Merger of HPX and Monterey
Exhibit B Form of Employment Agreement
Exhibit C Form of Registration Rights Agreement
Exhibit D Form of Escrow and Contingent Stock Agreement
Exhibit E Form of HPX Guaranty
Exhibit F Form of Warrant Assumption Agreement
TABLE OF CONTENTS
iv
<PAGE> 198
INDEX TO SCHEDULES
<TABLE>
<S> <C>
Monterey Schedules
Schedule 3.1(a) Due Incorporation, Good Standing and Qualification
Schedule 3.1(d) Options, Warrants and Rights
Schedule 3.1(e) Subsidiaries
Schedule 3.1(f) Material Liabilities
Schedule 3.1(g) Material Changes
Schedule 3.1(h) Title to Properties; Home Inventory
Schedule 3.1(k) No Violation; Valid Consents
Schedule 3.1(l) Taxes
Schedule 3.1(m) Contracts
Schedule 3.1(q) Employees
Schedule 3.1(s) Agreement with Affiliates
Schedule 3.1(t) Environmental Matters
Schedule 3.1(w) Ownership of HPX Common Stock
Schedule 4.1(b) Ordinary Course
Schedule 4.1(d) No Organic Change
Schedule 4.1(e) No Issuance of Shares, Options or Other Securities
Schedule 4.1(f) Compensation
Schedule 4.1(i) Distributions
Schedule 8.1 Broker's Fees
HPX Schedules
Schedule 3.2(a) Due Incorporation, Good Standing and Qualification
Schedule 3.2(d) Options, Warrants and Rights
Schedule 3.2(e) Subsidiaries
Schedule 3.2(m) Contracts
Schedule 3.2(q) Employees
Schedule 4.2(f) Compensation
Schedule 8.1 Broker's Fees
</TABLE>
v
<PAGE> 199
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION is dated as of September 13,
1996, by and among Homeplex Mortgage Investments Corporation, a Maryland
corporation ("HPX"), Monterey Homes Construction II, Inc., an Arizona
corporation ("MHC II"), Monterey Homes Arizona II, Inc., an Arizona corporation
("MHA II," together with MHC II individually a "Monterey Company" and
collectively "Monterey"), and the shareholders of Monterey listed on the
signature pages hereto (collectively, the "Monterey Shareholders").
WHEREAS, prior to the date hereof, Monterey Homes Corporation, an Arizona
corporation ("MHC") and Monterey Management, Inc., an Arizona corporation
("MMI"), were merged with and into MHC II and MHA II, respectively (the
"Monterey Mergers") (the term "Monterey" shall include MHC and MMI before the
Monterey Mergers);
WHEREAS, prior to the Effective Date, each of MHC II and MHA II shall form
a wholly-owned subsidiary ("Newco I" and "Newco II") to which MHC II and MHA II
shall transfer and convey substantially all of its respective assets and
liabilities (the "Monterey Drop Down") (the Monterey Mergers and the Monterey
Drop Down are herein collectively referred to as the "Monterey Transactions");
WHEREAS, the parties hereto desire that after the consummation of the
Monterey Transactions each of MHC II and MHA II be merged with and into HPX upon
the terms and conditions of this Agreement.
NOW, THEREFORE, the parties hereto hereby approve and adopt this Agreement
as a Plan of Reorganization and do mutually covenant and agree as follows:
I. THE MERGER
1.1 MERGER. On the Effective Date (as that term is hereinafter defined),
each of MHC II and MHA II (individually a "Monterey Merging Company") shall be
merged with and into HPX, which will be the surviving corporation of the merger,
pursuant to the Articles of Merger attached as Exhibit A hereto (collectively,
the "Merger").
1.2 EFFECT OF THE MERGER. On the Effective Date:
(a) HPX as surviving corporation of the Merger shall change its name
to "Monterey Homes Corporation;"
(b) the Articles of Incorporation of HPX, as in effect immediately
prior to the Effective Date, except as amended by the Articles of Merger
attached as Exhibit A hereto, shall be the Articles of Incorporation of HPX
as the surviving corporation of the Merger until thereafter amended; and
(c) the bylaws of HPX, as in effect immediately prior to the Effective
Date, shall be the bylaws of HPX as the surviving corporation of the Merger
until thereafter amended. Subject to the foregoing, the additional effects
of the Merger shall be as provided in the applicable provisions of the
Maryland Corporations and Associations Code (the "MCAC") and the Arizona
Business Corporation Act ("ABCA").
1.3 STATUS AND CONVERSION OF SECURITIES.
(a) CONVERSION OF MONTEREY COMMON STOCK INTO HPX COMMON STOCK. On the
Effective Date, each share of common stock of each Monterey Merging Company
(collectively the "Monterey Common Stock") issued and outstanding on the
Effective Date, by reason of the Merger and without any action on the part of
the holders thereof, shall be converted into the Merger Consideration Per Share
(as defined below), except that any shares of Monterey Common Stock owned by HPX
or held in the treasury of a Monterey Merging Company shall be cancelled and all
rights in respect thereof shall cease to exist and no Merger Consideration or
other property shall be issued in respect thereof.
(b) MERGER CONSIDERATION. The term "Merger Consideration Per Share" shall
mean for each Monterey Merging Company the Merger Consideration divided by the
number of issued and outstanding shares of
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common stock of such Monterey Merging Company at the Effective Date. The term
"Merger Consideration" shall mean for each Monterey Merging Company (i) a number
of shares of common stock of HPX ("HPX Common Stock") equal to (x) the book
value of such Monterey Merging Company as of the Effective Date as determined in
accordance with generally accepted accounting principles ("GAAP") consistent
with those used in connection with Monterey's financial statements referred to
in Section 3.1(f) (but reflecting adjustments for warranty reserve, overhead
absorption, amortization of capitalized debt costs and deferred bonus as agreed
to by the parties prior to the date hereof) and certified by the President and
Chief Financial Officer of Monterey (a "Monterey Merging Company Book Value")
multiplied by (y) a factor of 3.0 and divided by (z) the fully diluted book
value (after giving effect to any outstanding stock options, whether vested or
not, which dilute book value (after consideration of any amounts accrued for the
related dividend equivalent rights)) per share of HPX Common Stock (the "HPX
Book Value") as of the Effective Date as determined in accordance with GAAP in a
manner consistent with those used in connection with the HPX's financial
statements referred to in Section 3.2(f) and certified by the Chief Executive
Officer and Chief Financial Officer of HPX; provided, however, in the event the
sum of the Monterey Merging Companies Book Values used in clause (x) as
initially determined by Monterey and subsequently verified by KPMG Peat Marwick
LLP shall be less than $2,500,000, the Monterey Shareholders shall contribute
cash to the Monterey Companies in the amount of such shortfall, and if such sum
shall be more than $2,500,000, the Monterey Companies shall distribute such
excess in cash to the Monterey Shareholders, and (ii) a pro rata number of
shares of Contingent Stock to be released at the times and subject to the terms
set forth in Section 1.3(f)). As soon as practicable, Ernst & Young LLP shall
certify to the HPX Book Value as of the Effective Date. In the event that the
HPX Book Value as determined by its independent auditors varies from the
determination made by HPX, the Merger Consideration shall be increased or
decreased, as the case may be, by the total amount of such difference (an
"Adjustment Amount"). If the Adjustment Amount increases the amount of Merger
Consideration, HPX shall pay in HPX Common Stock (valued at the HPX Book Value)
the Adjustment Amount within five business days after the Adjustment Amount is
determined to the Monterey Shareholders. If the Adjustment Amount decreases the
amount of Merger Consideration, the Monterey Shareholders shall remit to HPX
within five business days after the Adjustment Amount is determined an amount in
HPX Common Stock (valued at the HPX Book Value) equal to the Adjustment Amount.
Notwithstanding the foregoing, for the purposes of computing the Book Values of
each Monterey Merging Company and HPX to be used in the above calculations, all
direct expenses related to the Merger are to be treated as if they have been
capitalized. Such direct merger expenses are expected to include, among other
things, fees payable to accountants and attorneys, filing, printing and mailing
costs of the Proxy and Registration Statement, Hart-Scott-Rodino fees and the
fees referred to in Schedule 8.1.
(c) SUBSTITUTION OF HPX COMMON STOCK WITH CASH. HPX shall have the right to
substitute an amount of cash equal to the HPX Book Value, as determined above,
for as many shares of HPX Common Stock to be issued to the Monterey
Shareholders, as HPX determines, in its reasonable discretion, to be necessary
to preserve the net operating loss carryovers, capital loss carryovers and
built-in losses to which HPX is entitled pursuant to the Internal Revenue Code
of 1986, as amended (the "Code") and the regulations thereunder (taking into
account the HPX Common Stock to be issued in the Merger and all options
previously outstanding and to be issued in connection with the Merger) upon
written notice to Monterey; provided, however, that the maximum amount of cash
that can be substituted by HPX hereunder shall be an amount equal to the HPX
Book Value times 200,000. Any substitution shall be made, as nearly as
practicable, on a pro rata basis.
(d) INDEMNIFICATION FUND. HPX shall initially retain from the Merger
Consideration, in the same proportion as the Merger Consideration is to be
delivered to the Monterey Shareholders pursuant to Section 1.3(b), as security
for the indemnification obligations under Article VII, a number of shares of HPX
Common Stock issued in the names of the Monterey Shareholders equal to $500,000
divided by the average closing price for the last five trading days of HPX
Common Stock (the "Trading Average") ending with the Effective Date (the
"Indemnification Fund"). Every six months thereafter, the Indemnification Fund
shall be valued at the Trading Average ending with the last day of each
six-month period, with the Monterey Shareholders delivering additional shares of
HPX Common Stock or receiving back excess shares of HPX Common Stock to maintain
such $500,000 level less any amount previously applied to a Loss (as defined in
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Section 7.1) as of the end of each period. The Monterey Shareholders may at any
time deposit cash with HPX to replace all or a portion of the shares of HPX
Common Stock retained by HPX hereunder as all or part of the Indemnification
Fund. If shares of HPX Common Stock are applied to the Monterey Shareholders'
indemnification obligation, such shares shall be valued as of the immediately
preceding valuation date. To the extent not applied to or reserved for such
indemnification obligations as provided under Article VII, HPX will release the
Indemnification Fund in the same proportion as the Merger Consideration was
delivered to the Monterey Shareholders pursuant to Section 1.3(b) on the second
anniversary of the Effective Date. The Monterey Shareholders shall be entitled
to vote the shares of HPX Common Stock held in the Indemnification Fund.
(e) WARRANTS. HPX shall also retain from the Merger Consideration in escrow
16.48% of the shares of HPX Common Stock (the "Warrant Stock") issued in the
names of the Monterey Shareholders pursuant to Section 1.3(b)(i) for delivery
upon the exercise or expiration of warrants to purchase the common stock of MHA
II (the "Warrants"), by the holders of the Warrants (the "Warrantholders"). The
retention and disbursement of the Warrant Stock (and the exercise proceeds, if
any) by HPX shall be governed by a mutually satisfactory agreement among the
parties hereto.
(f) CONTINGENT STOCK. In addition, HPX shall be obligated to issue up to an
aggregate of 800,000 shares of HPX Common Stock (the "Contingent Stock")
pursuant to a mutually satisfactory agreement among the parties hereto. Pursuant
to such agreement, 131,840 shares of the Contingent Stock shall be reserved for
issuance upon the exercise of the Warrants held by the Warrantholders (the
"Contingent Warrant Stock"). Upon the exercise of a Warrant, the Warrantholder
shall receive the number of Shares of Contingent Warrant Stock allocable on a
pro rata basis to the Warrant exercised. To the extent any Warrants remain
unexercised and expire, any remaining shares of Contingent Warrant Stock shall
be issued and released to the Monterey Shareholders. The agreement will provide
that the Contingent Stock (other than the Contingent Warrant Stock) shall be
issued and released pro rata to each Monterey Shareholder if the price of HPX
Common Stock reaches certain levels (as described below) during the five year
period following the Effective Date, and if, at the time of such release, such
Monterey Shareholder is still employed with HPX pursuant to his Employment
Agreement, a form of which is attached hereto as Exhibit B, or such Monterey
Shareholder has been terminated without Cause (as defined in such Employment
Agreement). The agreement will provide that the Contingent Stock (other than the
Contingent Warrant Stock) shall be issued and released as follows: (i) if the
closing price of the HPX common stock on the New York Stock Exchange (the "HPX
Stock Price") averages $1.75 for twenty consecutive trading days at any time
during the five year period following the Effective Date, then 134,828 shares of
Contingent Stock will be released as soon as practicable but only after the
first anniversary of the Effective Date; (ii) if the HPX Stock Price averages
$2.50 for twenty consecutive trading days at any time during the five year
period following the Effective Date, then an additional 266,666 shares of
Contingent Stock will be released as soon as practicable but only after the
second anniversary of the Effective Date; and (iii) if the HPX Stock Price
averages $3.50 for twenty consecutive trading days at any time during the five
year period following the Effective Date, then the remaining 266,666 shares of
Contingent Stock will be released as soon as practicable but only after the
third anniversary of the Effective Date. To illustrate the above, assume that
the Effective Date is December 31, 1996 and that the Monterey Shareholders
continue their employment through all the release dates mentioned below. If the
HPX Stock Price averages $1.75 for twenty consecutive trading days during the
first quarter of 1997, 134,828 shares of Contingent Stock will be released to
the Monterey Shareholders on January 1, 1998. If, instead, the HPX Stock Price
first averages $1.75 for twenty consecutive trading days on June 30, 1999,
134,828 shares of the Contingent Stock will be released on that date or as soon
thereafter as is practicable. If the HPX Stock Price averages $3.50 for twenty
consecutive trading days in the first quarter of 1997, then 134,828 shares of
Contingent Stock will be released on January 1, 1998, 266,666 shares of
Contingent Stock will be released on January 1, 1999, and the remaining 266,666
shares of Contingent Stock will be released on January 1, 2000.
(g) FRACTIONAL SHARES. Certificates for fractional shares of HPX Common
Stock shall not be issued. The total number of shares of HPX Common Stock that
the Monterey Shareholders shall have a right to receive under this Agreement
will be rounded up to the nearest whole share of HPX Common Stock.
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(h) EXCHANGE OF CERTIFICATES. After the Effective Date, each holder, other
than HPX, of an outstanding certificate or certificates theretofore representing
shares of Monterey Common Stock (the "Monterey Stock Certificates"), upon
surrender thereof, together with such supporting documentation as HPX shall
reasonably require, to such bank, trust company or other person, including HPX,
as shall be designated by HPX (the "Exchange Agent"), shall be entitled to
receive in exchange therefor a certificate or certificates representing the
appropriate number of whole shares of HPX Common Stock into which the shares of
Monterey Common Stock theretofore represented by such surrendered certificate or
certificates shall have been converted. Until so surrendered, each outstanding
certificate theretofore representing shares of Monterey Common Stock shall be
deemed for all purposes, other than the payment of dividends or other
distributions, if any, in respect of HPX Common Stock to represent the number of
whole shares of HPX Common Stock into which the shares of Monterey Common Stock
theretofore represented thereby shall have been converted. No dividend or other
distribution, if any, payable to holders of shares of HPX Common Stock shall be
paid to the holders of certificates theretofore representing shares of Monterey
Common Stock; provided, however, that upon surrender and exchange of Monterey
Stock Certificates there shall be paid to the record holders of the stock
certificate or certificates issued in exchange therefor, the amount, without
interest thereon, of dividends and other distributions, if any, which
theretofore but subsequent to the Effective Date have become payable with
respect to the number of whole shares of HPX Common Stock into which the shares
of Monterey Common Stock theretofore represented thereby shall have been
converted. If any certificate for shares of HPX Common Stock is to be issued in
a name other than that in which the certificate, which immediately prior to the
Effective Date represented shares of Monterey Common Stock, surrendered in
exchange therefor is registered, it shall be a condition of such exchange that
the person requesting such exchange shall pay any transfer or other taxes
required by reason of the issuance of certificates for such shares of HPX Common
Stock in a name other than that of the registered holder of any such certificate
surrendered.
(i) REVERSE STOCK SPLIT. In the event that the one-for-three reverse stock
split referred to in Section 5.1(c)(i) is approved by the shareholders of HPX
and is effected, all the per share calculations referred to in this Agreement
and the other agreements referred to herein shall be proportionately adjusted,
as nearly as practicable.
1.4 HPX TO MAKE SHARES AVAILABLE. Promptly after the Effective Date, HPX
shall make available, by causing to be transferred to the Exchange Agent, for
the benefit of the Monterey Shareholders, such number of shares of HPX Common
Stock as shall be required for conversion in accordance with this Agreement and
such shares shall be delivered to the Monterey Shareholders as provided herein.
1.5 FURTHER DOCUMENTS. From time to time on and after the Effective Date,
as and when requested by HPX or its successors or assigns, the appropriate
officers and directors of Monterey as of the Effective Date shall, for and on
behalf and in the name of Monterey or otherwise, execute and deliver all such
deeds, bills of sale, assignments and other instruments, and shall take or cause
to be taken such further or other actions as HPX or its successors or assigns
may deem necessary or desirable in order to confirm of record or otherwise to
HPX title to and possession of all of the properties, rights, privileges,
powers, franchises and immunities of Monterey and otherwise to carry out fully
the provisions and purposes of this Agreement.
1.6 EFFECTIVE DATE. Subject to and in accordance with the MCAC and the
ABCA, the Articles of Merger attached hereto as Exhibit A with respect to the
Merger shall be filed with the Secretary of State of the State of Maryland and
the Corporation Commission of the State of Arizona at the earliest possible date
following the satisfaction or waiver of all conditions precedent which is the
last business day of a calendar month. The Merger shall become effective on the
date and time (the "Effective Date") the Articles of Merger attached as Exhibit
A hereto are filed with respect to the Merger; provided, however, that in no
event shall the Effective Date be prior to December 31, 1996.
1.7 CLOSING OF TRANSFER BOOKS. From and after the Effective Date, the stock
transfer books of Monterey shall be closed and no transfer of shares of Monterey
Common Stock shall thereafter be made.
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II. SHAREHOLDER APPROVAL; PROXY AND REGISTRATION FILINGS
2.1 SHAREHOLDER APPROVAL. As promptly as practicable, a meeting of the
shareholders of HPX shall be held in accordance with the MCAC to consider and
act upon, among other things, the adoption of this Agreement and the other
matters referred to in Section 5.1(c). Subject to fiduciary duties under
applicable law, the HPX Board of Directors shall recommend and HPX shall use its
reasonable best efforts to obtain the shareholder approvals referred to in
Section 5.1(c).
2.2 PROXY AND REGISTRATION STATEMENTS.
(a) PREPARATION OF PROXY STATEMENT. HPX and Monterey shall prepare and HPX
shall file with the Securities and Exchange Commission (the "SEC") a proxy
statement (the "Proxy Statement") and related proxy material to be used in
connection with the meeting of the shareholders of HPX referred to in Section
2.1.
(b) INFORMATION RESPECTING HPX. HPX shall furnish information about HPX for
inclusion in the Proxy Statement and the Registration Statement (as defined
below). HPX represents and warrants that the information so furnished will not
as of the time the Proxy Statement is mailed and on the date of the meeting of
shareholders of HPX referred to in Section 2.1 contain any statement which, in
the light of the circumstances under which it is made, is false or misleading
with respect to any material fact or which omits to state any material fact
required to be stated therein or necessary in order to make the statements
therein not false or misleading.
(c) INFORMATION RESPECTING MONTEREY. Monterey shall furnish information
about Monterey for inclusion in the Proxy Statement and the Registration
Statement. Monterey represents and warrants that the information so furnished
will not as of the time the Proxy Statement is mailed and on the date of the
meeting of shareholders of HPX referred to in Section 2.1 hereof contain any
statement which, in the light of the circumstances under which it is made, is
false or misleading with respect to any material fact or which omits to state
any material fact required to be stated therein or necessary in order to make
the statements therein not false or misleading.
(d) PREPARATION OF REGISTRATION STATEMENT. HPX shall prepare and file a
registration statement, including a form of prospectus (which shall include the
Proxy Statement), and one or more amendments thereto, on Form S-4 or other
appropriate form covering the shares of HPX Common Stock into which the
outstanding shares of Monterey Common Stock are to be converted as set forth in
Section 1.3 of this Agreement, including the Contingent Stock and the Warrant
Stock and shall use reasonable efforts to cause the registration statement to
become effective as promptly as practicable. HPX shall deliver to Monterey
copies of the registration statement and each amendment thereto filed or
proposed to be filed (and of each related preliminary prospectus). The
registration statement and the prospectus, as amended at the time the
registration statement becomes effective, are herein called the "Registration
Statement" and the "Prospectus." HPX shall advise Monterey (i) when the
Registration Statement or any post-effective amendment thereto shall have become
effective and when any amendment of or supplement to the Prospectus is filed
with the SEC, (ii) when the SEC shall make a request or suggestion for any
amendment to the Registration Statement or the Prospectus or for additional
information and the nature and substance thereof, and (iii) of the issuance by
the SEC of a stop order suspending the effectiveness of the Registration
Statement, and shall use reasonable efforts to prevent the issuance of a stop
order, and if such an order shall be issued, to obtain the withdrawal thereof at
the earliest possible time. HPX represents and warrants to Monterey that the
Registration Statement and the Prospectus (including the information therein
provided by Monterey and assuming its accuracy and completeness) and any other
amendments and supplements thereto, will, when they become effective, comply as
to form in all material respects to the requirements of the Securities Act of
1933, as amended, and the rules and regulations thereunder, and will not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading; provided, however, that HPX makes no representation or warranty as
to statements or omissions therein relating to Monterey.
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(e) AMENDMENTS TO PROXY STATEMENT AND REGISTRATION STATEMENT. If, at any
time prior to the meeting of the shareholders of HPX, it shall be necessary to
amend or supplement the Proxy Statement or the Registration Statement to correct
any statement or omission with respect to HPX or Monterey in order to comply
with any applicable legal requirements, HPX or Monterey, as the case may be,
shall supply the necessary information. To the extent necessary to comply with
applicable legal requirements, HPX shall amend or supplement the Proxy Statement
and the Registration Statement.
III. REPRESENTATIONS AND WARRANTIES
3.1 REPRESENTATIONS AND WARRANTIES OF MONTEREY. Each of Monterey and the
Monterey Shareholders represents and warrants to HPX as follows:
(a) DUE INCORPORATION, GOOD STANDING AND QUALIFICATION. Each Monterey
Company is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or
organization with all requisite corporate power and authority to own,
operate and lease its properties and to carry on its business as now being
conducted. Each Monterey Company is not subject to any material disability
or liability by reason of the failure to be duly qualified as a foreign
corporation for the transaction of business or to be in good standing under
the laws of any jurisdiction. Schedule 3.1(a) sets forth each jurisdiction
in which each Monterey Company is qualified to do business.
(b) CORPORATE AUTHORITY. Each Monterey Company has the corporate power
and authority to enter into this Agreement and to carry out the
transactions contemplated hereby (which for all purposes hereof shall
include the Monterey Drop Down). The Board of Directors of each Monterey
Company and the Monterey Shareholders have unanimously approved and duly
authorized the execution, delivery and performance of this Agreement, the
Merger and the other transactions contemplated hereby.
(c) CAPITALIZATION. The authorized capitalization of MHC II consists
solely of 2,000,000 shares of common stock, par value $.00017 per share, of
which 1,155,832 shares are validly issued and outstanding, fully paid and
non-assessable; and the authorized capitalization of MHA II consists solely
of 2,000,000 shares of common stock, par value $.0007 per share, of which
871,944 shares are validly issued and outstanding, fully paid and
non-assessable. All of the outstanding Monterey Common Stock is owned by
the Monterey Shareholders, free and clear of all claims, liens, charges and
encumbrances.
(d) OPTIONS, WARRANTS AND RIGHTS. Except as set forth in Schedule
3.1(d), Monterey has no outstanding options, warrants, or other rights to
purchase, or convert any obligation into, any shares of Monterey capital
stock. Upon the Effective Date, the Warrants shall represent the right to
acquire an aggregate of not more than 16.48% of the shares of HPX Common
Stock to be issued to the Monterey Shareholders pursuant to Section
1.3(b)(i) and 131,840 shares of Contingent Warrant Stock, subject to
further adjustment for events occurring after the Effective Date pursuant
to that certain Warrant Agreement dated October 17, 1994.
(e) SUBSIDIARIES. Except as set forth on Schedule 3.1(e), Monterey
does not directly or indirectly own an interest in any other person,
corporation, partnership, joint venture or other business association.
(f) FINANCIAL STATEMENTS. The combined balance sheets of Monterey, as
of December 31, 1995 and 1994 and the combined statements of earnings,
shareholders' equity and cash flows of Monterey for the three years ended
December 31, 1995 and all related schedules and notes to the foregoing,
have been certified by KPMG Peat Marwick LLP, independent auditors. The
foregoing financial statements and the unaudited combined balance sheet of
Monterey as of June 30, 1996 and the unaudited combined statements of
earnings and shareholders' equity of Monterey for the six months ended June
30, 1996 and related schedules and notes to the foregoing, have been
prepared in accordance with GAAP applied on a consistent basis, are correct
and complete and fairly present in all material respects the financial
condition, results of operations and changes in financial condition and
shareholders' equity of Monterey for the periods indicated (subject, in the
case of unaudited statements, to normal year-end audit adjustments). Except
as set forth in Schedule 3.1(f), Monterey does not have any material
liabilities or obligations of a type which would be included in a balance
sheet (or the notes thereto) prepared in
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accordance with GAAP, whether related to tax or non-tax matters, accrued or
contingent, due or not yet due, liquidated or unliquidated, or otherwise
except as and to the extent disclosed or reflected in the most recent
historical combined balance sheets of Monterey or incurred since the date
thereof in the ordinary course of business.
(g) NO MATERIAL CHANGE. Except as set forth in Schedule 3.1(g), since
June 30, 1996, there has not been (i) any material adverse change in the
financial condition, business, properties, assets or results of operations
of Monterey, taken as a whole (other than changes resulting from general
economic or market conditions over which Monterey has no control), (ii) any
loss or damage (whether or not covered by insurance) to any of the assets
or properties of Monterey which materially affects or impairs its ability
to conduct its business, (iii) any event or condition of any character
which has materially and adversely affected the business or prospects
(financial or otherwise) of Monterey (other than changes resulting from
general economic or market conditions over which Monterey has no control),
or (iv) any mortgage or pledge of any material amount of the assets or
properties of Monterey, or any indebtedness incurred by Monterey other than
indebtedness to fund the Distributions referred to in Section 4.1(i) and
indebtedness, not material in the aggregate to Monterey, incurred in the
ordinary course of business.
(h) TITLE TO PROPERTIES; HOME INVENTORY. Monterey has good and
marketable title to all of its material real and personal properties,
including all properties reflected in the most recent combined balance
sheet listed in Section 3.1(f), or acquired subsequent to the dates thereof
(except properties disposed of subsequent to such dates in the ordinary
course of business). Except as set forth in Schedule 3.1(h), such assets
and properties are not subject to any mortgage, pledge, lien, claim,
encumbrance, charge, security interest or title retention or other security
arrangement except for assets and properties subject to leases and liens
for the payment of federal, state and other taxes, the payment of which is
neither delinquent nor subject to penalties (other than those being
contested in good faith), and except for other liens and encumbrances
incidental to the conduct of the business of Monterey or the ownership of
its assets or properties which were not incurred in connection with the
borrowing of money or the obtaining of advances, and which do not in the
aggregate materially detract from the value of the assets or properties of
Monterey or materially impair the use thereof in the operation of its
business, except as disclosed in the most recent combined balance sheet
(including the notes thereto) listed in Section 3.1(f). All leases pursuant
to which Monterey leases any material amount of real or personal property
are valid and effective in accordance with their respective terms. Schedule
3.1(h) sets forth a true and complete summary as of June 30, 1996 by dollar
amounts of all lots and work in process (including related debt), and
backlog of home purchase contracts of the Monterey Companies. The lot
inventory and work in process included in the most recent combined balance
sheet listed in Section 3.1(f) properly reflect the recorded value of such
lots and work in process in accordance with GAAP and the Monterey Companies
normal inventory valuation policy of stating inventories at the lower of
cost or market.
(i) LITIGATION. There are no claims, actions, suits, proceedings,
arbitrations or other litigation pending or, to the knowledge of Monterey
or the Monterey Shareholders, threatened against or directly affecting
Monterey, at law or in equity, or before or by any federal, state,
municipal or other department, commission, board, bureau, agency or
instrumentality which, if determined adversely to Monterey, would
individually or in the aggregate have a material adverse effect on the
business, assets, properties, operations or prospects or on the condition,
financial or otherwise, of Monterey, taken as a whole.
(j) INTELLECTUAL PROPERTY RIGHTS AND LICENSES. Monterey is not subject
to any material disability or liability by reason of its failure to possess
any trademark, trademark right, trade name, trade name right or license.
(k) NO VIOLATION; VALID CONSENTS. Except as set forth in Schedule
3.1(k), the execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby will not violate, require a consent
or result in a breach by Monterey of, or constitute a default under, or
conflict with, or cause any acceleration of any material obligation with
respect to (i) any provision or restriction of any charter or bylaw of
Monterey, or (ii) any provision or restriction of any material loan,
indenture,
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mortgage, lien, lease, agreement, contract, instrument, order, judgment,
award, decree, law, statute, ordinance or regulation or any other material
restriction of any kind or character to which any material assets or
properties of Monterey is subject or by which Monterey is bound. Monterey
has received valid and irrevocable consents to this Agreement, the Monterey
Transactions, the Distributions referred to in Section 4.1(i) and the other
transactions contemplated hereby from the requisite holders of the 13.0%
Senior Subordinated Notes Due 2001 issued by MMI (the "Notes").
(l) TAXES. Except as set forth in Schedule 3.1(l), Monterey has filed
all material federal, state, foreign, local and other tax returns and
reports required to be filed, and has paid in full all taxes and
assessments required to be shown as due thereon (together with all
interest, penalties, assessments and deficiencies assessed in connection
therewith which have become due or are not being contested in good faith).
Such tax returns and reports are correct in all material respects. The
amounts set up as reserves for taxes on the financial statements described
in Section 3.1(f) above are sufficient in the aggregate for the payment of
all unpaid taxes (including any interest or penalties thereon) whether or
not disputed, accrued or applicable. There is no material dispute, claim,
ongoing audit or administrative proceeding concerning any tax liability of
Monterey either (i) claimed or raised by any authority in writing or (ii)
as to which Monterey or the Monterey Shareholders have knowledge based upon
personal contact with any agent of such authority. Monterey is not a party
to any tax allocation or sharing agreement. Monterey (i) has not been a
member of an affiliated group filing a consolidated federal income tax
return and (ii) does not have any liability for the taxes of any person
under Treasury Regulation Section 1.1502-6 (or any similar provision of
state, local or foreign law), as a transferee or successor, by contract, or
otherwise. Each Monterey Company is an "S corporation" under the Code, has
had in effect since its respective corporate inception a valid, binding,
timely filed election to be taxed pursuant to Subchapter S of the Code, and
is not liable for any federal income taxes as a "C-corporation" under the
Code.
(m) CONTRACTS. Except as set forth in Schedule 3.1(m), Monterey is not
a party to (i) any plan or contract providing for bonuses, pensions,
options, stock purchases, deferred compensation, retirement payments or
profit sharing, (ii) any collective bargaining or other contract or
agreement with any labor union, (iii) any material lease, installment
purchase agreement or other contract with respect to any real or personal
property used or proposed to be used in its operations, except, in each
case, items included within aggregate amounts disclosed in the most recent
combined balance sheet listed in Section 3.1(f), (iv) any employment
agreement or other similar arrangement not terminable upon thirty (30) days
or less notice without penalty to it or providing for any severance,
termination or other payment or benefit upon a change in control of any
Monterey Company, (v) any contract or agreement for the purchase of any
commodity, material, fixed asset or equipment in excess of $100,000 or any
contract or agreement creating an obligation of $100,000 or more in each
case which by its terms does not terminate or is not terminable without
penalty to it within one year after the date hereof (excluding for purposes
hereof home sales contracts, subcontractors' agreements, real property
option agreements and real property purchase agreements in the ordinary
course of business), (vi) any loan agreement, indenture, promissory note,
conditional sales agreement or other similar type of arrangement, (vii) any
material license agreement, or (viii) any contract which is reasonably
likely to result in a material loss or obligation to it. Except as
disclosed in Schedule 3.1(m), all material contracts, agreements and other
arrangements to which Monterey is a party are valid and enforceable in
accordance with their terms; Monterey has performed all material
obligations required to be performed to date; Monterey is not in material
default or in arrears under the terms of any of the foregoing; and to the
knowledge of Monterey and the Monterey Shareholders, no condition exists or
event has occurred which, with the giving of notice or lapse of time or
both, would constitute a material default under any of them.
(n) PERMITS; COMPLIANCE WITH LAW AND OTHER REGULATIONS. Monterey has
all material franchises, grants, authorizations, licenses, permits,
easements, variances, exemptions, consents, certificates, approvals and
orders necessary to own, lease, develop, sell and operate its properties
and to carry on its business as it is now being conducted (collectively,
the "Monterey Permits"), and there is no action, proceeding or, to the
knowledge of Monterey, investigation pending or threatened regarding
suspension or cancellation of any of the Monterey Permits. Since December
31, 1992, Monterey has not been subject to or have
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been threatened with any material fine, penalty, liability or disability as
the result of its failure to comply with any requirement of federal, state,
local or foreign law or regulation (including those relating to the
employment of labor) or any requirement of any governmental body or agency
having jurisdiction over it, its properties, the conduct of its business,
the use of its assets and properties or any premises occupied by it.
(o) INSURANCE. Monterey maintains in full force and effect insurance
coverage on its assets, properties, premises, operations and personnel in
such amounts and against such risks and losses as are adequate and
customary for the business engaged in by Monterey.
(p) MINUTE BOOKS. The minute books of Monterey previously provided to
HPX accurately reflect all actions taken by its shareholders and directors,
as such, since incorporation.
(q) EMPLOYEES. Except as set forth in Schedule 3.1(q), Monterey has
never maintained or contributed to any "employee benefit plan," as such
term is defined in Section 3(3) of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), including, without limitation, any stock
option plan, stock purchase plan, defined benefit plan, deferred
compensation plan or other similar employee benefit plan. With respect to
each plan listed on such Schedule, Monterey has performed all material
obligations required to be performed by it under each such plan, each such
plan has been established and maintained in all material respects in
accordance with its terms and all applicable statutes and regulations and
there exist no unfunded liabilities with respect to any of such plans.
Monterey has never contributed to any "multi-employer pension plan," as
such term is defined in Section 3(37)(A) of ERISA.
(r) ACCURACY OF STATEMENTS. To the best knowledge of the Monterey
Shareholders and Monterey, neither this Agreement (including the Schedules
hereto) nor any certificate furnished or to be furnished by Monterey or the
Monterey Shareholders to HPX in connection with this Agreement or any of
the transactions contemplated hereby contains or will contain an untrue
statement of a material fact or omits or will omit to state a material fact
necessary to make the statements contained herein or therein, in light of
the circumstances under which they are made, not misleading.
(s) AGREEMENTS WITH AFFILIATES. Except as set forth in Schedule
3.1(s), Monterey is not a party to any material agreement or contract with
any Affiliate of Monterey or HPX, other than this Agreement. For purposes
of this Agreement, the term "Affiliate" means, with respect to any person,
(i) each person that, directly or indirectly, owns or controls, whether
beneficially or as a trustee, guardian or other fiduciary, 5% or more of
the shares having ordinary voting power in the election of directors of
such person, (ii) each person that controls, is controlled by or is under
common control with such person or any Affiliate of such person or (iii)
each of such person's officers, directors, joint venturers and partners.
(t) ENVIRONMENTAL MATTERS. Except as set forth in Schedule 3.1(t), to
the knowledge of Monterey and the Monterey Shareholders, (i) the
properties, operations, and activities of Monterey are in compliance in all
material respects with all applicable Environmental Laws (as defined
below); (ii) Monterey and the properties and operations of Monterey are not
subject to any existing, pending, or threatened action, suit, claim,
investigation, inquiry, or proceeding by or before any governmental entity
under any Environmental Laws; (iii) all material notices, permits,
licenses, or similar authorizations, if any, required to be obtained or
filed by Monterey under any Environmental Laws in connection with any
aspect of the business of Monterey have been duly obtained or filed and
will remain valid and in effect after the Effective Date and Monterey is in
material compliance with the terms and conditions of all such notices,
permits, licenses, and similar authorizations; (iv) there are no physical
or environmental conditions existing on any property of Monterey or
resulting from the operations or activities of Monterey, past or present,
at any location, that would give rise to any material on-site or off-site
remedial obligations imposed on Monterey under any Environmental Laws; (v)
there has been no material release of hazardous substances or any pollutant
or contaminant into the environment by Monterey; and (vi) Monterey has made
available to HPX all internal and external environmental audits and studies
and all correspondence on substantial environmental matters in the
possession of Monterey relating to any of the current or former properties
or operations of Monterey.
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For purposes of this Agreement, the term "Environmental Laws" means
any and all laws, statutes, ordinances, rules, regulations, or orders of
any governmental entity pertaining to health or the environment currently
in effect in any and all jurisdictions in which the parties hereto own
property or conduct business, including without limitation, the Clean Air
Act, as amended, the Comprehensive Environmental, Response, Compensation,
and Liability Act of 1980 ("CERCLA"), as amended, the Federal Water
Pollution Control Act, as amended, the Occupational Safety and Health Act
of 1970, as amended, the Resource Conservation and Recovery Act of 1976
("RCRA"), as amended, the Safe Drinking Water Act, as amended, the Toxic
Substances Control Act, as amended, the Hazardous & Solid Waste Amendments
Act of 1984, as amended, the Superfund Amendments and Reauthorization Act
of 1986, as amended, the Hazardous Materials Transportation Act, as
amended, the Oil Pollution Act of 1990, any state laws implementing the
foregoing federal laws, and all other environmental conservation or
protection laws. For purposes of this Agreement, the terms "hazardous
substance" and "release" have the meanings specified in CERCLA and RCRA,
and the term "disposal" has the meaning specified in RCRA; provided,
however, that to the extent the laws of the state in which the property is
located establish a meaning for "hazardous substance," "release," or
"disposal" that is broader than that specified in either CERCLA or RCRA,
such broader meaning will apply.
(u) INTENT OF SHAREHOLDERS. Except for dispositions to the
Warrantholders upon the exercise of the Warrants, the Monterey Shareholders
have no present plan or intention to sell, exchange or otherwise dispose of
any of the shares of HPX Common Stock to be received by them in exchange
for the shares of outstanding Monterey Common Stock, and will have no such
plan or intention on and as of the Effective Date.
(v) NO INTENT TO EVADE TAX CODE. No economic direct or indirect
ownership interest in shares of HPX Common Stock, either before or after
the Merger, has been, or will be on and after the Merger, structured by any
individual Monterey Shareholder, or entity (as defined in the Treasury
Regulations (the "Tax Regulations") promulgated under Section 382 of the
Code, hereinafter "Entity") which includes a Monterey Shareholder, to avoid
treating an individual or Entity as a "5-Percent Shareholder" (as defined
in the Tax Regulations) of HPX, or to permit HPX to rely on the presumption
provided in Section 1.382-2T(g)(5)(i)(B) of the Tax Regulations (regarding
the treatment of 5-Percent Shareholders who reduce their ownership interest
in a loss corporation to less than 5%), for a principal purpose of
circumventing the limitation of Section 382 of the Code with respect to
HPX.
(w) OWNERSHIP OF HPX COMMON STOCK AFTER THE MERGER. Except as set
forth in Schedule 3.1(w), the HPX Common Stock to be acquired by the
Monterey Shareholders in the Merger will be (i) the only HPX Common Stock
owned by the Monterey Shareholders, and (ii) the only HPX Common Stock
whose ownership can be attributed (pursuant to Section 382 of the Code or
the Tax Regulations) to the Monterey Shareholders.
(x) OPTIONS TO ACQUIRE HPX COMMON STOCK. Except for the agreement
referred to in Section 1.3(e) with respect to the Warrants, no person will
have an immediate or contingent right to acquire any of the HPX Common
Stock acquired by the Monterey Shareholders pursuant to a purchase
agreement, option, pledge, security agreement or any other type of
instrument, other than pursuant to an option, pledge and/or security
agreement in a typical lending transaction subject to customary commercial
conditions which is described in Section 1.382-4(d)(7)(ii) of the Tax
Regulations.
3.2 REPRESENTATIONS AND WARRANTIES OF HPX. HPX represents and warrants to
Monterey and the Monterey Shareholders as follows:
(a) DUE INCORPORATION, GOOD STANDING AND QUALIFICATION. HPX and each
of its subsidiaries is a corporation duly organized, validly existing and
in good standing under the laws of the jurisdiction of its incorporation
with all requisite corporate power and authority to own, operate and lease
its properties and to carry on its business as now being conducted. Neither
HPX nor any of its subsidiaries is subject to any material disability or
liability by reason of the failure to be duly qualified as a foreign
corporation for the transaction of business or to be in good standing under
the laws of any jurisdiction. Schedule 3.2(a) sets forth each jurisdiction
in which HPX and its subsidiaries are qualified to do business.
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(b) CORPORATE AUTHORITY. HPX has the corporate power and authority to
enter into this Agreement and (subject to requisite approval of the
shareholders of HPX) to carry out the transactions contemplated hereby. The
Board of Directors of HPX has duly authorized the execution, delivery and
performance of this Agreement, the Merger and the other transactions
contemplated hereby. The execution, delivery and performance of this
Agreement, the Merger and the other transactions contemplated hereby have
been approved by a committee of all the disinterested directors of HPX
within the meaning of Section 10-2741(D) of the ABCA, to the extent such
statutory provision is applicable to HPX. The Board of Directors of HPX has
adopted a resolution that any business combination with any Monterey
Shareholder or any affiliate thereof shall be exempted from the provisions
of Section 3-602 of the MCAC and that the shares of HPX Common Stock to be
issued hereunder shall not be deemed to be "control shares" within the
meaning of Section 3-701 of the MCAC. The Merger requires the approval of
the holders of a majority of the issued and outstanding shares of HPX
Common Stock.
(c) CAPITALIZATION. The authorized capitalization of HPX consists of
50,000,000 shares of common stock, $.01 par value, of which 9,716,517
shares are issued and outstanding as of June 30, 1996. All of the issued
and outstanding shares of capital stock of HPX and each of its subsidiaries
have been duly authorized and validly issued and are fully paid and
nonassessable.
(d) OPTIONS, WARRANTS AND RIGHTS. Except as set forth in Schedule
3.2(d), neither HPX nor any of its subsidiaries has outstanding any
options, warrants, or other rights to purchase, or convert any obligation
into, any shares of its capital stock.
(e) SUBSIDIARIES. Schedule 3.2(e) sets forth (i) the name,
jurisdiction of incorporation and list of shareholders of each subsidiary
of HPX and (ii) the name and description of every other person,
corporation, partnership, joint venture or other business association in
which HPX directly or indirectly owns a material interest. The outstanding
shares of capital stock of the subsidiaries of HPX owned by HPX or any of
its subsidiaries are owned free and clear of all claims, liens, charges and
encumbrances.
(f) FINANCIAL STATEMENTS. The consolidated balance sheets of HPX as of
December 31, 1995 and 1994 and the consolidated statements of income,
shareholders' equity and cash flows of HPX and its subsidiaries for the
three years ended December 31, 1995, and all related schedules and notes to
the foregoing, have been certified by Ernst & Young LLP, independent public
accountants. All of the foregoing financial statements as well as the
unaudited consolidated balance sheet of HPX and its subsidiaries as of June
30, 1996 and the unaudited consolidated statements of income and cash flow
of HPX and its subsidiaries for the six months ended June 30, 1996, and all
related schedules and notes to such have been prepared in accordance with
GAAP applied on a consistent basis, are correct and complete and fairly
present in all material respects the financial condition, results of
operations and changes of financial condition and shareholders' equity of
HPX and its subsidiaries for the periods indicated (subject, in the case of
unaudited statements, to normal year-end audit adjustments). Neither HPX
nor any of its subsidiaries has any material liabilities or obligations of
a type which would be included in a balance sheet (or the notes thereto)
prepared in accordance with GAAP, whether related to tax or non-tax
matters, accrued or contingent, due or not yet due, liquidated or
unliquidated or otherwise, except as and to the extent disclosed or
reflected in the consolidated balance sheet of HPX and its subsidiaries as
of June 30, 1996, or incurred since June 30, 1996, in the ordinary course
of business.
(g) NO MATERIAL CHANGE. Since June 30, 1996, there has not been (i)
any material adverse change in the financial condition, business,
properties, assets or results of operations of HPX and its subsidiaries
taken as a whole (other than changes resulting from general economic or
market conditions over which HPX has no control), (ii) any loss or damage
(whether or not covered by insurance) to any of the assets or properties of
HPX or its subsidiaries which materially affects or impairs their ability
to conduct their respective businesses, (iii) any event or condition of any
character which has materially and adversely affected the business or
prospects (financial or otherwise) of HPX and its subsidiaries taken as a
whole (other than changes resulting from general economic or market
conditions over which HPX has no control), or (iv) any mortgage or pledge
of any material amount of the assets or properties of HPX or any
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of its subsidiaries, or any indebtedness incurred by HPX or any of its
subsidiaries, other than indebtedness, not material in the aggregate,
incurred in the ordinary course of business.
(h) TITLE TO PROPERTIES. HPX and its subsidiaries have good and
marketable title to all of their respective material real and personal
properties, including all properties reflected in the consolidated balance
sheet as of June 30, 1996, or acquired subsequent to June 30, 1996 (except
property disposed of subsequent to that date in the ordinary course of
business). Such assets and properties are not subject to any mortgage,
pledge, lien, claim, encumbrance, charge, security interest or title
retention or other security arrangement except for customary liens securing
mortgage-related obligations, assets and properties subject to leases and
liens for the payment of federal, state and other taxes, the payment of
which is neither delinquent nor subject to penalties, and except for other
liens and encumbrances incidental to the conduct of the business of HPX and
its subsidiaries or the ownership of their respective assets or properties
which were not incurred in connection with the borrowing of money or the
obtaining of advances, and which do not in the aggregate materially detract
from the value of the assets or properties of HPX and its subsidiaries
taken as a whole or materially impair the use thereof in the operation of
their respective businesses, except in each case as disclosed in the
consolidated balance sheet (including the notes thereto) as of June 30,
1996. All leases pursuant to which HPX or any of its subsidiaries leases
any material amount of real or personal property are valid and effective in
accordance with their respective terms.
(i) LITIGATION. There are no claims, actions, suits, proceedings,
arbitrations or other litigation pending or, to the knowledge of HPX,
threatened against or directly affecting HPX or any of its subsidiaries, at
law or in equity, or before or by any federal, state, municipal or other
department, commission, board, bureau, agency or instrumentality which, if
determined adversely to HPX or its subsidiaries, would individually or in
the aggregate have a materially adverse effect on the business, assets,
properties, operations or prospects or on the condition, financial or
otherwise, of HPX and its subsidiaries, taken as a whole.
(j) INTELLECTUAL PROPERTY RIGHTS AND LICENSES. Neither HPX nor any of
its subsidiaries is subject to any material disability or liability by
reason of its failure to possess any trademark, trademark right, trade
name, trade name right or license.
(k) NO VIOLATION. Except as set forth on Schedule 3.2(k), the
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby will not violate, require a consent (other
than the consent of the shareholders of HPX referred to in Section 2.1) or
result in a breach by HPX or any of its subsidiaries of, or constitute a
default under, or conflict with or cause any acceleration of any material
obligation with respect to (i) any provision or restriction of any charter
or bylaw of HPX or any of its subsidiaries, (ii) any provision or
restriction of any material loan, indenture, mortgage, lien, lease,
agreement, contract, instrument, order, judgment, award, decree, law,
statute, ordinance or regulation or any other material restriction of any
kind or character to which any material assets or properties of HPX or any
of its subsidiaries is subject or by which HPX or any of its subsidiaries
is bound or (iii) trigger any material obligation or benefits under any
employment, change of control, severance or other similar agreements.
(l) TAXES. HPX and its subsidiaries have filed all material federal,
state, foreign, local and other tax returns and reports required to be
filed, and have paid in full all taxes and assessments required to be shown
as due thereon (together with all interest, penalties, assessments and
deficiencies assessed in connection therewith which have become due or are
not being contested in good faith). Such tax returns and reports are
correct in all material respects. The amounts set up as reserves for taxes
on the books of HPX and its subsidiaries are sufficient in the aggregate
for the payment of all unpaid taxes (including any interest or penalties
thereon), whether or not disputed, accrued or applicable. There is no
material dispute, claim, ongoing audit or administrative proceeding
concerning any tax liability of HPX and its subsidiaries either (i) claimed
or raised by any authority in writing or (ii) as to which HPX or its
subsidiaries have knowledge based upon personal contact with any agent of
such authority. Neither HPX nor its subsidiaries is a party to any tax
allocation or sharing agreement. Neither HPX nor its subsidiaries
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(i) has been a member of an affiliated group filing a consolidated federal
income tax return (other than the group consisting of HPX and its
subsidiaries) or (ii) has any liability for the taxes of any person (other
than HPX and its current and former subsidiaries) under Treasury Regulation
Section 1.1502-6 (or any similar provision of state, local or foreign law),
as a transferee or successor, by contract, or otherwise.
(m) CONTRACTS. Except as set forth in Schedule 3.2(m), neither HPX nor
any of its subsidiaries is a party to (i) any plan or contract providing
for bonuses, pensions, options, stock purchases, deferred compensation,
retirement payments or profit sharing, (ii) any collective bargaining or
other contract or agreement with any labor union, (iii) any material lease,
installment purchase agreement or other contract with respect to any real
or personal property used or proposed to be used in its operations, except,
in each case, items included within aggregate amounts disclosed in the
consolidated balance sheet of HPX and its subsidiaries as of June 30, 1996,
(iv) any employment agreement or other similar arrangement not terminable
upon thirty (30) days or less notice without penalty to it or providing for
any severance, termination or other payment or benefit upon a change of
control of HPX, (v) any contract or agreement for the purchase of any
commodity, material, fixed asset or equipment in excess of $100,000, or any
contract or agreement creating an obligation of $100,000 or more in each
case which by its terms does not terminate or is not terminable without
penalty to it within one year after the date hereof, (vi) any loan
agreement, indenture, promissory note, conditional sales agreement or other
similar type of arrangement, (vii) any material license agreement, or
(viii) any contract which is reasonably likely to result in a material loss
or obligation to it. All mortgage-related securities issued by HPX or any
of its subsidiaries and all other material contracts, agreements and other
arrangements to which HPX or any of its subsidiaries is a party are valid
and enforceable in accordance with their terms; HPX and its subsidiaries
have performed all material obligations required to be performed to date;
neither HPX nor any of its subsidiaries is in material default or in
arrears under the terms of any of the foregoing; and to the knowledge of
HPX no condition exists or event has occurred which, with the giving of
notice or lapse of time or both, would constitute a material default under
any of them.
(n) PERMITS; COMPLIANCE WITH LAW AND OTHER REGULATIONS. HPX has all
material franchises, grants, authorizations, licenses, permits, easements,
variances, exemptions, consents, certificates, approvals and orders
necessary to own, lease, develop, sell and operate its properties and to
carry on its business as it is now being conducted (collectively, the "HPX
Permits"), and there is no action, proceeding or, to the knowledge of HPX,
investigation pending or threatened regarding suspension or cancellation of
any of the HPX Permits. Since December 31, 1992, neither HPX nor any of its
subsidiaries have been subject to or has been threatened with any material
fine, penalty or disability as the result of its failure to comply with any
requirements of federal, state, local or foreign law or regulation
(including those relating to the employment of labor) or any requirement of
any governmental body or agency having jurisdiction over it, its
properties, the conduct of its business, the use of its assets and
properties or any premises occupied by it.
(o) INSURANCE. HPX and each of its subsidiaries maintains in full
force and effect insurance coverage on its assets, properties, premises,
operations and personnel in such amounts and against such risks and losses
as are adequate and customary for the respective businesses engaged in by
HPX and its subsidiaries.
(p) MINUTE BOOKS. The minute books of HPX and each of its subsidiaries
previously provided to Monterey accurately reflect all actions taken by
their respective shareholders and directors as such, since incorporation.
(q) EMPLOYEES. Except as set forth in Schedule 3.2(q), neither HPX nor
any of its subsidiaries has ever maintained or contributed to any "employee
benefit plan," as such term is defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), including,
without limitation, any stock option plan, stock purchase plan, defined
benefit plan, deferred compensation plan or other similar employee benefit
plan. With respect to each plan listed on Schedule 3.2(q), HPX has
performed all material obligations required to be performed by it under
each such plan, each such plan
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has been established and maintained in all material respects in accordance
with its terms and all applicable statutes and regulations and there exist
no unfunded liabilities with respect to any of such plans. Neither HPX nor
any of its subsidiaries has ever contributed to any "multi-employer pension
plan," as such term is defined in Section 3(37)(A) of ERISA.
(r) SEC REPORTS. HPX's report on Form 10-K for the year ended December
31, 1995 filed with the SEC and all subsequent reports and proxy statements
filed by HPX thereafter pursuant to Section 13(a) of the Securities
Exchange Act of 1934 (the "Exchange Act"), including its Form 10-Q for the
quarter ended June 30, 1996, complied in all material respects with the
requirements of the Exchange Act and did not contain a misstatement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each
case as of the time the document was filed. Since the filing of such report
on Form 10-Q, no other report, proxy statement or other document has been
required to be filed by HPX pursuant to Section 13(a) or 14(a) of the
Exchange Act which has not been filed.
(s) ACCURACY OF STATEMENTS. To the best knowledge of HPX, neither this
Agreement (including the Schedules hereto) nor any certificate furnished or
to be furnished by HPX to Monterey and the Monterey Shareholders in
connection with this Agreement or any of the transactions contemplated
hereby contains or will contain an untrue statement of a material fact or
omits or will omit to state a material fact necessary to make the
statements contained herein or therein, in light of the circumstances under
which they are made, not misleading.
(t) STATUS OF HPX COMMON STOCK TO BE ISSUED. The shares of HPX Common
Stock into which the shares of Monterey Common Stock will be converted
pursuant to this Agreement, including the Contingent Stock and the Warrant
Stock, will be when issued validly authorized and issued, fully paid,
nonassessable and listed for trading on the New York Stock Exchange.
(u) RECOMMENDATION OF HPX BOARD OF DIRECTORS. The Board of Directors
of HPX has duly approved and duly authorized the Merger and determined that
the Merger is fair to and in the best interests of the shareholders of HPX
and has unanimously adopted resolutions recommending approval and adoption
of this Agreement, the Merger and the transactions contemplated hereby by
the shareholders of HPX.
(v) AGREEMENTS WITH AFFILIATES. Neither HPX nor any of its
subsidiaries is a party to any material agreement or contract with any
Affiliate of HPX or Monterey, other than this Agreement.
(w) ENVIRONMENTAL MATTERS. To the knowledge of HPX, (i) the
properties, operations, and activities of HPX and its subsidiaries are in
compliance in all material respects with all applicable Environmental Laws;
(ii) HPX, its subsidiaries and the properties and operations of HPX and its
subsidiaries are not subject to any existing, pending, or threatened
action, suit, claim, investigation, inquiry, or proceeding by or before any
governmental entity under any Environmental Laws; (iii) all material
notices, permits, licenses, or similar authorizations, if any, required to
be obtained or filed by HPX or its subsidiaries under any Environmental
Laws in connection with any aspect of the respective businesses of HPX and
its subsidiaries have been duly obtained or filed and will remain valid and
in effect after the Effective Date and HPX and its subsidiaries are in
material compliance with the terms and conditions of all such notices,
permits, licenses, and similar authorizations; (iv) there are no physical
or environmental conditions existing on any property of HPX and its
subsidiaries or resulting from the operations or activities of HPX and its
subsidiaries, past or present, at any location, that would give rise to any
material on-site or off-site remedial obligations imposed on HPX and its
subsidiaries under any Environmental Laws; (v) there has been no material
release of hazardous substances or any pollutant or contaminant into the
environment by HPX and its subsidiaries; and (vi) HPX and its subsidiaries
have made available to Monterey and the Monterey Shareholders all internal
and external environmental audits and studies and all correspondence on
substantial environmental matters in the possession of HPX and its
subsidiaries relating to any of the current or former properties or
operations of HPX and its subsidiaries.
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(x) CERTAIN INCOME TAX MATTERS. There has not been an "ownership
change" of HPX within the meaning of Section 382 of the Code prior to the
Effective Date, and the Merger will not cause an "ownership change" of HPX
within the meaning of Section 382 of the Code to occur on the Effective
Date. To the knowledge of HPX, no economic direct or indirect ownership
interest in the HPX Common Stock, either before or after the Merger, has
been, or will be on and after the Merger, structured by any individual or
Entity with a direct or indirect ownership interest in shares of HPX Common
Stock, to avoid treating an individual or Entity as a "5-Percent
Shareholder" (as defined in the Tax Regulations) of HPX, or to permit HPX
to rely on the presumption provided in Section 1.382-2T(g)(5)(i)(B) of the
Tax Regulations (regarding the treatment of 5-Percent Shareholders who
reduce their ownership interest in a loss corporation to less than 5%), for
a principal purpose of circumventing the limitation of Section 382 of the
Code with respect to HPX. HPX has no plan or intention to sell or otherwise
dispose of any of the assets of Monterey acquired in the Merger except for
dispositions made in the ordinary course of business. HPX has no plan or
intention to reacquire any of the HPX Common Stock to be issued in the
Merger. HPX intends to continue the historic business of each Monterey
Company or use a significant portion of each Monterey Company's historic
business assets in a business for a sufficient period of time to satisfy
the "continuity of business enterprise" requirement of Section 1.368-1(d)
of the Tax Regulations with respect to the Merger.
IV. COVENANTS
4.1 COVENANTS OF MONTEREY. Each of Monterey and the Monterey Shareholders
agrees that, unless HPX otherwise agrees in writing, prior to the Effective
Date:
(a) PRESERVATION OF BUSINESS. Monterey shall use reasonable efforts to
(i) preserve intact in all material respects the present business
organization of Monterey, (ii) preserve in all material respects the
present goodwill and advantageous relationships of Monterey with persons
having business dealings with Monterey, and (iii) preserve and maintain in
force all material licenses, registrations, franchises, patents,
trademarks, copyrights, bonds and other similar rights of Monterey.
Monterey shall not enter into any employment agreements with any of its
officers or management personnel which may not be canceled without penalty
upon notice not exceeding thirty (30) days. Monterey shall maintain in
force or replace with reasonably equivalent policies all property,
casualty, fiduciary, directors and officers and other forms of insurance
which it is presently carrying.
(b) ORDINARY COURSE. Monterey shall operate its business only in the
usual, regular and ordinary course and manner and consistent with past
practice. Without limiting the foregoing, except as set forth in Schedule
4.1(b), Monterey shall not (i) encumber or mortgage any property or assets,
incur any obligation (contingent or otherwise) or purchase or acquire, or
transfer or convey, any material assets or properties or enter into any
transaction or make or enter into any contract or commitment except in the
ordinary course of business and consistent with past practice or (ii)
acquire any stock or other equity interest in any corporation, trust or
other entity.
(c) BOOKS AND RECORDS. Monterey shall maintain its books, accounts and
records in the usual, regular and ordinary manner, and on a basis
consistent with prior years, and shall comply in all material respects with
all laws applicable to it or to the conduct of its business. Monterey shall
not write up any of its assets.
(d) NO ORGANIC CHANGE. Except as expressly contemplated herein or as
set forth in Schedule 4.1(d), each Monterey Company shall not (i) amend its
Articles of Incorporation or bylaws, (ii) make any change in its capital
stock by reclassification, subdivision, reorganization or otherwise, or
(iii) merge or consolidate with any other corporation, trust or entity or
change the character of its business.
(e) NO ISSUANCE OF SHARES, OPTIONS, OR OTHER SECURITIES. Except as
expressly contemplated herein or as set forth in Schedule 4.1(e), Monterey
shall not (i) issue any shares of capital stock, or (ii) grant any option,
warrant or other right to purchase or to convert any obligation into shares
of Monterey capital stock.
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(f) COMPENSATION. Monterey shall not (i) increase the compensation
payable to any elected officer or to other management personnel from the
amount payable as of December 31, 1995 except in accordance with normal and
customary annual reviews consistent with past practice, (ii) except as set
forth on Schedule 4.1(f), introduce or change any pension or profit sharing
plan, or any other employee benefit arrangement, except for insubstantial
changes necessary to comply with the minimum requirements of the Code or
ERISA or (iii) amend, renew, modify or extend any employment, change of
control, severance or other similar agreement or arrangement.
(g) DIVIDENDS AND DISTRIBUTIONS. Except for the 1996 Distribution and
the Previously Taxed Earnings Distribution as defined in Section 4.1(i),
Monterey shall not declare, make or pay any dividend or other distribution
with respect to its equity securities or purchase, redeem or otherwise
acquire any of its equity securities.
(h) CONSENTS AND APPROVALS. Monterey shall use reasonable efforts to
obtain all necessary consents and approvals of other persons and
governmental authorities to the performance by Monterey of the transactions
contemplated by this Agreement. Monterey shall make all filings,
applications, statements and reports to all federal and state government
agencies or entities which are required to be made prior to the Effective
Date by or on behalf of Monterey pursuant to any statute, rule or
regulation in connection with the transactions contemplated by this
Agreement.
(i) DISTRIBUTIONS.
(i) To reduce the book value of Monterey and correspondingly reduce
the amount of stock to be issued to the Monterey Shareholders in the
Merger, Monterey made certain distributions to the Monterey Shareholders
prior to the date hereof. Consistent therewith, Monterey has declared
distributions to the Monterey Shareholders independent of the Merger and
in accordance with the S corporation distribution rules of Section 1368
of the Code in amounts equal to the 1996 Distribution and the Retained
Earnings Distribution (collectively, the "Distributions"). For purposes
of this Agreement, the 1996 Distribution is equal to the GAAP earnings
of Monterey from January 1, 1996 to the Effective Date multiplied by
.40; and the Retained Earnings Distribution is equal to the excess of
the shareholders' equity of Monterey as of the Effective Date (after
giving effect to the 1996 Distribution) over $2,500,000. The Monterey
Shareholders tendered no consideration in exchange for receipt of the
Distributions.
(ii) Prior to the date hereof, Monterey has paid one hundred
percent (100%) of the estimated Distributions. Prior to the Effective
Date, Monterey shall pay an amount equal in the aggregate to the excess,
if any, of the then estimated Distributions as determined by Monterey
over the amounts previously distributed to the Monterey Shareholders. As
soon as practicable after the Effective Date, Monterey's independent
public accountants shall determine and certify (in accordance with GAAP
consistent with those used in connection with Monterey's financial
statements referred in Section 3.1(f) (but reflecting adjustments for
warranty reserve, overhead absorption, amortization of capitalized debt
costs and deferred bonus as agreed to by the parties prior to the date
hereof)) the actual amount of the Distributions through and as of the
Effective Date. Subject to subparagraph (iii), HPX shall assume
Monterey's obligation to pay, and pursuant thereto shall pay to the
Monterey Shareholders an amount in cash equal in the aggregate to the
excess, if any, of the Distributions certified by Monterey's independent
public accountants over the amounts previously distributed to the
Monterey Shareholders (the "Final Distribution"). HPX shall succeed to
Monterey's right to be returned, and pursuant thereto the Monterey
Shareholders shall return to HPX, an amount in cash equal in the
aggregate to the shortfall, if any, of the Distributions certified by
Monterey's independent public accountant under the amounts previously
distributed to the Monterey Shareholders (the "Return Payment").
(iii) To the extent HPX is obligated to fund the Final
Distribution, HPX shall be entitled to full repayment of such
obligation, including commercially reasonable interest, by each of Newco
I and Newco II to the extent of their determined share. To the extent
HPX is entitled to a Return
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Payment, each of Newco I and Newco II, to the extent of their determined
share, shall be entitled to all such Return Payments including
commercially reasonable interest.
4.2 COVENANTS OF HPX. HPX agrees that, unless Monterey and the Monterey
Shareholders otherwise agree in writing, prior to the Effective Date:
(a) PRESERVATION OF BUSINESS. HPX shall use reasonable efforts to (i)
preserve intact in all material respects the present business organization
of HPX and its subsidiaries, (ii) preserve in all material respects the
present goodwill and advantageous relationships of HPX and its subsidiaries
with persons having business dealings with HPX and its subsidiaries, and
(iii) preserve and maintain in force all material licenses, registrations,
franchises, patents, trademarks, copyrights, bonds and other similar rights
of HPX and its subsidiaries. HPX and its subsidiaries shall not enter into
any employment agreements with any of their officers or management
personnel which may not be canceled without penalty upon notice not
exceeding thirty (30) days. HPX and its subsidiaries shall maintain in
force or replace with reasonably equivalent policies all property,
casualty, fidelity, directors and officers and other forms of insurance
which they are presently carrying.
(b) ORDINARY COURSE. HPX and its subsidiaries shall operate their
business only in the usual, regular and ordinary course and manner and
consistent with past practice. Without limiting the foregoing, HPX and its
subsidiaries shall not (i) encumber or mortgage any property or assets,
incur any obligation (contingent or otherwise) or purchase or acquire, or
transfer or convey, any material assets or properties or enter into any
transaction or make or enter into any contract or commitment except in the
ordinary course of business and consistent with past practice, (ii) acquire
any stock or other equity interest in any corporation, trust or other
entity or (iii) make any new loans or purchase any residual interests in
mortgage securitizations, whether or not in the ordinary course of
business, except that HPX and its subsidiaries may extend, renew or modify
any existing loans in the ordinary course of business. Notwithstanding the
foregoing, nothing in this Section 4.2 shall prohibit or limit the ability
of HPX to transfer or convey its residual interests in mortgage
securitizations in arm's-length transactions.
(c) BOOKS AND RECORDS. HPX and its subsidiaries shall maintain their
books, accounts and records in the usual, regular and ordinary manner, and
on a basis consistent with prior years, and shall comply in all material
respects with all laws applicable to it or to the conduct of its business.
HPX and its subsidiaries shall not write up any of their assets.
(d) NO ORGANIC CHANGE. Neither HPX nor its subsidiaries shall (i)
amend their Articles of Incorporation or bylaws, (ii) make any change in
their capital stock by reclassification, subdivision, reorganization or
otherwise, or (iii) merge or consolidate with any other corporation, trust
or entity or change the character of its business.
(e) NO ISSUANCE OF SHARES, OPTIONS OR OTHER SECURITIES. Neither HPX
nor its subsidiaries shall (i) issue any shares of capital stock, or (ii)
grant any option, warrant or other right to purchase or to convert any
obligation into shares of capital stock.
(f) COMPENSATION. Except as set forth in Schedule 4.2(f) and except as
expressly contemplated by Section 5.2(q), neither HPX nor its subsidiaries
shall (i) increase the compensation payable to any elected officer or to
other management personnel from the amount payable as of December 31, 1995,
except in accordance with normal and customary annual reviews consistent
with past practice, (ii) introduce or change any pension or profit sharing
plan, or any other employee benefit arrangement, except for insubstantial
changes necessary to comply with the minimum requirements of the Code or
ERISA or (iii) amend, renew, modify or extend any employment, change of
control, severance or other similar agreement or arrangement.
(g) DIVIDENDS. Neither HPX nor its subsidiaries shall declare, make or
pay any dividend or other distribution with respect to their capital stock;
provided, however, so long as HPX is operated as a real estate investment
trust (a "REIT") under the Code, HPX shall be allowed to distribute
dividends to the shareholders of HPX equal to (i) 95% of its REIT taxable
income (within the meaning of Sec-
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tion 857(a)(1)(A)(i) of the Code) plus (ii) 95% of the excess of its net
income from foreclosure property over the tax imposed on such income by the
Code (determined in accordance with Section 857(a)(1)(A)(ii) of the Code)
less (iii) any excess noncash income (within the meaning of Section 857(e)
of the Code); provided further, however, that HPX shall distribute as a
dividend substantially all the net gain (as determined by GAAP) from any
sale of a residual interest referred to in Section 4.2(b) in excess of
$100,000.
(h) CONSENTS AND APPROVALS. HPX shall use reasonable efforts to obtain
all necessary consents and approvals of other persons and governmental
authorities to the performance by HPX of the transactions contemplated by
this Agreement. HPX shall make all filings, applications, statements and
reports to all federal and state government agencies and entities which are
required to be made prior to the Effective Date by or on behalf of HPX or
its subsidiaries pursuant to any statute, rule or regulation in connection
with the transactions contemplated by this Agreement.
(i) BOARD OF DIRECTORS. Each member of HPX's current Board of
Directors, other than Alan D. Hamberlin (the "HPX Nominee"), shall resign
as of the Effective Date and the Monterey Shareholders shall designate four
nominees for HPX's Board of Directors, two of whom shall be the Monterey
Shareholders and two of whom shall not be officers or employees of Monterey
or HPX and shall be reasonably satisfactory to HPX (the "Monterey
Nominees," together with the HPX Nominee, the "Nominees"). HPX shall
include the Nominees in the Proxy Statement for election to the Board of
Directors of HPX and HPX shall use reasonable best efforts to obtain a vote
of a majority of the shares cast for the election of the Board of Directors
in favor of the Nominees. If any of the Nominees shall for any reason cease
to serve as a director of HPX at any time prior to the first anniversary of
the Effective Date, the vacancy shall be filled by a person selected by the
remaining Nominees as the case may be, then serving as directors; provided,
however, that if either Monterey Shareholder shall cease to so serve, the
vacancy shall be filled by a person selected by the remaining Monterey
Shareholder. The HPX Nominee and the Monterey Shareholders shall be
nominated for election to the Board of Directors of HPX for a two-year term
and the remaining Nominees for a one-year term.
4.3 ADDITIONAL COVENANTS OF HPX. For a period of at least two (2) years
after the Effective Date, unless approved by a majority of the Independent
Directors (as defined below) with respect to paragraphs (a) through (f) and
unless approved by a majority of the Independent Directors in which the majority
must include the approval of the HPX Nominee with respect to paragraph (g), HPX
further agrees that:
(a) DIRECTOR COMPENSATION. HPX shall not, directly or indirectly,
compensate any person for serving as a director of the Board of Directors
of HPX who is not an Independent Director. For purposes of this Agreement,
the term "Independent Director" shall mean any person who is not after the
Effective Date an officer or employee of HPX.
(b) TRANSACTIONS WITH AFFILIATES. HPX shall not, and shall not permit
any of its subsidiaries to enter into or be a party to any agreement or
transaction with any Affiliate of HPX except in the ordinary course of
HPX's or its subsidiaries' business and on terms no less favorable to HPX
or its subsidiaries than would be obtained in a comparable arm's length
transaction with a person not an Affiliate of HPX. In the event that HPX or
any of its subsidiaries proposes to enter into or be a party to any
agreement or transaction or a series of agreements or transactions with any
Affiliate of HPX involving the purchase, sale or lease of assets or
purchase of stock which is required to be reported under the Exchange Act
and in which the amount involved exceeds $60,000 in any fiscal year, HPX
shall receive an opinion from HPX's independent auditors or an independent
valuation or consulting firm that such agreement or transaction is no less
favorable to HPX or its subsidiaries than would be obtained in a comparable
arm's length transaction with a person not an Affiliate of HPX. Approval by
the Independent Directors shall not be required pursuant to this Section
4.3 for the Monterey Shareholders to purchase any of the Notes which may be
put to HPX or any of its subsidiaries after the Effective Date.
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(c) LOANS. HPX shall not make or accrue, or permit any of its
subsidiaries to make or accrue, any loans or other advances of money to any
shareholder, director or officer of any of them, other than reimbursable
expense advances incurred in the ordinary course of HPX's business.
(d) SHARE REPURCHASES. HPX shall not or permit any of its subsidiaries
to repurchase any shares of the common stock of HPX, or any other capital
stock of HPX or its subsidiaries, from any Affiliate of HPX or any of its
subsidiaries.
(e) INDEPENDENT DIRECTORS. HPX's Board of Directors shall be comprised
of at least two persons who are Independent Directors and one person who is
a member of HPX's current Board of Directors.
(f) REGISTRATION OF HPX COMMON STOCK. HPX shall register for resale
the shares of HPX Common Stock, including the Contingent Stock and the
Warrant Stock, to be issued hereunder to the Monterey Shareholders only on
the terms and subject to the conditions contained in the Form of
Registration Rights Agreement attached hereto as Exhibit D.
(g) RESIDUALS. HPX shall not sell or otherwise dispose of any of its
residual interests in mortgage securitizations.
4.4 OFFICERS' AND DIRECTORS' INDEMNIFICATION. The parties to this Agreement
agree that all rights to indemnification now existing in favor of the directors
or officers of HPX and its subsidiaries as provided in their respective Articles
of Incorporation or bylaws will survive the Merger and stay in effect in
accordance with their respective terms. For a period of five years after the
Effective Date, HPX, as the surviving corporation of the Merger, will provide
officers' and directors' liability insurance in respect of acts or omissions
occurring up to and including the Effective Date covering each such person
currently covered by HPX's officers' and directors' liability insurance policy
on terms with respect to coverage and in an amount (including deductibles) no
less favorable than those of such policy in effect on the date hereof.
4.5 COOPERATION. In the event any action, suit, proceeding, or
investigation relating to this Agreement or to the transactions contemplated by
this Agreement is commenced by a third party, whether before or after the
Effective Date, the parties to this Agreement agree to cooperate and use
reasonable best efforts to defend against and respond to such action, suit,
proceedings, or investigation.
4.6 NO SOLICITATION. Unless and until this Agreement shall have been
terminated pursuant to Section 6.3, none of the parties hereto or any of their
officers, directors, Affiliates, representatives or agents (including, without
limitation, any investment banker, attorney or accountant retained by them)
shall:
(a) initiate or solicit, directly or indirectly, any inquiries or the
making of any proposal or engage in any negotiations with respect to (i)
any merger, consolidation, share exchange, business combination or similar
transaction of HPX or Monterey; (ii) any sale, lease, exchange, mortgage,
pledge, transfer or other disposition of 20% or more of the assets of HPX
or Monterey; (iii) any tender offer or exchange offer for 20% or more of
the outstanding shares of capital stock of HPX or Monterey, or the filing
of a registration statement under the Securities Act of 1933, as amended,
in connection therewith; (iv) any person acquiring beneficial ownership of,
or the formation of any group (as such term is used in Section 13(d) of the
Exchange Act and the rules and regulations promulgated thereunder) which
would beneficially own or have the right to acquire beneficial ownership of
20% or more of the outstanding shares of capital stock of HPX or Monterey
(collectively, a "Competing Transaction");
(b) subject to the fiduciary duties of the parties' respective boards
of directors under applicable law, provide to any other person (or have
discussions relating to) any information or data relating to HPX or
Monterey for the purpose of seeking, facilitating or encouraging any effort
or attempt by any other person to seek or effect a Competing Transaction;
or
(c) enter into any agreement or arrangement with any other party with
respect to a Competing Transaction.
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In the event a party hereto receives any offer of the type of transactions
referred to in this Section 4.6, such party shall promptly communicate to the
other parties hereto the terms of any such offer.
4.7 REASONABLE EFFORTS; ACCESS. Subject to the terms and conditions of this
Agreement, and subject to fiduciary duties under applicable law, each of the
parties hereto agrees to use reasonable best efforts to take, or cause to be
taken, all actions, and to do, or cause to be done, all things necessary, proper
or advisable to consummate and make effective the transactions contemplated by
this Agreement, including, without limitation, using reasonable best efforts to
make all necessary, proper or advisable registrations and filings (including any
required under the Hart-Scott-Rodino Act or Blue Sky laws and for the listing of
the shares of HPX Common Stock to be issued for Monterey Common Stock on the New
York Stock Exchange) and obtain all necessary, proper or advisable permits,
consents, authorizations, requests and approvals of third parties and
governmental authorities. If at any time after the Effective Date, further
action is necessary or desirable to carry out the purposes of this Agreement,
the proper officers and directors of each party to this Agreement shall take all
such action. Each party hereto will afford the officers and representatives of
each other party to this Agreement, from the date of this Agreement until the
Effective Date, full access upon reasonable notice during normal business hours
to all properties, books, accounts, contracts, commitments and any other records
of such party. Sufficient access shall be allowed to provide any party with full
opportunity to make any investigation it reasonably desires to conduct of any
other party, and to keep itself fully informed of the affairs of such party. In
addition, each party will permit the other parties hereto to make extracts or
copies of all such books, accounts, contracts, commitments, and records, and to
furnish to such party within five (5) days after demand, any further financial
and operating data of that party as such party reasonably requests.
4.8 PUBLIC ANNOUNCEMENTS. The parties hereto shall consult with each other
before issuing any press release or otherwise making any public statements with
respect to this Agreement and shall not issue any such press release or make any
such public statement prior to such consultation, except as may be required by
law on the advice of counsel or by any listing agreement with any national
securities exchange.
V. CONDITIONS PRECEDENT TO OBLIGATIONS
5.1 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF HPX. The obligations of HPX
under this Agreement are, unless waived by HPX, subject to the satisfaction of
the following conditions on or before the Effective Date:
(a) ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties of Monterey herein contained shall have been true and
correct in all material respects when made, and, in addition, shall be true
and correct in all material respects on and as of the Effective Date with
the same force and effect as though made on and as of the Effective Date,
except as affected by the transactions contemplated hereby or disclosed
herein or on a Schedule hereto.
(b) PERFORMANCE OF AGREEMENTS; MONTEREY TRANSACTIONS; CONSENTS.
Monterey shall have in all material respects performed all obligations and
agreements and complied with all covenants and conditions contained in this
Agreement to be performed and complied with by it on or prior to the
Effective Date, the Monterey Transactions shall have been completed and
Monterey shall have obtained each consent and approval necessary in order
that the transactions contemplated hereby do not constitute a material
breach or violation of, or result in a material right of termination or
acceleration of any encumbrance on any of Monterey's material assets
pursuant to any provisions of any material agreement, arrangement or
understanding or any license, franchise or permit, including, without
limitation, all of the consents referred to in Schedule 3.1(k).
(c) SHAREHOLDER APPROVAL. The shareholders of HPX at the meeting of
shareholders of HPX referred to in Section 2.1 shall have, by the
affirmative vote of at least a majority of the outstanding shares with
respect to item (i) below and by the affirmative vote of at least a
majority of the shares present in person or by proxy and voting at the
meeting with respect to items (ii) through (iii) below, (i) approved this
Agreement and the Merger, including the termination of HPX's status as a
REIT and the amendments to the Articles of Incorporation of HPX (and the
one-for-three reverse stock split and the classified board provided for
therein) as set forth in the Articles of Merger attached hereto as Exhibit
A, (ii) approved the employment, stock option and registration rights
agreements between each of the
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Monterey Shareholders and HPX and (iii) elected the Nominees to the Board
of Directors of HPX. Furthermore, the shareholders of HPX at the meeting of
the shareholders of HPX referred to in Section 2.1 shall have considered
and voted upon (i) a proposal to approve certain stock options granted
pursuant to that certain Amended and Restated Employment Agreement dated
December 31, 1995 by and between HPX and Alan D. Hamberlin (the "Hamberlin
Employment Agreement"), and (ii) a proposal to amend the HPX Stock Option
Plan and the stock option agreements thereunder to extend the exercise
period after an optionee ceases to be a director or employee of HPX from
three months after cessation to two years after such cessation of
employment or service as a director.
(d) OPINION OF COUNSEL FOR MONTEREY. HPX shall have received a written
opinion from Snell & Wilmer, L.L.P., special counsel for Monterey, dated
the Effective Date, in form and substance reasonably satisfactory to HPX
and its counsel, covering the matters set forth in Annex A.
(e) NO MATERIAL ADVERSE CHANGE. There shall have been no material
adverse change in the business, properties, prospects (other than changes
resulting from general economic or market conditions over which Monterey
has no control), results of operations or financial condition of Monterey,
taken as a whole.
(f) LITIGATION. No action or proceeding by any governmental agency
shall have been instituted or threatened which would enjoin, restrain or
prohibit, or might result in substantial damages in respect of this
Agreement or the consummation of the transactions contemplated by this
Agreement, and would in the reasonable judgment of HPX make it inadvisable
to consummate such transaction, and no court order shall have been entered
in any action or proceeding instituted by any other party which enjoins,
restrains or prohibits this Agreement or consummation of the transactions
contemplated by this Agreement.
(g) HART-SCOTT-RODINO ACT. Each of the parties hereto and any other
person (as defined in the Hart-Scott-Rodino Act and the rules and
regulations thereunder) required in connection with the Merger or the other
transactions contemplated by this Agreement to file a Notification and
Report Form for Certain Mergers and Acquisitions with the Department of
Justice and the FTC pursuant to Title II of the Hart-Scott-Rodino Act shall
have made such filing and the applicable waiting period with respect to
each such filing (including any extension thereof by reason of a request
for additional information) shall have expired or been terminated.
(h) OPINION FROM INVESTMENT BANKER. HPX shall have received an
updating opinion reasonably satisfactory to it for inclusion in the Proxy
Statement from Rauscher Pierce Refsnes, Inc. with respect to the fairness
of the terms of the Merger to the shareholders of HPX from a financial
point of view.
(i) TAX OPINION. HPX shall have received a written opinion of Hughes &
Luce, L.L.P., special counsel for HPX, dated the Effective Date, to the
effect that (i) the Merger contemplated by this Agreement will qualify as a
reorganization under Section 368(a) of the Code, (ii) there has not been an
"ownership change" of HPX within the meaning of Section 382 of the Code
prior to the Effective Date and (iii) the Merger will not cause an
"ownership change" of HPX within the meaning of Section 382 of the Code to
occur on the Effective Date.
(j) EMPLOYMENT AGREEMENTS. Each of the Monterey Shareholders and HPX
shall have entered into an employment agreement substantially in the form
of Exhibit B hereto.
(k) REGISTRATION RIGHTS AGREEMENTS. Each of the Monterey Shareholders
and HPX shall have entered into a registration rights agreement
substantially in the form of Exhibit C hereto.
(l) WARRANTS AND CONTINGENT STOCK AGREEMENT. As contemplated by
Section 1.3(e) and Section 1.3(f), Monterey, the Monterey Shareholders and
HPX shall have entered into a mutually satisfactory agreement regarding (i)
delivery of the Warrant Stock upon the exercise or expiration of the
Warrants and (ii) the retention and disbursement of the Contingent Stock
which is attached as Exhibit D hereto.
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(m) CERTIFICATES. Monterey shall have furnished certificates of its
Chief Executive and Chief Financial Officers to evidence compliance with
the conditions set forth in paragraphs (a), (b) and (e) of this Section 5.1
in form reasonably satisfactory to HPX.
(n) PROCEEDINGS SATISFACTORY TO COUNSEL. All proceedings taken by
Monterey and all instruments executed and delivered by Monterey on or prior
to the Effective Date in connection with the transactions herein
contemplated (including the Distributions and the Monterey Transactions)
shall be reasonably satisfactory in form and substance to counsel for HPX.
5.2 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF MONTEREY. The obligations
of Monterey and the Monterey Shareholders under this Agreement are, unless
waived by Monterey and the Monterey Shareholders, subject to the satisfaction of
the following conditions on or before the Effective Date:
(a) ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties of HPX herein contained shall have been true and correct in
all material respects when made and, in addition, shall be true and correct
in all material respects on and as of the Effective Date with the same
force and effect as though made on and as of the Effective Date, except as
affected by the transactions contemplated hereby or disclosed herein or on
any Schedule hereto.
(b) PERFORMANCE OF AGREEMENTS; CONSENTS. HPX shall have in all
material respects performed all obligations and agreements and complied
with all covenants and conditions contained in this Agreement to be
performed and complied with by it on or prior to the Effective Date. HPX
shall have obtained each consent and approval necessary in order that the
transactions contemplated hereby do not constitute a material breach or
violation of, or result in a right of termination or acceleration of any
encumbrance on any of HPX's material assets pursuant to any material
agreement, arrangement or understanding or any license, franchise or permit
(other than pursuant to those employment agreements listed on Schedule
3.2(m)).
(c) OPINION OF COUNSEL FOR HPX. Monterey shall have received a written
opinion from Hughes & Luce, L.L.P., special counsel for HPX, dated the
Effective Date, in form and substance reasonably satisfactory to Monterey
and its counsel, covering the matters set forth in Annex B.
(d) NO MATERIAL ADVERSE CHANGE. There shall have been no material
adverse change in the business, properties, prospects (other than changes
resulting from general economic or market conditions over which HPX has no
control), results of operations or financial condition of HPX.
(e) LITIGATION. No action or proceeding by any governmental agency
shall have been instituted or threatened which would enjoin, restrain or
prohibit, or might result in substantial damages in respect of this
Agreement or the consummation of the transactions contemplated by this
Agreement, and would in the reasonable judgment of Monterey and the
Monterey Shareholders make it inadvisable to consummate such transaction,
and no court order shall have been entered in any action or proceeding
instituted by any other party which enjoins, restrains or prohibits this
Agreement or consummation of the transactions contemplated by this
Agreement.
(f) REGISTRATION UNDER SECURITIES ACT OF 1933 AND LISTING ON STOCK
EXCHANGE. All of the shares of HPX Common Stock to be issued hereunder,
including the Contingent Stock, the Warrant Stock and the Warrants shall
have been registered under the Securities Act of 1933, no stop order
suspending the effectiveness of the Registration Statement shall have been
issued and the shares of HPX Common Stock to be issued hereunder shall have
been authorized for listing, subject to official notice of issuance, on the
New York Stock Exchange.
(g) HART-SCOTT-RODINO ACT. Each of the parties hereto and any other
person (as defined in the Hart-Scott-Rodino Act and the rules and
regulations thereunder) required in connection with the Merger or the other
transactions contemplated by this Agreement to file a Notification and
Report Form for Certain Mergers and Acquisitions with the Department of
Justice and the FTC pursuant to Title II of the Hart-Scott-Rodino Act shall
have made such filing and the applicable waiting period with respect to
each
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such filing (including any extension thereof by reason of a request for
additional information) shall have expired or been terminated.
(h) HPX SHAREHOLDER APPROVAL. The shareholder approvals referred to in
items (i) through (iv) of paragraph (c) of Section 5.1 shall have been
obtained.
(i) EMPLOYMENT AGREEMENTS. Each of the Monterey Shareholders and HPX
shall have entered into an employment agreement substantially in the form
of Exhibit B hereto.
(j) REGISTRATION RIGHTS AGREEMENTS. Each of the Monterey Shareholders
and HPX shall have entered into a registration rights agreement
substantially in the form of Exhibit C hereto.
(k) WARRANTS AND CONTINGENT STOCK AGREEMENT. As contemplated by
Section 1.3(e) and Section 1.3(f), Monterey, the Monterey Shareholders and
HPX shall have entered into a mutually satisfactory agreement regarding (i)
delivery of the Warrant Stock upon the exercise or expiration of the
Warrants and (ii) the retention and disbursement of the Contingent Stock
which is attached as Exhibit D hereto.
(l) RESIGNATIONS AND ELECTIONS. All directors (other than the HPX
Nominee) and officers of HPX shall have resigned and William W. Cleverly
and Steven J. Hilton shall have been elected to the offices of Chairman and
Co-Chief Executive Officer of HPX, and President and Co-Chief Executive
Officer of HPX, respectively.
(m) TAX OPINION. Monterey shall have received a written opinion of
Hughes & Luce, L.L.P. to the effect set forth in Section 5.1(j), which
opinion will be reasonably satisfactory in form and substance to Monterey
and the Monterey Shareholders.
(n) DISTRIBUTIONS. Monterey shall have declared and paid the
Distributions as such term is defined in Section 4.1(i).
(o) CERTIFICATES. HPX shall have furnished certificates of its Chief
Executive and Chief Financial Officers to evidence compliance with the
conditions set forth in paragraphs (a), (b), (d), (h) and (l) of this
Section 5.2, in form reasonably satisfactory to Monterey.
(p) PROCEEDINGS SATISFACTORY TO COUNSEL. All proceedings taken by HPX
and all instruments executed and delivered by HPX on or prior to the
Effective Date in connection with the transactions herein contemplated
shall be reasonably satisfactory in form and substance to counsel for
Monterey.
(q) CHANGE OF CONTROL PAYMENTS. The Hamberlin Employment Agreement
shall have been amended to delete the $500,000 cash payment that might be
required to be paid (and the right to accelerate the related 750,000 stock
options) in the event of the consummation of the transactions contemplated
by this Agreement, and the Employment Agreements between HPX and each of
Jay R. Hoffman and Barry L. Reger dated July 1, 1996, shall have been
amended to provide that the consummation of the transactions contemplated
by this Agreement pursuant to which Messrs. Hoffman and Reger will resign
as officers or employees of HPX will result in a termination of employment
by HPX without cause thereunder. HPX shall be required to make only those
severance and change of control payments pursuant to the employment and
severance agreements and arrangements listed on Schedule 3.2(m).
(r) HPX GUARANTY AND ASSUMPTION. HPX shall have executed an agreement
to become a guarantor of the Notes as of the Effective Date as contemplated
by that certain Consent Solicitation Statement of MMI and MHC dated August
7, 1996 and shall have executed an agreement to assume the Warrants in
substantially the forms previously provided by Monterey to HPX, both of
which are attached as Exhibits E and F, respectively.
VI. WAIVER, MODIFICATION, TERMINATION
6.1 WAIVERS. The failure of Monterey or the Monterey Shareholders to comply
with any of their obligations, agreements or conditions as set forth herein may
be waived expressly in writing by HPX, by action
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of its Board of Directors without the requirement for a vote of shareholders.
The failure of HPX to comply with any of its obligations, agreements or
conditions as set forth herein may be waived expressly in writing by Monterey
and the Monterey Shareholders.
6.2 MODIFICATION. This Agreement may be modified at any time in any respect
by the mutual consent of all of the parties, notwithstanding prior approval by
the shareholders of HPX. Any such modification may be approved for HPX by its
Board of Directors, without further shareholder approval and for Monterey by its
Board of Directors and the Monterey Shareholders, except the value or the method
of calculating the Merger Consideration to be issued in exchange for the shares
of Monterey Common Stock may not be increased or materially altered without the
consent of the shareholders of HPX given by the same vote as is required under
applicable state law for approval of this Agreement; provided, however, no
consent of the shareholders of HPX or Monterey and the Monterey Shareholders
shall be required to substitute cash in place of HPX Common Stock in accordance
with the provisions of Section 1.3(c) hereto.
6.3 TERMINATION. The Merger may be terminated on or before the Effective
Date notwithstanding any adoption of this Agreement by the shareholders of HPX
or the Monterey Shareholders:
(a) By the mutual agreement of HPX, Monterey and the Monterey
Shareholders;
(b) By either HPX or Monterey and the Monterey Shareholders if the
other party or parties willfully breaches any of its material
representations, warranties or covenants contained herein and such breach
is not cured or waived within fifteen business days after written notice
thereof;
(c) By HPX, if any of the conditions provided in Section 5.1 shall not
have been satisfied, complied with or performed in any material respect by
Monterey and the Monterey Shareholders as of the Effective Date, and HPX
shall not have waived such failure of satisfaction, noncompliance or
nonperformance;
(d) By Monterey and the Monterey Shareholders, if any of the
conditions provided in Section 5.2 shall not have been satisfied, complied
with or performed in any material respect by HPX as of the Effective Date,
and Monterey and the Monterey Shareholders shall not have waived such
failure of satisfaction, noncompliance or nonperformance;
(e) At the option of HPX or Monterey and the Monterey Shareholders, if
any nonappealable final order, decree or judgment permanently restraining
or prohibiting the Merger shall have been issued by any court or
governmental agency having competent jurisdiction; or
(f) By either HPX or Monterey and the Monterey Shareholders if the
Effective Date has not occurred on or prior to March 31, 1997 or such later
date as shall have been agreed to by the parties hereto under Section 6.2.
In the event of any termination pursuant to this Section 6.3 (other than
pursuant to subparagraphs (a) or (f) hereof) written notice setting forth the
reasons thereof shall forthwith be given by Monterey if it is the terminating
party, to HPX, or by HPX, if it is the terminating party, to Monterey.
6.4 EFFECT OF TERMINATION. If the Merger is terminated, this Agreement
shall forthwith become wholly void, of no effect and, except as specifically
provided in Section 6.5, without liability to any party to this Agreement or to
the directors, officers, representatives and agents of any such party.
6.5 FEES AND EXPENSES. (a) In the event that HPX, on the one hand or
Monterey and the Monterey Shareholders, on the other, terminates the Merger
pursuant to Section 6.3(b), 6.3(c) or 6.3(d), as the case may be, as a result of
the other party's or parties' willful breach or willful failure to perform in
any material respect any of their respective representations, warranties,
covenants or agreements under this Agreement or the transactions contemplated
hereby (the "Non-Breaching Party"), the other party or parties, as the case may
be (the "Breaching Party"), will reimburse the Non-Breaching Party for all
reasonable out-of-pocket fees and expenses incurred by the Non-Breaching Party
in connection with and incident to the negotiation, preparation and execution of
this Agreement and the obtaining of the necessary approvals thereof (including,
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without limitation, filing fees and fees payable to legal counsel, financial
printers, investment bankers, counsel to any of the foregoing, and accountants).
(b) In the event that a party (a "Terminating Party") terminates this
Agreement pursuant to Section 6.3 (other than as a result of a willful breach or
willful failure to perform by the other party or parties or pursuant to Section
6.3(a) or Section 6.3(f)) and then enters into an agreement, letter of intent,
or binding arrangement with respect to a Competing Transaction within one year
after termination of this Agreement, then the Terminating Party will pay to the
other party or parties a fee, in cash, equal to 2% of the aggregate value of the
Competing Transaction.
(c) Except as specifically provided in this Section 6.5, each party will
bear its own expenses in connection with this Agreement and the transactions
contemplated hereby; provided, however, HPX and Monterey will each pay one half
of any filing fees paid in connection with any filings made with respect to this
Agreement under the Hart-Scott-Rodino Act.
VII. INDEMNIFICATION
7.1 INDEMNIFICATION OF HPX INTERESTS. Notwithstanding any investigation by
HPX or any of its representatives, HPX and its officers, directors, and agents
(the "HPX Interests") shall be indemnified against and held harmless from any
and all damage, loss, liability, and expense, including without limitation
amounts paid in settlement, reasonable expenses of investigation, and attorneys'
fees and expenses relating to any action, suit, or proceeding (collectively,
"Losses") incurred or suffered by the HPX Interests arising out of any action,
suit, claim or demand arising out of, relating to or based on Monterey's or the
Monterey Shareholders' breach or failure to perform in any material respect any
of their representations, warranties, covenants or agreements under this
Agreement or the transactions contemplated hereby; provided, however, that such
action, suit, claim or demand is first asserted prior to the second anniversary
of the Effective Date.
7.2 INDEMNIFICATION OF THE MONTEREY SHAREHOLDER'S INTERESTS.
Notwithstanding any investigation by the Monterey Shareholders or any of their
representatives, the Monterey Shareholders shall be indemnified against and held
harmless from their pro rata share (based on the shares of HPX Common Stock
delivered to them pursuant to Section 1.3(b)) of any Loss incurred or suffered
by the Monterey Shareholders arising out of any action, suit, claim or demand
arising out of, relating to or based on HPX's breach or failure to perform in
any material respect any of its representations, warranties, covenants or
agreements under this Agreement or the transactions contemplated hereby;
provided, however, that such action, suit, claim or demand is first asserted
prior to the second anniversary of the Effective Date.
7.3 HPX COMMITTEE. For purposes of this Article VII, a committee to be
comprised of the Independent Directors of HPX serving after the Effective Date
(the "Committee") is irrevocably appointed to exercise HPX's rights under this
Article VII and is hereby authorized, on behalf and in the name of HPX, to act,
as the Committee may deem appropriate, as HPX's agent in respect of receiving
all notices, documents and certificates and making all determinations required
under this Article VII. The appointment of the Committee is irrevocable and any
action taken by the Committee pursuant to the authority granted in this Article
VII shall be effective and absolutely binding on HPX notwithstanding any
contrary action or direction from any other representative of HPX.
7.4 NOTICE. Any person or persons entitled to receive indemnification under
this Article VII (the "Indemnified Party") agrees to give prompt written notice
to the person or persons obligated to provide such indemnification (the
"Indemnifying Party") upon (a) the occurrence of any Loss in respect of which
indemnification may be sought or (b) the assertion of any claim or the
commencement of any action or proceeding in respect of which such a Loss may
reasonably be expected to occur (a "Claim"), but the Indemnified Party's failure
to give such notice will not affect the obligations of the Indemnifying Party
under Article VII except to the extent that the Indemnifying Party is materially
prejudiced thereby. Such written notice will set forth a reference to the event
or events forming the basis of such claimed Loss and the amount of the claimed
Loss, unless the amount is uncertain or contingent, in which event the
Indemnified Party will give a later written notice when the amount becomes
fixed. The Indemnifying Party will not be liable under
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this Article VII for any settlement of a claimed Loss effected without the
consent of the Indemnifying Party, which consent shall not be unreasonably
withheld.
7.5 INDEMNIFICATION FUND. To provide the sole and exclusive source of
reimbursement and indemnification to the HPX Interests for the amount of any
Loss as determined in accordance with Sections 7.5 and 7.6 of this Article VII,
HPX shall retain as security the Indemnification Fund as provided for in Section
1.3(d). From time to time, the Indemnification Fund may be reduced and applied
(based on the most recent semi-annual valuation date) by the amount of any Loss.
For purposes of this Article VII, each share of HPX Common Stock held in the
Indemnification Fund will be valued every six months after the Effective Date at
the Trading Average, ending with the last trading day of each six-month period,
with the Monterey Shareholders delivering additional cash or shares of HPX
Common Stock or receiving back excess cash or shares of HPX Common Stock to
maintain such $500,000 level at the end of each period less any amounts
previously applied. As provided in Section 1.3(d), the Monterey Shareholders may
at any time deposit cash with HPX to replace all or a portion of the shares of
HPX Common Stock retained by HPX hereunder as all or part of the Indemnification
Fund. On the second anniversary of the Effective Date, any cash or shares of HPX
Common Stock remaining in the Indemnification Fund will be released to the
Monterey Shareholders; provided, that if the Committee has notified the Monterey
Shareholders prior to the second anniversary of the Effective Date of a Loss or
Claim, the amount of which is uncertain or contingent, HPX will be entitled to
retain an amount of cash or a number of shares of HPX Common Stock that, based
on the Committee's good faith estimate of the potential amount of such Loss or
Claim, would be adequate to indemnify and hold harmless the HPX Interests for
each Loss or Claim; and provided, further, that when the amount of such
uncertain or contingent Loss or Claim is fixed, any cash or shares of HPX Common
Stock remaining in the Indemnification Fund after the application for such
indemnification, will be released promptly thereafter to the Monterey
Shareholders in the same proportion as the Merger Consideration was delivered
pursuant to Section 1.3(b).
7.6 PROCEDURES. Notwithstanding any other Section of this Agreement, upon
receipt of the notice of a Loss or Claim, the Committee and the Monterey
Shareholders shall work reasonably and in good faith to determine the amount of
such a Loss or Claim within thirty days of the receipt of notice of the Loss or
Claim after which time the amount of the Loss or Claim shall, at the option of
either the Committee or the Monterey Shareholders, be determined by arbitration
in accordance with Section 7.7 of this Agreement.
7.7 ARBITRATION. All disputes, claims and other matters in controversy
arising directly or indirectly out of or related to this Agreement, or the
breach thereof, whether contractual or non-contractual, including any dispute as
to the amount of a Loss or Claim or the existence of a Loss or Claim hereunder,
shall be determined by arbitration and shall be settled by three arbitrators,
one of whom shall be appointed by the Committee, one by the Monterey
Shareholders and the third of whom shall be appointed by the first two
arbitrators. Persons eligible to be selected as arbitrators shall be limited to
attorneys who have been in practice at least 15 years specializing in corporate
and securities matters and who have had both training and experience as
arbitrators ("Experienced Arbitrators"). If either such person fails to appoint
an arbitrator within ten (10) days of a request in writing by the other such
person to do so or if the first two arbitrators cannot agree on the appointment
of a third arbitrator within thirty days, then such arbitrator shall be
appointed by the American Arbitration Association (which appointment shall not
be limited to Experienced Arbitrators if not made within the applicable time
period). Except as to the selection of arbitrators which shall be as set forth
above, the arbitration shall be conducted promptly and expeditiously at such
place in Phoenix, Arizona agreed to between the Committee and the Monterey
Shareholders in accordance with the Commercial Rules of Arbitration of the
American Arbitration Association then in effect so as to enable the arbitrators
to determine the Loss or Claim and/or the existence of a Loss or Claim within
forty-five (45) days of the commencement of the arbitration proceedings. The
arbitrators shall base their award on applicable law and judicial precedent and,
unless both parties agree otherwise, shall include in such award the findings of
fact and conclusions of law upon which the award is based and may award
temporary or permanent equitable relief. Judgment on the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof. The
arbitrators' resolution of the dispute shall be final, binding and
non-appealable. The nonprevailing party shall bear the expenses of the
arbitrators and the arbitration, including reasonable attorneys' fees and costs.
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7.8 LIMITATIONS ON INDEMNIFICATION. The maximum aggregate amount of
indemnification that may be required of the Monterey Shareholders on the one
hand, and HPX, on the other, under this Article VII shall be $500,000 each.
VIII. GENERAL
8.1 NO BROKERS OR FINDERS. Monterey and the Monterey Shareholders hereby
represent and warrant to HPX with respect to Monterey, and HPX hereby represents
and warrants to Monterey and the Monterey Shareholders with respect to HPX that,
except for amounts payable to Rauscher Pierce Refsnes, Inc.; Friedman, Billings,
Ramsey & Co., Inc. and Michael P. Kahn & Associates, Ltd., as set forth on
Schedule 8.1, no person is entitled to receive from Monterey and the Monterey
Shareholders or HPX, respectively, any investment banking, brokerage, or
finder's fee or fees in connection with this Agreement or any of the
transactions contemplated by this Agreement.
8.2 CONTROLLING LAW. This Agreement and all questions relating to its
validity, interpretation, performance and enforcement, shall be governed by and
construed in accordance with the internal laws of the State of Arizona,
notwithstanding any conflict-of-law provisions to the contrary except to the
extent that the internal laws of the State of Maryland mandatorily apply.
8.3 NOTICES. All notices, requests, demands and other communications
required or permitted under this Agreement shall be in writing and shall be
deemed to have been duly given when delivered in person, by cable, telegram or
telex, facsimile or by registered or certified mail (postage prepaid, return
receipt requested) to the respective parties as follows:
If to HPX:
Homeplex Mortgage Investments Corporation
5333 North Seventh Street, Suite 219
Phoenix, Arizona 85014
Attention: Corporate Secretary
Fax: (602) 230-1690
with a copy given in the manner
prescribed above, to:
Hughes & Luce, L.L.P.
1717 Main Street, Suite 2800
Dallas, Texas 75201
Attention: Alan J. Bogdanow
Fax: (214) 939-6100
If to Monterey or the Monterey Shareholders:
Monterey Homes
6613 North Scottsdale Road
Suite 200
Scottsdale, Arizona 85250
Attention: President
Fax: (602) 998-9162
with a copy given in the manner
prescribed above, to:
Snell & Wilmer, L.L.P.
One Arizona Center
Phoenix, Arizona 85004
Attention: Steven D. Pidgeon
Fax: (602) 382-6070
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Any party may alter the address to which communications or copies are to be
sent by giving notice to such of change of address in conformity with the
provisions of this paragraph for the giving of notice.
8.4 BINDING NATURE OF AGREEMENT; NO ASSIGNMENT. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns, except that no party may assign or transfer its rights
or obligations under this Agreement without the prior written consent of the
other parties hereto.
8.5 ENTIRE AGREEMENT. This Agreement and the documents required to be
executed herewith contain the entire understanding among the parties hereto with
respect to the subject matter hereof, and supersedes all prior and
contemporaneous agreements and understandings, inducements or conditions,
express or implied, oral or written, except that the confidentiality provisions
of paragraph 6 of the letter of intent dated May 24, 1996 shall be deemed
incorporated herein. The express terms hereof control and supersede any course
of performance and/or usage of the trade inconsistent with any of the terms
hereof. This Agreement and the documents required to be executed herewith may
not be modified or amended other than by an agreement in writing.
8.6 PARAGRAPH HEADINGS. The paragraph headings in this Agreement are for
convenience only; they form no part of this Agreement and shall not affect its
interpretation.
8.7 GENDER. Words used herein, regardless of the number and gender
specifically used, shall be deemed and construed to include any other number,
singular or plural, and any other gender, masculine, feminine or neuter, as the
context requires.
8.8 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
warranties made in this Agreement shall survive the Effective Date for a period
of two years. The covenants in Sections 4.3 and 4.4 and Article VII shall
survive the Effective Date for the period specified therein. All statements
contained in any schedule or certificate delivered in connection with this
Agreement will constitute representations and warranties under this Agreement.
8.9 CERTAIN DEFINITIONS. For the purposes of this Agreement: (a) the term
"subsidiary" means each person in which a person owns or controls, directly or
through one or more subsidiaries, 50 percent or more of the stock or other
interests having general voting power in the election of directors or persons
performing similar functions or more than 50% of the equity interests; (b) the
term "person" will be broadly construed to include any individual, corporation,
company, partnership, trust, joint stock company, association, or other private
or governmental entity; and (c) the term "knowledge" with respect to HPX or
Monterey shall be deemed to mean the knowledge of its executive officers after
reasonable inquiry.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
13th day of September, 1996.
HOMEPLEX MORTGAGE INVESTMENTS
CORPORATION
By: /s/ JAY R. HOFFMAN
------------------------------------
Name: Jay R. Hoffman
Title: President
MONTEREY HOMES CONSTRUCTION II, INC.
By: /s/ WILLIAM W. CLEVERLY
------------------------------------
Name: William W. Cleverly
Title: President
MONTEREY HOMES ARIZONA II, INC.
By: /s/ STEVEN J. HILTON
------------------------------------
Name: Steven J. Hilton
Title: Secretary and Treasurer
MONTEREY SHAREHOLDERS
/s/ WILLIAM W. CLEVERLY
------------------------------------
William W. Cleverly
/s/ STEVEN J. HILTON
------------------------------------
Steven J. Hilton
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APPENDIX B
FORM OF ARTICLES OF MERGER
<PAGE> 229
ARTICLES OF MERGER
THESE ARTICLES OF MERGER are dated as of , 1996, by and among
Homeplex Mortgage Investments Corporation, a Maryland corporation ("Surviving
Company"), and Monterey Homes Construction II, Inc., an Arizona corporation
("MHC II") and Monterey Homes Arizona II, Inc., an Arizona corporation ("MHA
II", together with MHC II, the "Merged Companies"), such corporations sometimes
hereinafter being jointly referred to as the "Constituent Corporations."
WITNESSETH:
WHEREAS, Surviving Company, the Merged Companies, and the shareholders of
the Merged Companies, have entered into an Agreement and Plan of Reorganization
(the "Agreement") in which the parties thereto agreed, among other things, that
each of the Merged Companies would be merged with and into Surviving Company;
NOW, THEREFORE, the following is adopted as and for the Articles of Merger
of the Constituent Corporations:
1. MHC II and MHA II were incorporated under the laws of the State of
Arizona on June 1, 1995 and own no interest in land in the State of Maryland.
2. On the effective date of the merger (as defined in paragraph 16 hereof
and sometimes referred to herein as the "Effective Date"), the Merged Companies
shall be merged with and into Surviving Company which shall be the surviving
corporation.
3. Surviving Company shall be governed by the laws of the State of Maryland
and the registered office of Surviving Company in that state shall be CT
Corporation System, Inc.
4. Upon the merger becoming effective, the separate existence of the Merged
Companies shall cease, and Surviving Company shall succeed to and possess all
the properties, rights, privileges, powers, franchises and immunities, of a
public as well as of a private nature, and be subject to all the debts,
liabilities, obligations, restrictions, disabilities and duties of the Merged
Companies, all without further act or deed, as provided in the applicable
provisions of the Maryland Corporations and Associations Code and the Arizona
Business Corporation Act.
5. Except as amended by the provisions of paragraph 6 hereof, the Articles
of Incorporation and bylaws of Surviving Company as in effect on the Effective
Date shall be, from and after the Effective Date, the Articles of Incorporation
and bylaws of the surviving corporation until they are thereafter amended.
6. The amendments to the Articles of Incorporation of Surviving Company
which are to be effected as part of the merger are to (i) delete Article IX of
said charter in its entirety, (ii) renumber existing Article X of said charter
to Article IX (iii) strike out Articles I, VI and VIII of said charter and to
substitute the following new articles and (iv) add the following subparagraph
(e) to Article V of said charter:
ARTICLE I
NAME
The name of the corporation (which is hereinafter called the "Corporation")
is: Monterey Homes Corporation.
<PAGE> 230
ARTICLE V
CAPITAL STOCK
(e) Simultaneously with the Effective Date of this amendment, the
authorized shares of the Corporation's Common Stock, par value $0.01 per share,
and each share of such Common Stock issued and outstanding immediately prior to
the Effective Date (the "Old Common Stock") shall automatically and without any
action on the part of the holder thereof be reclassified as and changed into
one-third ( 1/3) of a share of the Corporation's Common Stock, par value equal
to the par value of the Old Common Stock (the "New Common Stock"), subject to
the treatment of fractional share interests as described below. Each holder of a
certificate or certificates which immediately prior to the Effective Date
represented outstanding shares of Old Common Stock (the "Old Certificates,"
whether one or more) shall be entitled to receive upon surrender of such Old
Certificates to the Corporation's Transfer Agent for cancellation, a certificate
or certificates (the "New Certificates," whether one or more) representing the
number of whole shares of the New Common Stock into which and for which the
shares of the Old Common Stock formerly represented by such Old Certificates so
surrendered, are reclassified under the terms hereof. From and after the
Effective Date, Old Certificates shall represent only the right to the number of
shares of New Common Stock into which the Old Common Stock shall have been
reclassified and the right to receive New Certificates therefor pursuant to the
provisions hereof. No certificates or scrip representing fractional share
interests in New Common Stock will be issued, and no such fractional share
interest will entitle the holder thereof to vote, or to any rights of a
shareholder of the Corporation. All fractional shares for one-half share or more
shall be increased to the next higher whole number of shares and all fractional
shares of less than one-half share shall be decreased to the next lower whole
number of shares, respectively. If more than one Old Certificate shall be
surrendered at one time for the account of the same stockholder, the number of
full shares of New Common Stock for which New Certificates shall be issued shall
be computed on the basis of the aggregate number of shares represented by the
Old Certificates so surrendered. In the event that the Corporation's Transfer
Agent determines that a holder of Old Certificates has not tendered all his
certificates for exchange, the Transfer Agent shall carry forward any fractional
share until all certificates of that holder have been presented for exchange
such that rounding for fractional shares to any one person shall not exceed one
share. If any New Certificate is to be issued in a name other than that in which
the Old Certificates surrendered for exchange are issued, the Old Certificates
so surrendered shall be properly endorsed and otherwise in proper form for
transfer, and the person or persons requesting such exchange shall affix any
requisite stock transfer tax stamps to the Old Certificates surrendered, or
provide funds for their purchase, or establish to the satisfaction of the
Transfer Agent that such taxes are not payable. From and after the Effective
Date the amount of capital represented by the shares of the New Common Stock
into which and for which the shares of the Old Common Stock are reclassified
under the terms hereof shall be the same as the amount of capital represented by
the shares of Old Common Stock so reclassified, until thereafter reduced or
increased in accordance with applicable law.
ARTICLE VI
DIRECTORS
The number of directors of the Corporation shall be as set forth in the
Bylaws of the Corporation, but shall never be less than the minimum number
permitted by the General Laws of the State of Maryland now or hereinafter in
force. The directors shall be divided into two classes designated Class I and
Class II. Each Class shall consist of one-half of the directors or as close as
approximation thereto as possible. The Class I directors shall stand of election
at the 1996 annual meeting of shareholders and shall be elected for a two-year
term. The Class II directors shall stand for election at the 1996 annual meeting
of shareholders and shall be elected for a one-year term. At each annual meeting
of shareholders, commencing with the annual meeting to be held during fiscal
1997, each of the successors to the directors of the Class whose term shall have
expired at such annual meeting shall be elected for a term running until the
second annual meeting next succeeding his or her election and until his or her
successor shall have been duly elected and qualified.
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ARTICLE VIII
RESTRICTION ON TRANSFER OF SHARES
(a) In order to preserve the net operating loss carryovers, capital loss
carryovers and built-in losses (the "Tax Benefits") to which the Corporation is
entitled pursuant to the Internal Revenue Code of 1986, as amended, or any
successor statute (collectively the "Code") and the regulations thereunder, the
following restrictions shall apply until the earlier of (x) the business day
following the fifth anniversary of the effectiveness of this Article VIII, (y)
the repeal of Sections 382 and 383 of the Code (or successor provisions) if the
Board of Directors determines that the restrictions are no longer necessary, or
(z) the beginning of a taxable year of the Corporation to which the Board of
Directors determines that no Tax Benefits may be carried forward, unless the
Board of Directors shall fix an earlier or later date in accordance with
paragraph (i) of this Article VIII (such date is sometimes referred to herein as
the "Expiration Date"):
(i) No person (as herein defined), including the Corporation, shall engage
in any Transfer (as herein defined) with any person to the extent that such
Transfer, if effective, would cause the Ownership Interest Percentage (as herein
defined) of any person or Public Group (as herein defined) to increase to 4.9
percent or above, or from 4.9 percent or above to a greater Ownership Interest
Percentage, or would create a new Public Group; provided, however, that the
foregoing restriction on such Transfers shall not be applicable to the Transfer
of shares of Stock pursuant to (1) the exercise of any option that is issued by
the Corporation and is outstanding on the effective date of the amendment to the
Amended and Restated Articles of Incorporation of the Corporation which makes
this Article VIII a part of such Amended and Restated Articles of Incorporation,
(2) the exercise of those certain options initially covering 750,000 shares of
stock referred to in the Stock Option Agreement dated December 21, 1995 between
the Corporation and Alan D. Hamberlin, (3) the issuance of the 800,000 shares of
Contingent Stock referred to in the Agreement and Plan of Reorganization dated
as of September 13, 1996 (the "Agreement") or (4) the exercise of those certain
options initially covering an aggregate of 1,000,000 shares of stock referred to
in those Stock Option Agreements dated , 199 between the Corporation
and each of William W. Cleverly and Steven J. Hilton.
For purposes of this Article VIII:
(A) "person" refers to any individual, corporation, estate, trust,
association, company, partnership, joint venture, or other entity or
organization, including, without limitation, any "entity" within the
meaning of Treasury Regulation Section 1.382-3(a);
(B) a person's "Ownership Interest Percentage" shall be the sum of
such person's direct ownership interest in the Corporation as determined
under Treasury Regulation Section 1.382-2T(f)(8) or any successor
regulation and such person's indirect ownership interest in the Corporation
as determined under Treasury Regulation Section 1.382-2T(f)(15) or any
successor regulation, except that, for purposes of determining a person's
direct ownership interest in the Corporation, any ownership interest in the
Corporation described in Treasury Regulation Section
1.382-2T(f)(18)(iii)(A) or any successor regulation shall be treated as
stock of the Corporation, and for purposes of determining a person's
indirect ownership interest in the Corporation, Treasury Regulations
Sections 1.382-2T(g)(2), 1.382-2T(h)(2)(i)(A), 1.382-2T(h)(2)(iii) and
1.382-2T(h)(6)(iii) or any successor regulations shall not apply and any
Option Right to acquire Stock shall be considered exercised;
(C) "Transferee" means any person to whom Stock is Transferred;
(D) "Stock" shall mean shares of stock of the Corporation (other than
stock described in Section 1504(a)(4) of the Code or any successor statute,
or stock that is not described in Section 1504(a)(4) solely because it is
entitled to vote as a result of dividend arrearages), any Option Rights to
acquire Stock, and all other interests that would be treated as stock of
the Corporation pursuant to Treasury Regulation Section 1.382-2T(f)(18) (or
any successor regulation);
(E) "Public Group" shall mean a group of individuals, entities or
other persons described in Treasury Regulation Section 1.382-2T(f)(13) or
any successor regulation;
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(F) "Option Right" shall mean any option, warrant, or other right to
acquire, convert into or exchange or exercise for, or any similar interests
in, shares of Stock;
(G) "Transfer" shall mean any issuance, sale, transfer, gift,
assignment, devise or other disposition, as well as any other event, that
causes a person to acquire or increase an Ownership Interest Percentage in
the Corporation, or any agreement to take any such actions or cause any
such events, including (a) the granting or exercise of any Option Right
with respect to Stock, (b) the disposition of any securities or rights
convertible into or exchangeable or exercisable for Stock or any interest
in Stock or any exercise of any such conversion or exchange or exercise
right, and (c) transfers of interests in other entities that result in
changes in direct or indirect ownership of Stock, in each case, whether
voluntary or involuntary, of record, and by operation by law or otherwise;
(H) "Optionee" means any person holding an Option Right to acquire
Stock.
(ii) Any Transfer that would otherwise be prohibited pursuant to the
preceding subparagraph may nonetheless be permitted if information relating to a
specific proposed transaction is presented to the Board of Directors and the
Board (including a majority of the Independent Directors, as such term is
defined in the Agreement) determines in its discretion (x) based upon an opinion
of legal counsel or independent public accountants selected by the Board, that
such transaction will not jeopardize or create a material limitation on the
Corporation's then current or future ability to utilize its Tax Benefits, taking
into account both the proposed transaction and potential future transactions, or
(y) that the overall economic benefits of such transaction to the Corporation
outweigh the detriments of such transaction. Nothing in this subparagraph shall
be construed to limit or restrict the Board of Directors in the exercise of its
fiduciary duties under applicable law.
(b) Unless approval of the Board of Directors is obtained as provided in
subparagraph (a)(ii) of this Article VIII, any attempted Transfer that is
prohibited pursuant to subparagraph (a)(i) of this Article VIII, to the extent
that the amount of Stock subject to such prohibited Transfer exceeds the amount
that could be Transferred without restriction under subparagraph (a) (i) of this
Article VIII (such excess hereinafter referred to as the "Prohibited
Interests"), shall be void ab initio and not effective to transfer ownership of
the Prohibited Interests with respect to the purported acquiror thereof (the
"Purported Acquiror"), who shall not be entitled to any rights as a shareholder
of the Corporation with respect to the Prohibited Interests (including, without
limitation, the right to vote or to receive dividends with respect thereto), or
otherwise as the holder of the Prohibited Interests. All rights with respect to
the Prohibited Interests shall remain the property of the person who initially
purported to Transfer the Prohibited Interests to the Purported Acquiror (the
"Initial Transferor") until such time as the Prohibited Interests are resold as
set forth in subparagraph (b)(i) or subparagraph (b)(ii) of this Article VIII.
(i) Upon demand by the Corporation, the Purported Acquiror shall Transfer
any certificate or other evidence of purported ownership of the Prohibited
Interests within the Purported Acquiror's possession or control, along with any
dividends or other distributions paid by the Corporation with respect to the
Prohibited Interests that were received by the Purported Acquiror (the
"Prohibited Distributions"), to an agent designated by the Corporation (the
"Agent"). If the Purported Acquiror has sold the Prohibited Interests to an
unrelated party in an arms-length transaction after purportedly acquiring them,
the Purported Acquiror shall be deemed to have sold the Prohibited Interests as
agent for the Initial Transferor, and in lieu of Transferring the Prohibited
Interests to the Agent shall Transfer to the Agent the Prohibited Distributions
and the proceeds of such sale (the "Resale Proceeds") except to the extent that
the Agent grants written permission to the Purported Acquiror to retain a
portion of the Resale Proceeds not exceeding the amount that would have been
payable by the Agent to the Purported Acquiror pursuant to the following
subparagraph (b)(ii) if the Prohibited Interests had been sold by the Agent
rather than by the Purported Acquiror. Any purported Transfer of the Prohibited
Interests by the Purported Acquiror other than a Transfer described in one of
the two preceding sentences shall not be effective to Transfer any ownership of
the Prohibited Interests.
(ii) The Agent shall sell in an arms-length transaction (on the New York
Stock Exchange, if possible) any Prohibited Interests transferred to the Agent
by the Purported Acquiror, and the proceeds of such sale
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<PAGE> 233
(the "Sales Proceeds"), or the Resale Proceeds, if applicable, shall be
allocated to the Purported Acquiror up to the following amount: (x) where
applicable, the purported purchase price paid or value of consideration
surrendered by the Purported Acquiror for the Prohibited Interests, and (y)
where the purported Transfer of the Prohibited Interests to the Purported
Acquiror was by gift, inheritance, or any similar purported Transfer, the fair
market value of the Prohibited Interests at the time of such purported Transfer.
Subject to the succeeding provisions of this subparagraph, any Resale Proceeds
or Sales Proceeds in excess of the amount allocable to the Purported Acquiror
pursuant to the preceding sentence, together with any Prohibited Distributions,
shall be the property of the Initial Transferor. If the identity of the Initial
Transferor cannot be determined by the Agent through inquiry made to the
Purported Acquiror, the Agent shall publish appropriate notice (in The Wall
Street Journal, if possible) for seven consecutive business days in an attempt
to identify the Initial Transferor in order to transmit any Resale Proceeds or
Sales Proceeds or Prohibited Distributions due to the Initial Transferor
pursuant to this subparagraph. The Agent may also take, but is not required to
take, other reasonable actions to attempt to identify the Initial Transferor. If
after ninety (90) days following the final publication of such notice the
Initial Transferor has not been identified, any amounts due to the Initial
Transferor pursuant to this subparagraph may be paid over to a court or
governmental agency, if applicable law permits, or otherwise shall be
transferred to an entity designated by the Corporation that is described in
Section 501(c)(3) of the Code. In no event shall any such amounts due to the
Initial Transferor inure to the benefit of the Corporation or the Agent, but
such amounts may be used to cover expenses (including but not limited to the
expenses of publication) incurred by the Agent in attempting to identify the
Initial Transferor.
(c) Within thirty (30) business days of learning of a purported Transfer of
Prohibited Interests to a Purported Acquiror, the Corporation through its
Secretary shall demand that the Purported Acquiror surrender to the Agent the
certificates representing the Prohibited Interests, or any Resale Proceeds, and
any Prohibited Distributions, and if such surrender is not made by the Purported
Acquiror within thirty (30) business days from the date of such demand the
Corporation shall institute legal proceedings to compel such Transfer; provided,
however, that nothing in this paragraph (c) shall preclude the Corporation in
its discretion from immediately bringing legal proceedings without a prior
demand, and also provided that failure of the Corporation to act within the time
periods set out in this paragraph (c) shall not constitute a waiver of any right
of the Corporation under this Article VIII.
(d) Upon a determination by the Board of Directors that there has been or
is threatened a purported Transfer of Prohibited Interests to a Purported
Acquiror, the Board of Directors may take such action in addition to any action
required by the preceding paragraph as it deems advisable to give effect to the
provisions of this Article VIII, including, without limitation, refusing to give
effect on the books of this Corporation to such purported Transfer or
instituting proceedings to enjoin such purported Transfer.
(e) In the event of any Transfer which does not involve a Transfer of
"securities" of the Corporation within the meaning of the Maryland Corporations
and Associations Code, as amended ("Securities"), but which would cause a person
or Public Group (the "Prohibited Party") to violate a restriction provided for
in subparagraph (a) of this Article VIII, the application of subparagraphs (b)
and (c) of this Article VIII shall be modified as described in this paragraph
(e). In such case, the Prohibited Party and/or any person or Public Group whose
ownership of the Corporation's Securities is attributed to the Prohibited Party
pursuant to Section 382 of the Code and the Treasury Regulations thereunder
(collectively, the "Prohibited Party Group") shall not be required to dispose of
any interest which is not a Security, but shall be deemed to have disposed of,
and shall be required to dispose of, sufficient Securities (which Securities
shall be disposed of in the inverse order in which they were acquired by members
of the Prohibited Party Group), to cause the Prohibited Party, following such
disposition, not to be in violation of subparagraph (a) of this Article VIII.
Such disposition shall be deemed to occur simultaneously with the Transfer
giving rise to the application of this provision, and such amount of Securities
which are deemed to be disposed of shall be considered Prohibited Interests and
shall be disposed of through the Agent as provided in subparagraphs (b) and (c)
of this Article VIII, except that the maximum aggregate amount payable to the
Prohibited Party Group in connection with such sale shall be the fair market
value of the Prohibited Interests at the time of the
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<PAGE> 234
prohibited Transfer. All expenses incurred by the Agent in disposing of the
Prohibited Interests shall be paid out of any amounts due the Prohibited Party
Group.
(f) The Corporation may require as a condition to the registration of the
transfer of any shares of its Stock that the proposed Transferee furnish to the
Corporation all information reasonably requested by the Corporation with respect
to all the proposed Transferee's direct or indirect ownership interests in, or
options to acquire, Stock.
(g) All certificates evidencing ownership of shares of Stock that are
subject to the restrictions on Transfer contained in this Article VIII shall
bear a conspicuous legend referencing the restrictions set forth in this Article
VIII.
(h) Any person who knowingly violates the restrictions on Transfer set
forth in this Article VIII will be liable to the Corporation for any costs
incurred by the Corporation as a result of such violation.
(i) Nothing contained in this Article VIII shall limit the authority of the
Board of Directors to take such other action to the extent permitted by law as
it deems necessary or advisable to protect the Corporation and the interests of
the holders of its securities in preserving the Tax Benefits. Without limiting
the generality of the foregoing, in the event of a change in law or Treasury
Regulations making one or more of the following actions necessary or desirable,
the Board of Directors may (i) accelerate or extend the Expiration Date, (ii)
modify the Ownership Interest Percentage in the Corporation specified in the
first sentence of subparagraph (a)(i), or (iii) modify the definitions of any
terms set forth in this Article VIII; provided that the Board of Directors shall
determine in writing that such acceleration, extension, change or modification
is reasonably necessary or advisable to preserve the Tax Benefits under the Code
and the regulations thereunder or that the continuation of these restrictions is
no longer reasonably necessary for the preservation of the Tax Benefits, which
determination shall be based upon an opinion of legal counsel or independent
public accountants to the Corporation.
(j) The Corporation and the Board of Directors shall be fully protected in
relying in good faith upon the information, opinions, reports or statements of
the chief executive officer, the chief financial officer, or the chief
accounting officer of the Corporation or of the Corporation's legal counsel,
independent auditors, transfer agent, investment bankers, and other employees
and agents in making the determinations and findings contemplated by this
Article VIII, and neither the Corporation nor the Board of Directors shall be
responsible for any good faith errors made in connection therewith.
7. The authorized share structure of each of the Constituent Corporations
is as follows:
<TABLE>
<CAPTION>
SURVIVING
MHC II MHA II COMPANY
-------------- -------------- --------------
<S> <C> <C> <C>
Total number of shares of
all classes: .................... 2,000,000 2,000,000 50,000,000
Number and par value of shares of
each class: ..................... 2,000,000 2,000,000 50,000,000
shares of shares of shares of
common stock, common stock, common stock,
$.00017 par $.0007 par $.01 par
value value value
Number of shares without par value
of each class: .................. -- -- --
Aggregate par value of all shares
with par value: ................. $340 $1,400 $500,000
</TABLE>
8. The manner and basis of the conversion of the shares of the Merged
Companies shall be as follows:
(a) Upon the merger becoming effective, each share of common stock of
each Merged Company (the "Merged Companies Common Stock") issued and
outstanding on the Effective Date, by reason of
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<PAGE> 235
the merger and without any action on the part of the holders thereof, shall
be converted into the Merger Consideration Per Share (as defined below),
except that any shares of the Merged Companies Common Stock owned by
Surviving Corporation or held in the treasury of any of the Merged
Companies shall be cancelled and all rights in respect thereof shall cease
to exist and no securities, cash or other property shall be issued in
respect thereof. The term "Merger Consideration Per Share" shall mean for
each Merged Company an amount equal to the Merger Consideration (as defined
below) divided by the number of issued and outstanding shares of common
stock of such Merged Company. The term "Merger Consideration" shall mean
for each Merged Company (i) a number of shares of common stock of Surviving
Company (the "Surviving Company Common Stock") equal to (x) the book value
of such Merged Company as of the Effective Date multiplied by (y) a factor
of 3.0 and divided by (z) the fully diluted book value per share of the
Surviving Company Common Stock as of the Effective Date; provided, however,
in the event the sum of the Merged Companies book values used in clause (x)
above is more or less than $2,500,000, the excess or shortfall shall be
distributed or contributed in cash as set forth in Section 1.3(b) of the
Agreement, and (ii) a pro rata portion of the Contingent Stock upon the
terms and conditions as set forth in Section 1.3(f) of the Agreement. In
addition, the Surviving Company shall pay to or receive from the
shareholders of the Merged Companies in cash the Adjustment Amount as such
term is defined in Section 1.3(b) of the Agreement.
(b) Certificates for fractional shares of Surviving Company Common
Stock shall not be issued. The total number of shares of Surviving Company
Common Stock that any person shall have a right to receive under these
Articles of Merger will be rounded up to the nearest whole share of
Surviving Company Common Stock.
(c) After the Effective Date, each holder other than Surviving Company
of an outstanding certificate or certificates theretofore representing
shares of the Merged Companies Common Stock (the "Merged Companies Stock
Certificates"), upon surrender thereof to such bank, trust company or other
person including Surviving Company as shall be designated by the Surviving
Company (the "Exchange Agent"), shall be entitled to receive in exchange
therefor a certificate or certificates representing the number of whole
shares of Surviving Company Common Stock into which the shares of the
Merged Companies Common Stock theretofore represented by such surrendered
certificate or certificates shall have been converted. Until so
surrendered, each Merged Companies Stock Certificate, shall be deemed for
all purposes, other than the payment of dividends or other distributions,
if any, in respect of Surviving Company Common Stock, to represent the
appropriate number of whole shares of Surviving Company Common Stock into
which the shares of the Merged Companies Common Stock theretofore
represented thereby shall have been converted. No dividend or other
distribution, if any, payable to holders of shares of Surviving Company
Common Stock shall be paid to the holders of certificates theretofore
representing shares of the Merged Companies Common Stock; provided,
however, that upon surrender and exchange of such the Merged Companies
Stock Certificates there shall be paid to the record holders of the stock
certificate or certificates, issued in exchange therefor, the amount,
without interest thereon, of dividends and other distributions, if any,
which theretofore but subsequent to the Effective Date have become payable
with respect to the number of whole shares of Surviving Company Common
Stock into which the shares of the Merged Companies Common Stock
theretofore represented thereby shall have been converted.
(d) All issued shares of Surviving Company Common Stock, whether
outstanding or reacquired immediately prior to the Effective Date, shall
continue unchanged as shares of common stock of Surviving Company.
9. The terms and conditions of the merger and the Agreement were advised,
authorized, and approved by Surviving Company in the manner and by the vote
required by its Articles of Incorporation and the provisions of the Maryland
Corporations and Associations Code, and the said merger and Agreement approved
in the manner hereinafter set forth.
10. The merger and the Agreement were duly advised and approved by the
Board of Directors of Surviving Company in the following manner. Said Board of
Surviving Company adopted a resolution declaring
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<PAGE> 236
that the merger of the Merged Companies into Surviving Company is advisable upon
the terms and conditions set forth in the Agreement. Said resolution of the
Board of Directors was adopted at a meeting duly held on September 5, 1996, at
which a quorum was present, and at which the Board acted by at least a majority
of its members present thereat.
11. The Board of Directors of Surviving Company directed the Secretary of
the corporation to prepare a written notice of the time, place, and purpose of a
meeting of shareholders of Surviving Company to take action upon the proposed
merger and the Agreement and to furnish a copy of said notice to all of the
shareholders of Surviving Company entitled to vote upon the proposed merger and
the Agreement.
12. The merger and the Agreement were duly approved by the shareholders of
Surviving Company in the following manner. At a meeting of shareholders duly
held on , 1996, pursuant to notice duly given, the shareholders
approved the same by the affirmative vote of at least a majority of all of the
votes entitled to be cast thereon.
13. The terms and conditions of the merger herein set forth were duly
advised, authorized, and approved, in respect of the Merged Companies, in the
manner and by the vote required by the Articles of Incorporation of said
corporations and by the laws of the State of Arizona, which is the state of
incorporation of said corporations.
14. The merger and the Agreement were duly advised and unanimously approved
by the respective Board of Directors of each of the Merged Companies at a
meeting held pursuant to notice on July 31, 1996.
15. The merger and the Agreement were duly approved by the shareholders of
the Merged Companies by unanimous written consent dated September 9, 1996.
16. Subject to and in accordance with the laws of the States of Maryland
and Arizona, the conditions precedent contained in the Agreement and the other
obligations of the parties set forth in the Agreement, the Effective Date of the
merger for purposes of state law shall be such date and time the Articles of
Merger are filed with the Secretary of State of the State of Maryland and the
Corporation Commission of the State of Arizona.
17. Notwithstanding anything herein to the contrary, the merger may be
terminated at any time on or before the Effective Date as provided in the
Agreement. In the event of the termination of the merger, these Articles of
Merger shall become void and of no effect without any liability to the
Constituent Corporations or to the directors, officers, representatives or
agents of any of them except for the obligations the Constituent Corporations to
pay certain fees and expenses as provided for in the Agreement.
18. These Articles of Merger may be modified at any time in any respect by
the mutual consent of the Constituent Corporations, notwithstanding prior
approval by the respective shareholders. Any such modification may be approved
for any such corporation by its Board of Directors, without further shareholder
approval, except that the value and method of calculating the Merger
Consideration to be issued in exchange for the shares of the Merged Companies
Common Stock may not be increased or materially altered without the consent of
the shareholders of Surviving Company and may not be decreased or materially
altered without the consent of the shareholders of the Merged Companies given,
in each case, by the same vote as is required under applicable state law for
approval of the merger; provided, however, no consent of the shareholders of the
Constituent Corporations shall be required to substitute cash in place of
Surviving Company Common Stock.
8
<PAGE> 237
IN WITNESS WHEREOF, each of the Constituent Corporations has caused these
Articles of Merger to be executed on the day of , 1996.
HOMEPLEX MORTGAGE INVESTMENTS
CORPORATION
By:
---------------------------------
Name: Jay R. Hoffman
Title: President
MONTEREY HOMES CONSTRUCTION II, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
MONTEREY HOMES ARIZONA II, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
9
<PAGE> 238
APPENDIX C
FORM OF MONTEREY STOCKHOLDER AGREEMENTS
<PAGE> 239
FORM OF EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is dated as of ,
1996 by and between Homeplex Mortgage Investments Corporation, a Maryland
corporation (the "Company"), and ("Employee").
WHEREAS, the Company desires to obtain the services of Employee, and
Employee desires to provide services to the Company, in accordance with the
terms, conditions and provisions of this Agreement;
NOW, THEREFORE, the Company and Employee agree as follows:
1. EMPLOYMENT. Subject to the terms and conditions of this Agreement, the
Company agrees to employ Employee as of the Company, and Employee
agrees to perform the duties associated with such positions diligently and to
the reasonable satisfaction of the Company's Board of Directors. Employee will
devote substantially all of his business time, attention and energies to the
business of the Company and will comply with the policies and guidelines
established by the Company from time to time.
2. TERM. Employee will be employed under this Agreement for a term
beginning on , 1996 (the "Effective Date") and ending on December
31, 2001, unless Employee's employment is terminated earlier pursuant to Section
8.
3. BASE SALARY. The Company will pay Employee the Base Salary (as defined
below). For purposes of this Agreement, the term "Base Salary" shall mean until
December 31, 1997 an amount equal to $200,000 per year. For each year thereafter
during the term hereof, the Base Salary shall be equal to 105% of the previous
Base Salary. Salary will be payable biweekly in accordance with the payroll
practices of the Company in effect from time to time. All of Employee's
compensation under this Agreement will be subject to deduction and withholding
authorized or required by applicable law.
4. INITIAL STOCK OPTIONS. On the Effective Date, the Company will grant
Employee options to purchase 500,000 shares of the Company's common stock (the
"Common Stock"). The terms of such options are set forth in a Stock Option
Agreement, dated as of the Effective Date, between the Company and Employee,
which is attached hereto as Exhibit A.
5. INCENTIVE COMPENSATION. Employee will be entitled to incentive
compensation based on the achievement of certain budgeted income projections
specified in Exhibit B hereto.
6. EMPLOYEE BENEFITS. During the term of this Agreement, the Company will
provide to Employee such fringe benefits and other employee benefit plans as are
regularly maintained by the Company for its senior executives, in accordance
with the policies of the Company in effect from time to time.
7. REIMBURSEMENT OF EXPENSES. The Company will reimburse Employee for
reasonable out-of-pocket business, entertainment and travel expenses incurred
and documented in accordance with the policies of the Company in effect from
time to time.
8. TERMINATION.
(a) If Employee voluntarily terminates his employment with the Company
or if the Company discharges Employee for Cause (as defined below), then
the Company's obligations to pay the Base Salary and incentive compensation
under this Agreement will terminate immediately, except for the payment of
the Base Salary through the date of such termination of employment. For
purposes of this Agreement, "Cause" is defined to mean only an act or acts
of dishonesty by Employee constituting a felony and resulting or intended
to result directly or indirectly in substantial personal gain or enrichment
at the expense of the Company. Notwithstanding the foregoing, Employee
shall not be deemed to have been terminated for Cause unless and until
there shall have been delivered to Employee a copy of a resolution duly
adopted by the affirmative vote of not less than three-quarters of the
entire membership of the Company's Board of Directors (excluding Employee
if he is then a director) at a meeting of the Board called and held for the
purpose (after reasonable notice to Employee and an opportunity for
Employee, together with his counsel, to be heard before the Board), finding
that in the good faith opinion
<PAGE> 240
of the Board Employee was guilty of conduct meeting the criteria set forth
above and specifying the particulars thereof.
(b) If Employee's employment with the Company is terminated by the
Company without Cause or as a result of Employee's death or Permanent
Disability (as defined below), then (i) the Company will be obligated to
pay Employee's then current Base Salary pursuant to Section 3 (A) through
the end of the stated term of employment hereunder in the event of
termination by the Company without Cause or (B) for six months after such
termination in the event of death or Permanent Disability and (ii) within
90 days after such termination, the Company will pay Employee pro rated
incentive compensation pursuant to Section 5 through the date of
termination. For purposes hereof, "Permanent Disability" means a disability
that results or, in the judgment of a physician mutually agreeable to the
Company and Employee, is likely to result in Employee being unable to
fulfill his duties under this Agreement for 180 consecutive days.
(c) Any termination by the Company for Cause or Permanent Disability
pursuant to Section 8(a) or 8(b), respectively, shall be communicated by
written Notice of Termination. For purposes of this Agreement, a "Notice of
Termination" shall mean a notice which shall indicate the specific
termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis
for termination of Employee's employment under the provision so indicated.
For purposes of this Agreement, no such purported termination shall be
effective without such Notice of Termination.
(d) For purposes of this Agreement, "Date of Termination" shall mean
(i) if the Agreement is terminated as a result of Employee's death, the
date of Employee's death, (ii) if the Agreement is terminated by Employee,
the date on which he delivers a Notice of Termination to the Company, (iii)
if this Agreement is terminated by the Company for Permanent Disability, 30
days after a Notice of Termination is given (provided that Employee shall
not have returned to the performance of Employee's duties on a full-time
basis during such 30-day period), or (iv) if Employee's employment is
terminated by the Company for any other reason, the date on which a Notice
of Termination is given ; provided that if within 30 days after any Notice
of Termination is given by the Company, Employee notifies the Company that
a dispute exists concerning the termination, the Date of Termination shall
be the earlier of the fifth anniversary date of this Agreement or the date
on which the dispute is finally determined, either by mutual written
agreement of the parties, or by a final judgment, order or decree of a
court of competent jurisdiction (the time for appeal therefrom having
expired and no appeal having been perfected).
(e) Employee shall have no duty to mitigate the Company's obligations
with respect to the payments set forth in this Section 8 by seeking other
employment following his termination of employment, nor shall such
obligations be subject to offset or reduction by reason of any compensation
received by Employee from such other employment.
9. RESTRICTIVE COVENANT. In consideration of the Company's agreement to
employ Employee, until December 31, 2001, Employee hereby agrees that Employee
will not, except in connection with the performance of his duties hereunder,
directly or indirectly, either as an employee, partner, owner, director, adviser
or consultant or in any other capacity:
(a) engage in the homebuilding business (a "Competing Business");
(b) recruit, hire or discuss employment with any person who is, or
within the six month period preceding the date of such activity was, an
employee of the Company (other than as a result of a general solicitation
for employment);
(c) subject to the proviso below, solicit any customer or supplier of
the Company for a Competing Business or otherwise attempt to induce any
such customer or supplier to discontinue its relationship with the Company;
or
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<PAGE> 241
(d) except solely as a limited partner or other form of passive
investment with no management or operating responsibilities, engage in the
land banking or lot development business; provided, however, that the
foregoing shall not restrict (i) the ownership of less than 5% of a
publicly-traded company or, (ii) in the event Employee's employment is
terminated hereunder, engaging in the custom homebuilding business,
including soliciting customers through a general solicitation and
soliciting suppliers who serve the Company, but not to induce them to
discontinue their relationship with the Company, or engaging in the
production homebuilding business outside a 100 mile radius of any project
of the Company or outside Northern California (which shall be deemed to
mean the metropolitan area of San Jose and all of the State of California
north of such area) or engaging in the land banking or lot development
business.
Employee represents to the Company that he is willing and able to engage in
businesses that are not Competing Businesses hereunder and that enforcement of
the restrictions set forth in this Section 9 would not be unduly burdensome to
Employee. The Company and Employee acknowledge and agree that the restrictions
set forth in this Section 9 are reasonable as to time, area and scope of
activity and do not impose a greater restraint than is necessary to protect the
goodwill and other business interests of the Company, and Employee agrees that
the Company is justified in believing the foregoing. If the provisions of this
Section 9 are found by a court of competent jurisdiction to contain limitations
as to time, area or scope of activity that are not reasonable or not necessary
to protect the goodwill or other business interests of the Company, then such
court is hereby directed to reform such provisions to the minimum extent
necessary to cause the limitations contained herein as to time, area and scope
of activity to be reasonable and to impose a restraint that is not greater than
necessary to protect the goodwill and other business interests of the Company.
The provisions of this Section 9 will survive any termination of this Agreement,
except that this Section 9 will not apply following termination of Employee by
the Company without Cause.
10. CONFIDENTIAL INFORMATION. During the term of Employee's employment and
for one year thereafter, without the Company's prior written consent, Employee
will not use competitively or disclose to any third party (other than in
accordance with the proper performance of his duties hereunder or as may be
required by statute or court order) the proprietary information, trade secrets,
business, marketing, advertising, strategic or business information, customer or
prospect lists, work product, know-how or other confidential information of the
Company ("Confidential Information"), all of which Employee acknowledges and
agrees is the sole and exclusive property of the Company. Upon termination of
his employment for any reason, Employee will immediately return to the Company
all copies, in whatever form, of any Confidential Information that may be in his
possession or control.
11. SEVERABILITY. If any provision of this Agreement is held to be illegal,
invalid or unenforceable under any applicable law, then such provision will be
deemed to be modified to the minimum extent necessary to render it legal, valid
and enforceable, and if no such modification will render it legal, valid and
enforceable, then this Agreement will be construed as if not containing the
provision held to be invalid, and the rights and obligations of the parties will
be construed and enforced accordingly.
12. INJUNCTIVE RELIEF. Employee acknowledges and agrees that the Company
would be irreparably harmed by any violation of Employee's obligations under
Sections 9 and 10 hereof and that, in addition to all other rights or remedies
available at law or in equity, the Company will be entitled to injunctive and
other equitable relief to prevent or enjoin any such violation.
13. ENTIRE AGREEMENT. This Agreement embodies the complete agreement of the
parties hereto with respect to the subject matter hereof and supersedes any
prior written, or prior or contemporaneous oral, understandings or agreements
between the parties that may have related in any way to the subject matter
hereof. This Agreement may be amended only in writing executed by the Company
and Employee.
14. GOVERNING LAW. This Agreement and all questions relating to its
validity, interpretation, performance and enforcement, shall be governed by and
construed in accordance with the internal laws, and not the law of conflicts, of
the State of Arizona.
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<PAGE> 242
15. NOTICE. Any notice required or permitted under this Agreement must be
in writing and will be deemed to have been given when delivered personally or by
overnight courier service or three days after being sent by mail, postage
prepaid, at the address indicated below or to such changed address as such
person may subsequently give such notice of:
if to the Company: Homeplex Mortgage Investments Corporation
5333 North Seventh Street,
Suite 219
Phoenix, Arizona 85014
Attention: Corporate Secretary
if to Employee: -----------------------------------------
-----------------------------------------
-----------------------------------------
-----------------------------------------
16. ARBITRATION. All disputes, claims and other matters in controversy
arising directly or indirectly out of or related to this Agreement, or the
breach thereof, whether contractual or non-contractual, shall be determined by
arbitration and shall be settled by three arbitrators, one of whom shall be
appointed by the Company, one by the Employee and the third of whom shall be
appointed by the first two arbitrators. Persons eligible to be selected as
arbitrators shall be limited to attorneys who have been in practice at least 15
years specializing in employment law matters and who have had both training and
experience as arbitrators ("Experienced Arbitrators"). If either such person
fails to appoint an arbitrator within ten (10) days of a request in writing by
the other such person to do so or if the first two arbitrators cannot agree on
the appointment of a third arbitrator within thirty days, then such arbitrator
shall be appointed by the American Arbitration Association (which appointment
shall not be limited to Experienced Arbitrators if not made within the
applicable time period). Except as to the selection of arbitrators which shall
be as set forth above, the arbitration shall be conducted promptly and
expeditiously at such place in Phoenix, Arizona agreed to between the Company
and the Employee in accordance with the Commercial Rules of Arbitration of the
American Arbitration Association then in effect so as to enable the arbitrators
to resolve the disputes, claims and other matters in controversy within
forty-five (45) days of the commencement of the arbitration proceedings. The
arbitrators shall base their award on applicable law and judicial precedent and,
unless both parties agree otherwise, shall include in such award the findings of
fact and conclusions of law upon which the award is based and may award
temporary or permanent equitable relief. Judgment on the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof. The
arbitrators' resolution of the dispute shall be final, binding and
non-appealable. The nonprevailing party shall bear the expenses of the
arbitrators and the arbitration, including reasonable attorneys' fees and costs.
IN WITNESS WHEREOF, the Company and Employee have executed and delivered
this Agreement as of the date first above written.
HOMEPLEX MORTGAGE INVESTMENTS
CORPORATION
By:
---------------------------------
Name: Jay R. Hoffman
Title: President
EMPLOYEE
------------------------------------
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<PAGE> 243
EXHIBIT A
FORM OF STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT (the "Agreement") is dated as of ,
1996 (the "Effective Date") between Homeplex Mortgage Investments Corporation, a
Maryland corporation (the "Company"), and ("Optionee").
WHEREAS, the Company desires to obtain the services of the Optionee, and
the Optionee has agreed to provide services to the Company;
WHEREAS, the Company desires to compensate the Optionee for such services
by granting the Optionee an option (the "Option") to purchase shares of the
Company's common stock, $.01 par value per share (the "Common Stock"), subject
to the terms and conditions of this Agreement;
NOW, THEREFORE, the parties agree as follows:
1. GRANT OF OPTION. The Company hereby grants to the Optionee, on the terms
and subject to the conditions, limitations and restrictions set forth in this
Agreement, an Option to purchase 500,000 shares of Common Stock at an exercise
price of $1.75 per share of Common Stock.
2. EXERCISE PERIOD, VESTING AND AMOUNT. The Option shall be exercisable
ratably in equal annual increments over three years commencing on the first
anniversary of the Effective Date; provided, however, that the Option shall
become exerciseable. in full if there is a change of control of the Company
required to be reported in response to Item 1 of Form 8-K under the Securities
Exchange Act of 1934 as in effect on the date of this Agreement (or any similar
or successor form or provisions) on or prior to the third anniversary of the
Effective Date. The Option shall expire and become null and void after December
31, 2002.
3. EXERCISE. In order to exercise the Option, the Optionee must provide
written notice (the "Exercise Notice") to the Company at its principal executive
office stating the number of shares in respect of which the Option is being
exercised. The Exercise Notice must be signed by the Optionee and must include
his complete address and social security number. At the time of exercise, the
Optionee must pay to the Company the applicable exercise price per share times
the number of shares as to which the Option is being exercised, payable (a) by
cash or cash equivalent or (b) at the Company's option, by the delivery of
shares of Common Stock having a Fair Market Value (defined below) on the date
immediately preceding the exercise date equal to the aggregate exercise price,
which may include shares subject to the Option. If the Option is exercised in
full, the Optionee will surrender this Agreement to the Company for
cancellation. If the Option is exercised in part, the Optionee will surrender
this Agreement to the Company so that the Company may make appropriate notation
hereon or cancel this Agreement and issue a new agreement (containing the same
terms and conditions set forth herein) representing the unexercised portion of
the Option. For these purposes, "Fair Market Value" means (i) the average
closing price on the New York Stock Exchange or any other exchange or market
system on which the Common Stock is primarily traded for the last five trading
days ending on the date immediately preceding the exercise date; or (ii) if
there is no reported price information for the Common Stock, the fair market
value as determined in good faith by the Company's Board of Directors.
4. TAX WITHHOLDING. Any provision of this Agreement to the contrary
notwithstanding, the Company may take such steps as it deems necessary or
desirable for the withholding of any taxes that it is required by law or
regulation of any governmental authority, federal, state or local, domestic or
foreign, to withhold in connection with any of the shares of Common Stock
subject hereto, including requiring the Optionee to pay to the Company the
amount of such withholding tax before the Company issues any shares pursuant to
the exercise of the Option.
5. DILUTION. If the number of shares of Common Stock outstanding is changed
by reason of a stock dividend, stock split, reclassification or combination of
shares, the number of shares of Common Stock then issuable upon exercise of the
Option and the exercise price per share will be appropriately adjusted. In the
event of any merger, consolidation, reorganization, or recapitalization of the
Company pursuant to which holders of the Common Stock receive securities, other
assets or cash (a "Reorganization Transaction"), then upon any subsequent
exercise of the Option, the Optionee will be entitled to receive, for each share
of
<PAGE> 244
Common Stock issuable upon exercise of the Option, the number and kind of
securities, other assets or cash received in respect of one share of Common
Stock as a result of such Reorganization Transaction.
6. TERMINATION.
(a) If the Company discharges Optionee for Cause (as defined below),
then the Option will terminate immediately. For purposes of this Agreement,
"Cause" is defined to mean only an act or acts of dishonesty by Optionee
constituting a felony and resulting or intended to result directly or
indirectly in substantial personal gain or enrichment at the expense of the
Company. Notwithstanding the foregoing, Optionee shall not be deemed to
have been terminated for Cause unless and until there shall have been
delivered to Optionee a copy of a resolution duly adopted by the
affirmative vote of not less than three-quarters of the entire membership
of the Company's Board of Directors (excluding Optionee if he is then a
director) at a meeting of the Board called and held for the purpose (after
reasonable notice to Optionee and an opportunity for Optionee, together
with his counsel, to be heard before the Board), finding that in the good
faith opinion of the Board Optionee was guilty of conduct meeting the
criteria set forth above and specifying the particulars thereof.
(b) If Optionee voluntarily terminates his employment with the Company
or if Optionee's employment with the Company is terminated as a result of
Optionee's death or Permanent Disability (as defined below), then the
Option will be exercisable for six months following such termination in the
event of voluntary termination and one year following such termination in
the case of death or Permanent Disability, but only in any such case to the
extent that the Option was exercisable on the date of termination. For
purposes hereof, "Permanent Disability" means a disability that results or,
in the judgment of a physician mutually agreeable to the Company and
Optionee, is likely to result in Optionee being unable to fulfill his
duties for 180 consecutive days.
(c) If Optionee's employment with the Company is terminated by the
Company without Cause, the Option will be immediately exercisable for the
aggregate number of Option Shares not previously exercised and issued
pursuant to this Agreement until December 31, 2002;
(d) For purposes of Section 6(a) or 6(b) hereof, any termination by
the Company for Cause or Permanent Disability shall be communicated by
written Notice of Termination complying with Section 8(c) of Optionee's
Employment Agreement with the Company dated the date hereof.
7. TRANSFER OF OPTION. The Optionee shall not, directly or indirectly,
sell, pledge or otherwise transfer ("Transfer") any unexercised portion of the
Option or the rights and privileges pertaining thereto, other than pursuant to a
qualified domestic relations order. Neither the Option nor the underlying shares
of Common Stock is liable for or subject to, in whole or in part, the debts,
contracts, liabilities or torts of the Optionee, nor will they be subject to
garnishment, attachment, execution, levy or other legal or equitable process,
other than pursuant to a qualified domestic relations order.
8. CERTAIN LEGAL REQUIREMENTS. The Company will register or qualify the
Optionee's shares of Common Stock under the Securities Act of 1933 and
applicable blue sky or state securities laws, and will cause such shares to be
listed on any exchange or trading system upon which the Company's Common Stock
is listed.
9. ARBITRATION. All disputes, claims and other matters in controversy
arising directly or indirectly out of or related to this Agreement, or the
breach thereof, whether contractual or non-contractual, shall be determined by
arbitration and shall be settled by three arbitrators, one of whom shall be
appointed by the Company, one by the Employee and the third of whom shall be
appointed by the first two arbitrators. Persons eligible to be selected as
arbitrators shall be limited to attorneys who have been in practice at least 15
years specializing in employment law matters and who have had both training and
experience as arbitrators ("Experienced Arbitrators"). If either such person
fails to appoint an arbitrator within ten (10) days of a request in writing by
the other such person to do so or if the first two arbitrators cannot agree on
the appointment of a third arbitrator within thirty days, then such arbitrator
shall be appointed by the American Arbitration Association (which appointment
shall not be limited to Experienced Arbitrators if not made within the
applicable time period). Except as to the selection of arbitrators which shall
be as set forth above, the arbitration shall be
2
<PAGE> 245
conducted promptly and expeditiously at such place in Phoenix, Arizona agreed to
between the Company and the Optionee in accordance with the Commercial Rules of
Arbitration of the American Arbitration Association then in effect so as to
enable the arbitrators to resolve the disputes, claims and other matters in
controversy within forty-five (45) days of the commencement of the arbitration
proceedings. The arbitrators shall base their award on applicable law and
judicial precedent and, unless both parties agree otherwise, shall include in
such award the findings of fact and conclusions of law upon which the award is
based and may award temporary or permanent equitable relief. Judgment on the
award rendered by the arbitrators may be entered in any court having
jurisdiction thereof. The arbitrators' resolution of the dispute shall be final,
binding and non-appealable. The nonprevailing party shall bear the expenses of
the arbitrators and the arbitration, including reasonable attorneys' fees and
costs.
10. MISCELLANEOUS.
(a) The Option is intended to be a non-qualified stock option under
applicable tax laws, and it is not to be characterized or treated as an
incentive stock option under Section 422 of the Internal Revenue Code of
1986.
(b) Neither the Optionee nor any person claiming under or through the
Optionee will have any of the rights or privileges of a shareholder of the
Company in respect of any of the shares issuable upon exercise of the
Option unless and until certificates representing such shares have been
issued and delivered, provided that the Company shall ensure that
certificates representing shares validly purchased hereunder shall be
issued and delivered promptly to the Optionee or person validly claiming
under or through Optionee.
(c) All notices and other communications hereunder must be in writing
and will be deemed to have been duly given when delivered or mailed in
accordance with the provisions of Section 14 of Optionee's Employment
Agreement with the Company dated the date hereof.
(d) Subject to the limitations in this Agreement on the
transferability by the Optionee of the Option and any shares of Common
Stock, this Agreement will be binding on and inure to the benefit of the
successors and assigns of the parties hereto.
(e) If any provision of this Agreement is held to be illegal, invalid
or unenforceable under any applicable law, then such provision will be
deemed to be modified to the minimum extent necessary to render it legal,
valid and enforceable, and if no such modification will render it legal,
valid and enforceable, then this Agreement will be construed as if not
containing the provision held to be invalid, and the rights and obligations
of the parties will be construed and enforced accordingly.
(f) The parties acknowledge and agree that any violation of the terms
of this Agreement would cause irreparable harm to the other party and that,
in addition to all other rights or remedies available at law or in equity,
such party will be entitled to injunctive and other equitable relief to
prevent or enjoin any such violation.
(g) THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE INTERNAL LAW, AND NOT THE LAW OF CONFLICTS, OF THE STATE OF
ARIZONA.
(h) This Agreement may be executed in any number of counterparts, and
all such counterparts will be deemed an original, will be construed
together and will constitute one and the same instrument.
(i) This Agreement embodies the complete agreement and understanding
among the parties with respect to the subject matter hereof and supersedes
and preempts any prior written, or prior or contemporaneous oral,
understandings, agreements or representations by or among any of the
parties that may have related to the subject matter hereof in any way.
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<PAGE> 246
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
HOMEPLEX MORTGAGE INVESTMENTS
CORPORATION
By:
---------------------------------
Name: Jay Hoffman
Title: President
OPTIONEE
------------------------------------
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<PAGE> 247
EXHIBIT B
INCENTIVE COMPENSATION SCHEDULE
The Company shall pay Employee a performance based cash bonus (the "Bonus")
for the calendar years 1997 and 1998 equal to the lesser of: (i) 4% of the
Consolidated Pre-Tax Net Income (as defined below), or (ii) $200,000.
Thereafter, the annual Bonus for the remaining term of this Agreement shall be
equal to the lesser of (i) the percentage payout of the Consolidated Pre-Tax Net
Income determined by the compensation committee of the Board of Directors of the
Company, or (ii) $200,000.
The term "Consolidated Pre-Tax Net Income" shall mean the consolidated net
income of the Company before the Bonus and the Bonus payable to the other
Co-Chief Executive Officer of the Company pursuant to his Agreement dated the
date hereof, income taxes, amortization of goodwill or purchase accounting
write-up of any asset resulting from the merger of the Company and Monterey and
the cumulative effect of any change in accounting principle for the fiscal year
then ended (or the portion of the fiscal year starting on the Effective Date in
the case of 1997) as determined from the Company's audited financial statements
by the Company's independent auditors. The Bonus will be payable within 90 days
after the Company's fiscal year end.
<PAGE> 248
FORM OF REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement"), dated ,
1996, is made by and between Homeplex Mortgage Investments Corporation, a
Maryland corporation (the "Company"), and (the "Holder").
The Company and the Holder agree as follows:
1. SHARES. As used herein, the term "Shares" shall mean the shares of
common stock, $.01 par value, of the Company, acquired by the Holder pursuant to
that certain Agreement and Plan of Reorganization (the "Merger Agreement") among
the Company, Monterey Homes Construction II, Inc.; Monterey Homes Arizona II,
Inc. and the Monterey Shareholders (as defined therein) dated September 13, 1996
(including the Contingent Stock (as defined in the Merger Agreement) and
underlying that certain Stock Option Agreement by and between the Company and
the Holder dated , 1996 (the "Option Shares") and any securities
issued to Holder as a dividend or distribution in respect of or in exchange for
such shares, whether by reclassification, stock split, reverse stock split or
otherwise) until their sale under this Agreement or in accordance with Rule 144
(or any similar provision then in force) under the Securities Act of 1933, as
amended (the "Securities Act").
2. DEMAND REGISTRATION. (a) Subject to the provisions of Section 2(b)
hereof, the Holder may at any time after the first anniversary of the date of
this Agreement make up to two written requests to the Company for registration
under Form S-3 (or such other appropriate or successor form if Form S-3 is not
available) and in accordance with the provisions of Rule 415 promulgated under
the Securities Act of all or a portion of his Shares. The Company shall prepare
and file with the Securities and Exchange Commission (the "SEC") a registration
statement on Form S-3 (or such other appropriate or successor form if Form S-3
is not available) under the Securities Act covering such Shares, shall use its
best efforts to cause such registration statement to become effective within
ninety (90) days of the Holder's request and shall file such post-effective
amendments to such registration statement in order for it to remain effective
without lapse until the sale of all the Shares and shall qualify such offering
under applicable blue sky or state securities laws.
(b) Notwithstanding delivery of any written request referred to in
Section 2(a), the Company will have the prior right at any time to conduct
public offerings of its common stock for its corporate purposes and may
preempt any pending demand registration, in which case Section 3 will apply
to the offering. Under these circumstances, the Company will not be
obligated to effect the requested demand registration under this Section 2
and such previously requested registration will not count as a demand
registration under Section 2(a). In addition, if, prior to the time a
written request is delivered under Section 2(a), the Company has given
written notice pursuant to Section 3(a) of its intention to file a
registration statement, the Company shall not be obligated to cause the
requested demand registration to become effective until 120 days after the
effective date of such registration statement or until the Company ceases
to diligently pursue the preparation, filing and effectiveness of such
registration statement.
(c) The Company shall file a registration statement on Form S-8 with
respect to the Option Shares promptly after the date hereof and shall use
its best efforts to cause such registration statement to remain effective
until the related stock options have been exercised or expired.
(d) The Company shall pay the expenses described in Section 6 for the
registration pursuant to this Section 2.
3. INCIDENTAL REGISTRATION RIGHTS. (a) If at any time the Company shall
determine to proceed with the preparation and filling of a registration
statement under the Securities Act in connection with the proposed offer and
sale of any of its securities by it or any of its security holders (other than a
registration statement on Form S-4, S-8 or other limited purpose form), the
Company will give written notice of its determination to the Holder. Upon the
written request from the Holder, within ten (10) days after receipt of any such
notice from the Company, the Company will, subject to the provisions of Section
3(b), include all Shares requested by the Holder in such registration statement
(and any related qualification under blue sky or state securities laws);
<PAGE> 249
provided, however, that nothing herein shall prevent the Company from, at any
time, abandoning or delaying any registration under this Section 3. If any
registration pursuant to this Section 3 shall be underwritten in whole or in
part, the Company shall require that the Shares requested for inclusion pursuant
to this Section 3 be included in the underwriting on the same terms and
conditions, including lock-up provisions, as the securities otherwise being sold
through the underwriters.
(b) Notwithstanding the foregoing, if the managing underwriter
determines and advises that the inclusion of the Shares proposed to be
included in the underwritten public offering, together with any other
issued and outstanding securities proposed to be included therein by
holders of securities other than the Holder who have registration rights
which are pari passu to the Holder, would interfere with the successful
marketing of such securities, then the number of such Shares that the
managing underwriter believes may be sold in such underwritten public
offering shall be allocated for inclusion in the registration statement in
the following order of priority: (i) first, the securities being offered by
the Company, and (ii) secondly, the number of Shares then owned by the
Holder and other holders entitled to participate therein who have
registration rights which are pari passu to the Holder on a pro rata basis
or such other basis as they shall have agreed.
(c) The Company shall pay the expenses described in Section 6 for
registration statements filed pursuant to this Section 3.
4. REGISTRATION PROCEDURES. If and whenever the Company is required by the
provisions of Section 2 or 3 to effect the registration of Shares under the
Securities Act, the Company will:
(a) prepare and file with the SEC a registration statement with
respect to such securities, and use its best efforts to cause such
registration statement to become and remain effective for such period as
may be reasonably necessary to effect the sale of such securities (the
"Effective Period").
(b) prepare and file with the SEC such amendments to such registration
statement and supplements to the prospectus contained therein as may be
necessary to keep such registration statement effective for the Effective
Period as may be reasonably necessary to effect the sale of such
securities.
(c) furnish to the Holder and to the underwriters for the securities
being registered, such reasonable number of copies of the registration
statement, preliminary prospectus, final prospectus and such other
documents as the Holder and such underwriters may reasonably request in
order to facilitate the public offering of such securities.
(d) use its best efforts to register or qualify the Shares covered by
such registration statement under such state securities or blue sky laws of
such jurisdictions as the Holder may reasonably request in writing within
ten (10) days following the original filing of such registration statement,
except that the Company shall not for any purpose be required to execute a
general consent to service of process or to qualify to do business as a
foreign corporation in any jurisdiction wherein it is not so qualified or
subject itself to taxation in a jurisdiction where it had not previously
been subject to taxation, or take any other action that would subject the
Company to service of process in a lawsuit other than one arising out of
the registration of the Shares.
(e) notify the Holder, promptly after it shall receive notice thereof,
of the time when such registration statement has become effective or a
supplement to any prospectus forming a part of such registration statement
has been filed.
(f) notify the Holder promptly of any request by the SEC for the
amending or supplementing of such registration statement or prospectus or
for additional information.
(g) prepare and promptly file with the SEC and promptly notify the
Holder of the filing of such amendment or supplement to such registration
statement or prospectus as may be necessary to correct any statements or
omissions if, at any time when a prospectus relating to such securities is
required to be delivered under the Securities Act, any event shall have
occurred as the result of which any such prospectus or any other prospectus
as then in effect would include an untrue statement of a material fact
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<PAGE> 250
or omit to state any material fact necessary to make the statements
therein, in the light of the circumstances in which they were made, not
misleading; and
(h) advise the Holder, promptly after it shall receive notice or
obtain knowledge thereof, of the issuance of any stop order by the SEC
suspending the effectiveness of such registration statement or the
initiation or threatening of any proceeding for that purpose and promptly
use its best efforts to prevent the issuance of any stop order or to obtain
its withdrawal if such stop order should be issued.
5. UNDERWRITING. The Holder agrees that any demand registration involving
the issuance of Common Stock by the Company will, at the Company's option, be
effected pursuant to an underwritten public offering. The Holder will select the
book-running managing underwriter and any additional investment bankers and
managers to be used in connection with the demand registration, provided that
such underwriter and additional investment bankers and managers are reasonably
acceptable to the Company and that the underwriting discounts, fees, discounts
and any other compensation proposed to be charged by such persons is competitive
with that obtainable from other underwriters, bankers and managers of comparable
quality and reputation. The Holder may not participate in an incidental
registration hereunder unless such Holder (a) agrees to sell the Shares on the
basis provided in the underwriting arrangements, if any, and (b) completes and
executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required under the terms of such
underwriting arrangements, if any, and these registration rights.
6. EXPENSES. (a) With respect to any registration requested pursuant to
Section 2 hereof, and with respect to an inclusion of Shares in a registration
statement pursuant to Section 3 hereof, all fees, costs and expenses of such
registration, inclusion and public offering (as further specified in paragraph
(b) below) shall be borne by the Company; provided, however, that the Holder
shall bear the underwriting discounts and commissions and transfer taxes in
respect of the sale of his Shares.
(b) The fees, costs and expenses of registration to be borne by the
Company as provided in Section 6(a) above shall include, without
limitation, all registration, filing, and NASD fees, printing expenses,
fees and disbursements of legal counsel and accountants for the Company and
all legal fees and disbursements and other expenses of complying with state
securities or blue sky laws of any jurisdictions in which the securities to
be offered are to be registered and qualified.
7. INDEMNIFICATION. (a) The Company will indemnify and hold harmless the
Holder and any underwriter (as defined in the Securities Act) for the Holder and
each person, if any, who controls such Holder or underwriter within the meaning
of the Securities Act, from and against and will reimburse the Holder and each
such underwriter and controlling person with respect to, any and all loss,
damage, liability, cost and expense to which the Holder or any such underwriter
or controlling person may become subject under the Securities Act or otherwise,
insofar as such losses, damages, liabilities, costs or expenses are caused by
any untrue statement or alleged untrue statement of any material fact contained
in such registration statement, any prospectus contained therein or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading; provided, however, that
the Company will not be liable in any such case to the extent that any such
loss, damage, liability, cost or expenses arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission so
made in conformity with information furnished in writing by the Holder, such
underwriter or such controlling person specifically for use in the preparation
thereof. The Company will not be subject to any liability for any settlement
made without its consent, which consent shall not be unreasonably withheld.
(b) The Holder will indemnify and hold harmless the Company, its
directors and officers, any controlling person and any underwriter thereof
from and against, and will reimburse the Company, its directors and
officers, any controlling person and any underwriter thereof with respect
to, any and all loss, damage, liability, cost or expense to which the
Company or any controlling person and/or any underwriter thereof may become
subject under the Securities Act or otherwise, insofar as such losses,
damages,
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liabilities, cost or expenses are caused by any untrue statement or alleged
untrue statement of any material fact contained in such registration
statement, any prospectus contained therein or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances in which they
were made, not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was so made in reliance upon and in conformity with
information furnished in writing by or on behalf of the Holder specifically
for use in the preparation thereof. The Holder will not be subject to any
liability for any settlement made without its consent, which consent shall
not be unreasonably withheld.
(c) Promptly after receipt by an indemnified party pursuant to the
provisions of paragraph (a) or (b) of this Section 6 of notice of the
commencement of any action involving the subject matter of the foregoing
indemnity provisions such indemnified party will, if a claim thereof is to
be made against the indemnifying party pursuant to the provisions of said
paragraph (a) or (b), promptly notify the indemnifying party of the
commencement thereof; but the omission to so notify the indemnifying party
will not relieve it from any liability which it may have to any indemnified
party otherwise than hereunder, except to the extent that such omission
materially and adversely affects the indemnifying party's ability to defend
against or compromise such claim. In case such action is brought against
any indemnified party and it notifies the indemnifying party of the
commencement thereof, the indemnifying party shall have the right to
participate in, and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party; provided, however, that if
the defendants in any action include both the indemnified party and the
indemnifying party and there are legal defenses available to the
indemnified party and/or other indemnified parties which are different from
or in addition to those available to the indemnifying party, or if there is
a conflict of interest which would prevent counsel for the indemnifying
party from also representing the indemnified party, the indemnified party
or parties shall have the right to select separate counsel to participate
in the defense of such action on behalf of such indemnified party or
parties. After notice from the indemnifying party to an indemnified party
of its election so to assume the defense thereof, the indemnifying party
will not be liable to such indemnified party pursuant to the provisions of
said paragraph (a) or (b) for any legal or other expense subsequently
incurred by such indemnified party in connection with the defense thereof
other than costs of investigation, unless (i) the indemnified party shall
have employed counsel in accordance with the provisions of the preceding
sentence, (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party
within a reasonable time after the notice of the commencement of the action
or (iii) the indemnifying party has authorized the employment of counsel
for the indemnified party at the expense of the indemnifying party.
(d) If for any reason the foregoing indemnification is unavailable, or
is insufficient to hold harmless an indemnified party, then the
indemnifying party shall contribute to the amount paid or payable by the
indemnified party as a result of such losses, claims, damages, liabilities
or expenses in such proportion as is appropriate to reflect the relative
fault of the indemnifying party on the one hand and the indemnified party
on the other in connection with the statement or omission which resulted in
the losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. No person guilty of fraudulent
misrepresentations (within the meaning of Section 11(f) of the Securities
Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation.
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8. MISCELLANEOUS.
(a) NOTICES. Any notice or other communications required or which may
be given hereunder shall be in writing and shall be delivered personally,
or telegraphed, telexed or telecopied, or sent by certified, registered or
express mail postage prepaid, and shall be given when so delivered
personally, or telegraphed, telexed or telecopied, or if mailed, two days
after mailing, as follows (or to such other address as any party may from
time to time specify in writing pursuant to the notice provisions hereof):
If to the Company:
Homeplex Mortgage Investments Corporation
5333 North Seventh Street, Suite 219
Phoenix, Arizona 85014
Fax: (602) 230-1690
Attention: Corporate Secretary
If to the Holder:
-----------------------------------------------------
-----------------------------------------------------
-----------------------------------------------------
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(b) ENTIRE AGREEMENT. This Agreement contains the entire agreement
between the Company and the Holder, in respect of the subject matter
hereof, and supersedes all prior agreements, written or oral, with respect
thereto.
(c) AMENDMENT. This Agreement may be amended, modified, superseded,
cancelled, renewed or extended, and any term or condition hereof may be
waived, only by a written instrument executed by the Company and the
Holder, in the case of a waiver, by the party waiving compliance. No delay
by any party in exercising any right, power or privilege hereunder shall
operate as a waiver thereof, nor shall any waiver on the part of any party
of any right, power or privilege hereunder, nor any single or partial
exercise of any right, power or privilege hereunder, preclude any other or
further exercise thereof or the exercise of any other right, power or
privilege hereunder. The rights and remedies herein provided are cumulative
and are not exclusive of any rights or remedies that any party may
otherwise have at law or in equity.
(d) GOVERNING LAW. This Agreement is made in, and shall be governed by
and construed in accordance with, the laws of the State of Arizona, without
giving effect to the provisions thereof pertaining to conflicts and choices
of law.
(e) SUCCESSORS AND ASSIGNS. This agreement shall inure to the benefit
of and be binding upon the successors and assigns of each of the parties;
notwithstanding the foregoing, neither party shall assign its rights,
duties or obligations under this Agreement to any other person, without the
other party's express written consent, except that the Holder may assign
the benefits of this Agreement to any member of the Holder's "immediate
family" as such term is defined in Rule 16a-1(e) or any trust, partnership
or other entity created for the benefit of such persons or to any other
transferee of more than 150,000 shares prior to giving effect to the
contemplated reverse stock split of the Company as set forth in the Merger
Agreement.
(f) COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed an original and all of which shall constitute one
and the same instrument.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
HOMEPLEX MORTGAGE INVESTMENTS
CORPORATION
By:
---------------------------------
Name: Jay R. Hoffman
Title: President
HOLDER
------------------------------------
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APPENDIX D
HAMBERLIN AGREEMENTS
<PAGE> 255
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT ("Agreement") is dated as of
the 21st day of December, 1995, by and between HOMEPLEX MORTGAGE INVESTMENTS
CORPORATION, a Maryland corporation ("Homeplex"), and ALAN D. HAMBERLIN
("Hamberlin").
WHEREAS, Hamberlin is an employee of Homeplex and has served as Chief
Executive Officer of Homeplex since its organization;
WHEREAS, Hamberlin is a party to an employment agreement dated as of
November 1, 1992 (the "1992 Employment Agreement") pursuant to which Hamberlin
has served as the Chief Executive Officer of Homeplex pursuant to the terms
thereof;
WHEREAS, the 1992 Employment Agreement provides for an employment term
ending on August 31, 1996;
WHEREAS, Homeplex desires to continue to have the benefits of Hamberlin's
knowledge and experience and considers his continued employment a vital element
in protecting and enhancing the best interests of Homeplex and its stockholders;
WHEREAS, Hamberlin has agreed to continue to serve as Chief Executive
Officer of Homeplex and to fulfill, with the other employees of Homeplex, the
functions performed by him under the 1992 Employment Agreement on the terms and
conditions contracted hereinafter; and
WHEREAS, Homeplex desires to continue to employ Hamberlin and Hamberlin
desires to continue to be employed by Homeplex upon the terms and conditions
contained hereinafter, which Homeplex and Hamberlin agree will supersede, amend
and restate the terms and conditions of the 1992 Employment Agreement effective
as of the date hereof;
NOW, THEREFORE, in consideration of the promises and of the mutual
covenants herein contained, the parties hereto have agreed and do agree as
follows:
1. EMPLOYMENT. Homeplex hereby employs Hamberlin and Hamberlin hereby
accepts employment by Homeplex upon the terms and conditions set forth
herein.
2. SERVICES REQUIRED.
(a) CHIEF EXECUTIVE OFFICER. Hamberlin shall be employed as the
Chief Executive Officer of Homeplex and shall perform such duties and
services as are customary for such a position. Such services shall
include the services currently being rendered by Hamberlin.
(b) EXPENSE REIMBURSEMENT. Hamberlin shall devote that portion of
his time required to perform his duties hereunder in a competent manner.
Because some of Hamberlin's duties under this paragraph will, from time
to time, be performed by him while he is physically located in the
offices of Courtland Homes, Homeplex hereby agrees to pay Courtland
$15,000 annually as reimbursement for expenses incurred by Courtland in
providing support to Hamberlin during the time he performs work for
Homeplex. Such payment shall be made in quarterly increments.
3. TERM OF EMPLOYMENT. The term of this Agreement shall be for a
period of three years commencing as of the date hereof; provided, however,
the rights of Hamberlin and the obligations of Homeplex under the Addendum
shall continue during the "PSR Exercise Period" as defined in Section 6 of
the Addendum.
4. CHANGE IN CONTROL. The term "Change in Control" of Homeplex shall
mean a change in control of a nature that would be required to be reported
in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated
under the Securities Exchange Act of 1934 as in effect on the date of this
Agreement or, if Item 6(e) is no longer in effect, any regulations issued
by the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934 which serve similar purposes; provided that, without
limitation, such a Change in Control shall be deemed to have occurred if
and when (a) any person (as such term is used in Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934)
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becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934) directly or indirectly of equity
securities of Homeplex representing 9.8 percent or more of the combined
voting power of Homeplex's then outstanding equity securities except that
this provision shall not apply to an acquisition which has been approved by
least 75 percent of the members of the Board of Directors who are not
affiliates or associates of person and by at least 80 percent of the issued
and outstanding shares of Homeplex common stock beneficially owned by
non-affiliates of such person; (b) during the period of this Agreement,
individuals who, at the beginning of such period, constituted the Board of
Directors of Homeplex (the "Original Directors"), cease for any reason to
constitute at least a majority thereof unless the election or nomination
for election of each new director was approved (an "Approved Director") by
the unanimous vote of a Board of Directors constituted entirely of Existing
Directors and/or previously Approved Directors; (c) a tender offer or
exchange offer is made whereby the effect of such offer is to take over and
control Homeplex; and such offer is consummated for the equity securities
of Homeplex representing 20 percent or more of the combined voting power of
Homeplex's then outstanding voting securities; (d) Homeplex is merged,
consolidated or enters into a reorganization transaction with another
person and as the result of such merger, consolidation or reorganization
less than 75 percent of the outstanding equity securities of the surviving
or resulting person shall then be owned in the aggregate by the former
stockholders of Homeplex; or (e) Homeplex transfers substantially all of
its assets to another person or entity which is not a wholly-owned
subsidiary of Homeplex; provided, however, that notwithstanding the
foregoing no Change of Control shall be deemed to have occurred if such a
Change of Control is a "Consented Change of Control." A "Consented Change
of Control" is any transaction described in Sections 4(a), (c) or (d) if
such transaction has been unanimously approved by a Board of Directors
constituted entirely of Existing Directors and/or previously Approved
Directors.
5. COMPENSATION.
(a) SALARY. Homeplex will pay Hamberlin an annual base salary of
One Dollar ($1.00) for the term of this Agreement. This annual base
salary shall be payable in annual installments.
(b) BONUSES. Hamberlin shall not be entitled to any bonus except as
granted by the Board of Directors in its absolute sole discretion.
(c) OPTIONS/PSRS. As of the date of this Agreement, Homeplex has
granted an option to Hamberlin to purchase common stock of Homeplex
pursuant to a Stock Option Agreement executed by and between Homeplex
and Hamberlin as of the date hereof (the "Stock Option Agreement").
Under the terms of the Stock Option Agreement, Hamberlin may not
exercise any options thereunder until that Stock Option Agreement has
been approved by the shareholders of Homeplex as required in the Stock
Option Agreement ("Shareholder Approval"). If Shareholder Approval has
not been obtained (i) at a Homeplex shareholders' meeting in which the
Stock Option Agreement is the subject of a shareholder vote; (ii) on or
before the day prior to the third anniversary date of this Agreement;
(iii) on or before the day prior to a Change in Control; or (iv) on or
before the day prior to any Date of Termination (not including a Date of
Termination occurring as a result of the termination of Hamberlin for
Cause), then on the earliest of the foregoing dates, Hamberlin shall
have the phantom stock rights ("PSRs") described in this Agreement and
the Addendum attached hereto which by this reference is incorporated
herein.
(d) FRINGE BENEFITS. Hamberlin shall be entitled to participate in
any group insurance, pension, retirement, vacation, expense
reimbursement or other plans, programs or benefits approved by the Board
of Directors and made available from time to time to employees of
Homeplex generally during the term of Hamberlin's employment hereunder.
The foregoing shall not obligate Homeplex to adopt or maintain any
particular plan, program or benefit.
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6. TERMINATION OF EMPLOYMENT. Hamberlin's employment shall terminate
during the of this Agreement under any of the following circumstances:
(a) DEATH. Hamberlin's employment shall terminate upon Hamberlin's
death.
(b) DISABILITY. Hamberlin's employment shall terminate in the event
Hamberlin becomes physically or mentally disabled so as to be unable,
for a period of more than 120 consecutive calendar days or for more than
180 calendar days in the aggregate during any twelve-month period, to
perform his duties hereunder in a timely and competent manner, and
Homeplex thereafter gives written notice of termination to Hamberlin.
Hamberlin's failure to present himself for work for either of the
periods described above shall be presumptive evidence of his disability.
The first day of any 120 or 180 day period described above shall be
referred to as the "Disablement Commencement Date."
(c) TERMINATION FOR CAUSE. Homeplex may terminate Hamberlin's
employment hereunder for Cause. For the purposes of this Agreement,
Homeplex shall have "Cause" to terminate Hamberlin's employment
hereunder only if termination shall have been the result of an act or
acts of dishonesty by Hamberlin constituting a felony and resulting or
intended to result directly or indirectly in substantial gain or
personal enrichment at the expense of Homeplex. Notwithstanding the
foregoing, Hamberlin shall not be deemed to have been terminated for
Cause unless and until there shall have been delivered to Hamberlin a
copy of a resolution duly adopted by the affirmative vote of not less
than three-quarters of the entire membership of the Homeplex Board of
Directors (excluding Hamberlin if he is then a director) at a meeting of
the Board called and held for the purpose (after reasonable notice to
Hamberlin and an opportunity for Hamberlin, together with his counsel,
to be heard before the Board), finding that in the good faith opinion of
the Board Hamberlin was guilty of conduct meeting the criteria set forth
above and specifying the particulars thereof.
(d) NOTICE OF TERMINATION. Any termination by Homeplex pursuant to
Section 6(b) or 6(c)above shall be communicated by written Notice of
Termination. For purposes of this Agreement, a "Notice of Termination"
shall mean a notice which shall indicate the specific termination
provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis
for termination of Hamberlin's employment under the provision so
indicated. For purposes of this Agreement, no such purported termination
shall be effective without such Notice of Termination.
(e) TERMINATION BY MUTUAL AGREEMENT. Within 90 days of a Consented
Change of Control, Homeplex may send a written "Notice of Requested
Termination" to Hamberlin asking him to terminate his employment.
Hamberlin shall have 30 days to respond in writing to the Notice of
Requested Termination. A termination of Hamberlin's employment pursuant
to this Section 6(e) shall be referred to herein as a "Consented
Termination."
(f) TERMINATION BY HAMBERLIN. Hamberlin may at any time during the
term of this Agreement terminate his employment hereunder for any reason
or no reason by giving Homeplex notice in writing not less than 120 days
in advance of such termination, provided that in the event of a Change
in Control such notice must be not less than 30 days in advance of
termination. The Date of Termination shall be the date specified in the
written Notice of Termination unless otherwise agreed and Hamberlin
shall have no further obligations to Homeplex after the effective date
of termination. Notwithstanding the foregoing, in the event any "person"
(as defined in Section 4 above) begins a tender or exchange offer,
circulates a proxy to shareholders or takes other steps to effect a
Change of Control, Hamberlin agrees that he will not voluntarily leave
the employ of Homeplex, and will render services to Homeplex
commensurate with his position, until such "person" has abandoned or
terminated efforts to effect a Change of Control or until a Change of
Control has occurred.
(g) DATE OF TERMINATION. "Date of Termination" shall mean (i) if
the Agreement is terminated as a result of Hamberlin's death, the date
of Hamberlin's death, (ii) if the Agreement is terminated by Hamberlin,
the date on which he delivers a Notice of Termination to Homeplex, (iii)
if this Agreement is terminated by Homeplex for Disability, 30 days
after a Notice of
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Termination is given (provided that Hamberlin shall not have returned to
the performance of Hamberlin's duties on a full-time basis during such
30-day period), (iv) if the Agreement is terminated as a result of a
Consented Termination, the date as agreed to by Hamberlin and Homeplex,
or (v) if Hamberlin's employment is terminated by Homeplex for any other
reason, the date on which a Notice of Termination is given; provided
that if within 30 days after any Notice of Termination is given by
Homeplex, Hamberlin notifies Homeplex that a dispute exists concerning
the termination, the Date of Termination shall be the earlier of the
third anniversary date of this Agreement or the date on which the
dispute is finally determined, either by mutual written agreement of the
parties, or by a final judgment, order or decree of a court of competent
jurisdiction (the time for appeal therefrom having expired and no appeal
having been perfected).
7. COMPENSATION IN THE EVENT OF TERMINATION PRIOR TO A CHANGE IN
CONTROL. If Hamberlin's employment is terminated prior to a Change in
Control, the following provisions shall apply.
(a) DEATH OR DISABILITY. If Hamberlin's employment is terminated
under Section 6(a) or 6(b) hereof, Homeplex will pay Hamberlin or his
estate (i) his salary and fringe benefits to the Date of Termination and
(ii) if Shareholder Approval of the Stock Option Agreement has not
occurred as of the Date of Termination, an amount equal to the Excess
Value of each vested PSR. For purposes of the foregoing, the Excess
Value of each vested PSR shall be calculated (i) as of the Date of
Termination if Hamberlin is deceased or (ii) as of the Disablement
Commencement Date if Hamberlin is disabled. The foregoing amounts shall
be paid to Hamberlin in a lump sum within 10 days after the Date of
Termination.
(b) FOR CAUSE. If Hamberlin's employment is terminated under
Section 6(c) hereof, Homeplex will immediately pay Hamberlin his salary
and fringe benefits to the Date of Termination and Hamberlin shall not
be entitled to any other salary or fringe benefits or PSR Exercise or
DER Payments (whether vested or unvested).
(c) OTHER. If Hamberlin's employment is terminated by Homeplex for
any reason other than death, disability, Cause, or a Consented
Termination, Homeplex will pay Hamberlin (i) his salary and fringe
benefits for the balance of the term of this Agreement and (ii) if
Shareholder Approval of the Stock Option Agreement has not occurred as
of the Date of Termination, all PSR DER Payments occurring during the
PSR Exercise Period, and such PSR Exercise Payments as elected by
Hamberlin during the PSR Exercise Period. All salary and fringe benefits
shall be paid to Hamberlin in a lump sum within 10 days after the Date
of Termination. All PSR DER Payments shall be paid at such time as
required by the Addendum, and all PSR Exercise Payments shall be paid at
such time as such PSRs are exercised by Hamberlin during the PSR
Exercise Period.
(d) BY HAMBERLIN. If Hamberlin's employment is terminated under
Section 6(f) hereof, Homeplex will pay Hamberlin only his salary and
fringe benefits which become payable on or prior to the Date of
Termination. All such salary and fringe benefits shall be paid to
Hamberlin in a lump sum within 10 days after the Date of Termination. In
addition, if Shareholder Approval of the Stock Option Agreement has not
occurred as of the Date of Termination, with respect to those PSRs that
vested prior to the Date of Termination, Hamberlin shall thereafter be
entitled during the PSR Exercise Period to all PSR DER Payments and such
PSR Exercise Payments as elected by Hamberlin.
(e) NO MITIGATION. Hamberlin shall not be required to mitigate the
amount of any payment provided for in this paragraph by seeking other
employment or otherwise, nor shall the amount of any payment provided
for in this paragraph be reduced by any compensation earned by Hamberlin
as the result of employment by another employer.
8. COMPENSATION IN THE EVENT OF A CONSENTED TERMINATION. If
Hamberlin's employment is terminated pursuant to a Consented Termination,
Homeplex will pay Hamberlin only the salary and fringe benefits that become
payable on or prior to the Date of Termination. All such salary and fringe
benefits shall be paid to Hamberlin in a lump sum within 10 days after the
Date of Termination. In
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addition, if Shareholder Approval of the Stock Option Agreement has not
occurred as of the Date of Termination, Hamberlin shall thereafter be
entitled during the PSR Exercise Period to all PSR DER payments and all
such PSR Exercise payments as elected by Hamberlin with respect to all PSRs
as those PSRs vest as if Hamberlin were still employed.
9. EFFECT OF CHANGE IN CONTROL. If a Change in Control occurs on or
before the third anniversary date of this Agreement and if there previously
shall have been a Consented Termination of Hamberlin, and if shareholder
approval of the Stock Option Agreement has not occurred as of the day prior
to the Change in Control, all PSRs shall immediately vest, all PSR DER
payments shall be paid at such times as required by the Addendum, and all
PSR Exercise Payments shall be paid at such time that such PSRs are
exercised by Hamberlin during the PSR Exercise Date. If a Change in Control
occurs during the term of this Agreement and Hamberlin's employment shall
not have been terminated previously, notwithstanding any other provision of
this Agreement to the contrary, the following provisions shall apply:
(a) BENEFIT PLANS. Homeplex shall maintain in full force and
effect, for Hamberlin's continued benefit until the earlier of the third
anniversary of the date of this Agreement, or the date Hamberlin becomes
entitled to participate in similar plans, programs or benefits provided
by a subsequent employer, all life, accident, medical and dental
insurance plans, programs or benefits, adopted from time to time by the
Board of Directors, in which he was entitled to participate immediately
prior to the Change in Control provided that his continued participation
is possible under the general terms and provisions of such plans,
programs and benefits. The foregoing shall not obligate Homeplex to
adopt or maintain any particular plan, program or benefit. In the event
that his participation in any such plan, program or benefit is barred,
Homeplex shall arrange to provide him with benefits substantially
similar to those to which he would have been entitled to receive under
such plans and programs. At the end of the period of coverage, Hamberlin
shall have the option to have assigned to him at no cost and with no
apportionment of prepaid premiums, any assignable insurance policy owned
by Homeplex and relating specifically to him.
(b) ACCELERATION OF PSRS. As provided in the Addendum, if
Shareholder Approval of the Stock Option Agreement has not occurred as
of the day prior to the Change in Control, all PSRs shall immediately
vest, all PSR DER Payments shall be paid at such times as required by
the Addendum and all PSR Exercise Payments shall be paid at such time as
such PSRs are exercised by Hamberlin during the PSR Exercise Period.
(c) CHANGE IN CONTROL BONUS. Within 10 days after a Change in
Control, Homeplex will pay $500,000 to Hamberlin as well as all unpaid
fringe benefits. If Hamberlin remains employed by Homeplex following a
Change in Control he shall be entitled to receive such other
compensation, if any, as Homeplex and Hamberlin shall then agree.
(d) NO MITIGATION. Hamberlin shall not be required to mitigate the
amount of any payment provided for in this paragraph by seeking other
employment or otherwise, nor shall the amount of any payment provided
for in this paragraph be reduced by any compensation earned by Hamberlin
as the result of employment by another employer.
10. LIQUIDATION OF HOMEPLEX. In the event that no Change in Control
has occurred and the Board of Directors has elected to declare a
Liquidating Dividend, then notwithstanding the Addendum hereof, no PSR DER
Payment shall be made to Hamberlin. Instead, regardless of whether or not
Shareholder Approval of the Stock Option Agreement has occurred, Hamberlin
shall receive on or before the date of the Liquidating Dividend a bonus in
an amount equal to $20,833 multiplied by each full or partial month that
Hamberlin has been employed by Homeplex since the date of this Agreement.
For purposes of this Agreement, a "Liquidating Dividend" shall mean a
dividend through which all or substantially all of the assets of Homeplex
are distributed to its shareholders.
11. SURRENDER OF BOOKS AND RECORDS. Hamberlin acknowledges that all
files, lists, books, records, literature, products and any other materials
owned by Homeplex or used by it in connection with the
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conduct of its business shall at all times remain the property of Homeplex
and that upon termination of employment hereunder, irrespective of the
time, manner or cause of said termination, Hamberlin will surrender to
Homeplex all such files, lists, books, records, literature, products and
other materials.
12. NOTICES. All notices, requests, demands and other communications
required under this Agreement shall be in writing and shall be deemed duly
given and received (i) if personally delivered, on the date of delivery,
(ii) if mailed, three days after deposit in the United States mail,
registered or certified, return receipt requested, postage prepaid and
addressed as provided below, or (iii) if by a courier delivery service
providing overnight or "next-day" delivery, on the next business day after
deposit with such service addressed as follows:
If to Homeplex: Homeplex Mortgage Investments
Corporation
5333 North 7th Street, Suite 219
Phoenix, Arizona 85014
If to Hamberlin: Alan D. Hamberlin
5333 North 7th Street, Suite 310
Phoenix, Arizona 85014
Any party may change its above-designated address by giving the other party
written notice of such change in the manner set forth herein.
13. WAIVER. No waiver of any of the provisions of this Agreement shall
be deemed, or shall constitute, a waiver of any other provision hereof
(whether or not similar) nor shall such waiver constitute a continuing
waiver, and no waiver shall be binding unless executed in writing by the
party making the waiver.
14. INTEGRATION, MODIFICATION AND AMENDMENT. This Agreement (which
includes the Addendum) and the Stock Option Agreement embody the full
understanding of the parties with respect to the subject matter hereof,
superseding any and all prior agreements, including the 1992 Employment
Agreement, and no amendment or modification thereof shall be effective
unless the same shall be in writing and signed by both of said parties.
15. GOVERNING LAW. Except as the corporate law of the State of
Maryland expressly applies hereto, this Agreement shall be construed in
accordance with, and governed by, the laws of the State of Arizona, without
regard to application of conflicts of law principles.
16. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which,
taken together, shall constitute one and the same instrument.
17. SEVERABILITY. Each provision of this Agreement is severable from
every other provision and is enforceable to the full extent that it is
valid without regard to the invalidity of any portion hereof or of any
other provision and without regard to any claim or cause of action
Hamberlin may have against Homeplex under this Agreement or otherwise.
18. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit
of and be binding upon the successors and assigns of the parties hereto;
provided that because the obligations of Hamberlin hereunder involve the
performance of personal services, such obligations shall not be delegated
by Hamberlin. For purposes of this Agreement successors and assigns shall
include, but not be limited to, any individual, corporation, trust,
partnership, or other entity which acquires a majority of the stock or
assets of Homeplex by sale, merger, consolidation, liquidation, or other
form of transfer. Homeplex will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of Homeplex to expressly
assume and agree to perform this Agreement in the same manner and to the
same extent that Homeplex would be required to perform it if no such
succession had taken place.
19. ATTORNEYS' FEES. Homeplex agrees to reimburse Hamberlin for his
legal fees and costs in connection with the negotiation of this Agreement.
In the event an action or suit is brought by any party
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hereto to enforce any of the terms of this Agreement, the prevailing party
shall be entitled to the payment of reasonable attorneys' fees and costs,
as determined by the judge of the court.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
HOMEPLEX MORTGAGE INVESTMENTS
CORPORATION, a Maryland corporation
By: /s/ JAY HOFFMAN
---------------------------------
Name: Jay Hoffman
Its: President
/s/ ALAN D. HAMBERLIN
------------------------------------
Alan D. Hamberlin
7
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ADDENDUM TO
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
1. ADDENDUM TO EMPLOYMENT AGREEMENT. This Addendum is attached to an
Amended and Restated Employment Agreement between Alan D. Hamberlin and Homeplex
Mortgage Investments Corporation dated as of December 21, 1995 (the "Employment
Agreement") and is intended to be incorporated in such Employment Agreement as
if it was a part thereof. All capitalized terms included in this Addendum and
not defined shall have the definitions given such term in the Employment
Agreement.
2. CONDITIONAL GRANT OF PSRS.
(a) GRANT. Homeplex conditionally grants to Hamberlin, as of December
21, 1995 (the "Grant Date"), the right, privilege and option (the phantom
stock right or "PSR") to be paid the appreciation occurring with respect to
750,000 shares of the common stock of Homeplex ("PSR Shares"), subject in
all respects to the terms, conditions and provisions of this Addendum. As
of the Grant Date, Homeplex has also granted to Hamberlin an option to
purchase common stock of Homeplex pursuant to the Stock Option Agreement.
Under the terms of the Stock Option Agreement, Hamberlin may not exercise
any options thereunder prior to Shareholder Approval. If Shareholder
Approval has not been obtained (i) at a Homeplex shareholders' meeting in
which the Stock Option Agreement is the subject of a shareholder vote; (ii)
on or before the day prior to the third anniversary date of this Agreement;
(iii) on or before the day prior to a Change in Control; or (iv) on or
before the day prior to any Date of Termination (not including a Date of
Termination occurring as a result of the termination of Hamberlin for
Cause), then on the earliest of the foregoing dates (the "Effective Date"),
Hamberlin shall have the PSRs described in the Employment Agreement and
this Addendum. If Shareholder Approval of the Stock Option Agreement occurs
prior to any Effective date, then this Addendum shall be void and no PSRs
shall be issued hereunder.
(b) PSR SHARES. The PSR Shares shall be deemed to become issued and
outstanding for purposes of this Addendum (including Section 5 hereof) when
the related PSRs vest, although the PSR Shares shall be only phantom shares
of common stock of Homeplex and shall not become actually issued and
outstanding. The number of PSR Shares deemed outstanding for purposes of
this Addendum (and the related PSRs held by Hamberlin) shall be reduced by
the number of PSRs exercised for cash under Section 4 and as provided in
Section 6 hereof.
3. VESTING OF PSRS. The PSRs shall vest according to following schedule:
(a) 200,000 of the PSRs shall vest immediately;
(b) 275,000 of the PSRs shall vest on the first anniversary of the
Grant Date provided Hamberlin is either employed by Homeplex on that date
or has left the employment of Homeplex pursuant to a Consented Termination
as described in Section 6(e) of the Employment Agreement; and
(c) 275,000 of the PSRs shall vest on the second anniversary of the
Grant Date provided Hamberlin is either employed by Homeplex on that date
or has left the employment of Homeplex pursuant to a Consented Termination
as described in Section 6(e) of the Employment Agreement.
Notwithstanding the foregoing, all PSRs shall vest upon a Change in Control or
upon the termination of Hamberlin's employment (without his consent) by Homeplex
for any reason other than death, disability or Cause. From and after the
Effective Date, Hamberlin may exercise vested PSRs with respect to any
outstanding PSR Shares at any time, and from time to time, in whole or in part,
during the PSR Exercise Period, as defined in Section 6 hereof.
4. EXERCISE OF PSRS. From and after the Effective Date, all or any portion
of the vested PSRs may be exercised by Hamberlin upon written notice to
Homeplex, addressed to Homeplex at its principal place of business. Such notice
shall be signed by Hamberlin and shall state the election to exercise PSRs and
specify the number of PSR Shares with respect to which the PSRs ate being
exercised. Upon the exercise of PSRs, Homeplex shall immediately pay to
Hamberlin for each PSR exercised cash in an amount equal to the
<PAGE> 263
difference between the Base Price of an PSR Share and the current FMV Price of
an PSR Share (an "PSR Exercise Payment"). The amount by which the FMV Price
exceeds the Base Price shall be referred to as the "Excess Value." For purposes
of the foregoing, the "Base Price" of a PSR Share shall be equal to $1.50, which
is the market price (as determined pursuant to Section 10 below) of a PSR Share
as of the Grant Date and the "FMV Price" value of a PSR Share shall be equal to
its market price (as determined pursuant to Section 10 below) as of any
applicable date.
5. PSR DER PAYMENTS. From and after the Effective Date, except as provided
in Section 10 of the Employment Agreement, to the extent that Homeplex at any
time declares and pays a dividend with respect to its shares of common stock
(the "Common Stock"), Homeplex shall also make a cash payment to Hamberlin (the
"PSR DER Payment") of an amount equal to the number of PSR Shares deemed to be
outstanding under Section 2 hereof on the date of such dividend declaration
multiplied by the per share dividend actually paid with respect to the Common
Stock. If Homeplex declares a dividend after the Grant Date but prior to the
Effective Date ("Interim Dividends"), Homeplex shall pay to Hamberlin on the
Effective Date the PSR DERs occurring with respect to such Interim Dividends.
6. TERMINATION OF PSRS. All PSRs, to the extent not previously exercised,
shall terminate (and any remaining PSR Shares shall no longer be considered to
be outstanding hereunder) upon the fifth anniversary of the Grant Date or as
earlier provided in the Employment Agreement (such termination date shall be
referred to as the "PSR Termination Date"). The period from the Grant Date to
the PSR Termination date shall be referred to as the "PSR Exercise Period."
7. DEATH OR DISABILITY OF HAMBERLIN. If Hamberlin dies or becomes disabled
on or after the Effective Date and prior to the PSRs being exercised in full but
during his employment, the Excess Value (as calculated on the date of death or
on the Disablement Commencement Date, whichever is applicable) of all
unexercised PSRs which had vested prior to the date of death or the Disablement
Commencement Date shall be immediately paid to Hamberlin or his estate as
provided in Section 7(a) of the Employment Agreement. If Hamberlin dies on or
after the Effective Date but after the termination of his employment pursuant to
a Consented Termination, the Excess Value (as calculated on the date of death)
of all unexercised PSRs that had vested prior to the date of death shall be paid
to Hamberlin's estate within 10 days.
8. NO PRIVILEGE OF COMMON STOCK OWNERSHIP. The holder of the PSRs granted
hereunder shall not have any of the rights of a stockholder with respect to the
PSR Shares.
9. CAPITAL ADJUSTMENTS. The number of PSR Shares deemed outstanding (and
the Base Price) shall be proportionately adjusted for any increase or decrease
in the number of outstanding shares of Common Stock of Homeplex resulting from a
subdivision or consolidation of the Common Stock or any other capital adjustment
or the payment of a stock dividend or any other increase or decrease in the
number of such shares effected without Homeplex's receipt of consideration
therefor in money, services or property.
10. CALCULATION OF FAIR MARKET VALUE OF COMMON STOCK. The market value of
an PSR Share shall be the same as the market value of a share of Common Stock.
The market value of a share of Common Stock on any relevant date shall be
determined in accordance with the following provisions:
(a) If the Common Stock is not at the time listed or admitted to
trading on any stock exchange but is traded in the over-the-counter market,
the fair market value shall be the mean between the highest bid and lowest
asked prices (or, if such information is available, the closing selling
price) per share of Common Stock on the date in question in the
over-the-counter market, as such prices are reported by the National
Association of Securities Dealers through its NASDAQ system or any
successor system. If there are no reported bid and asked prices (or closing
selling price) for the Common Stock on the date in question, then the mean
between the highest bid price and lowest asked price (or the closing
selling price) on the last preceding date for which such quotations exist
shall be determinative of fair market value.
(b) If the Common Stock is at the time listed or admitted to trading
on any stock exchange, then the fair market value shall be the closing
selling price per share of Common Stock on the date in question on the
stock exchange determined by the Board to be the primary market for the
Common Stock, as such
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<PAGE> 264
price is officially quoted in the composite tape of transactions on such
exchange. If there is no reported sale of Common Stock on such exchange on
the date in question, then the fair market value shall be the closing
selling price on the exchange on the last preceding date for which such
quotation exists.
(c) If the Common Stock at the time is neither listed nor admitted to
trading on any stock exchange nor traded in the over-the-counter market,
then the fair market value shall be determined by the Board after taking
into account such factors as the Board shall deem appropriate, including
one or more independent professional appraisals.
11. COMPLIANCE WITH LAWS AND REGULATIONS. The exercise of an PSR and the
payment of cash hereunder upon such exercise shall be subject to compliance by
Homeplex and Hamberlin with all applicable requirements of law relating thereto.
12. NONASSIGNABILITY. Neither the PSRs nor any rights or privileges,
conferred thereby shall be assignable or transferable by Hamberlin other than by
will or by the laws of descent and distribution, and the PSRs shall be
exercisable only by Hamberlin during Hamberlin's lifetime.
IN WITNESS WHEREOF, the parties hereto have executed this Addendum as of
the same date as the Employment Agreement.
HOMEPLEX MORTGAGE INVESTMENTS
CORPORATION, a Maryland corporation
By: /s/ JAY HOFFMAN
-----------------------------------
Name: Jay Hoffman
Its: President
/s/ ALAN D. HAMBERLIN
--------------------------------------
Alan D. Hamberlin
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HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
STOCK OPTION AGREEMENT
THIS AGREEMENT ("Agreement") is made as of the 21st day of December, 1995,
by and between HOMEPLEX MORTGAGE INVESTMENTS CORPORATION, a Maryland corporation
("Homeplex"), and ALAN D. HAMBERLIN ("Hamberlin").
WHEREAS, Hamberlin is an employee of Homeplex and has served as its Chief
Executive Officer since its organization;
WHEREAS, Hamberlin and Homeplex have entered into an Amended and Restated
Employment Agreement as of the same date hereof (the "Employment Agreement");
and
WHEREAS, Homeplex considers it desirable and its best interest that in lieu
of a regular salary Hamberlin be given an inducement to acquire a proprietary
interest in Homeplex and added incentive to advance the interest of Homeplex by
possessing an option to purchase shares of the common stock of Homeplex (the
"Stock").
NOW, THEREFORE, in consideration of the promises and of the mutual
covenants herein contained, it is agreed by and between the parties as follows:
1. GRANT OF OPTION. Homeplex grants to Hamberlin, as of the date of this
Agreement (the "Grant Date"), the right, privilege and option (the "Option") to
purchase 750,000 shares of Stock (the "Optioned Shares"), subject in all
respects to the terms, conditions and provisions of this Agreement.
2. OPTION PRICE. The purchase price of the Optioned Shares (the "Option
Price") is $1.50, which is 100 percent of the fair market value per share of the
Stock on the date of grant of this option.
3. VESTING OF OPTION.
(a) VESTING SCHEDULE. Optioned Shares that have vested may be acquired
in accordance with the terms of this Agreement at any time, and from time
to time, in whole or in part, until the Option expires as provided in
Section 5 hereof. The time at which the Optioned Shares vest and the
Hamberlin or his permitted assignee(s) (each, an "Optionholder") may
thereafter exercise this Option with respect to such Optioned Shares shall
be as follows:
(i) 200,000 of the Optioned Shares shall vest immediately;
(ii) 275,000 of the Optioned Shares shall vest on the first
anniversary of the Grant Date provided Hamberlin is either employed by
Homeplex on that date or has left the employment of Homeplex pursuant to
a Consented Termination as described in Section 6(e) of the Employment
Agreement; and
(iii) 275,000 of the Optioned Shares shall vest on the second
anniversary of the Grant Date provided Hamberlin is either employed by
Homeplex on that date or has left the employment of Homeplex pursuant to
a Consented Termination as described in Section 6(e) of the Employment
Agreement.
Notwithstanding the foregoing, all Optioned Shares shall accelerate and
vest upon a Change in Control (as defined in the Employment Agreement) or
upon the termination of Hamberlin's employment (without his consent) by
Homeplex for any reason other than death, disability, a Consented
Termination, or Cause (as that term is used in the Employment Agreement).
(b) ACCELERATION. Homeplex may, in its discretion, allow the Optioned
Shares "to be purchased prior to any vesting date.
4. EXERCISE OF OPTION. All or any portion of the vested Optioned Shares may
be purchased by an Optionholder upon written notice to Homeplex, addressed to
Homeplex at its principal place of business. Such notice shall be signed by the
Option holder and shall state the election to exercise the Option and the number
<PAGE> 266
of Optioned Shares with respect to which it is being exercised. Such notice
shall be accompanied by payment in full of the Option Price for the number of
shares of Stock being purchased. Payment may be made in cash or by check or by
tendering duly endorsed certificates representing shares of Stock then owned by
the Optionholder. In the sole discretion of Homeplex, an Optionholder may be
provided with the election to pay for the Option Price by having Homeplex
withhold, from the Stock otherwise issuable, a portion of those shares of Stock
with an aggregate fair market value equal to that portion of the Option Price
designated by the Optionholder (not to exceed 100% of the Option Price). Upon
the exercise of the Option, Homeplex shall deliver, or cause to be delivered, to
the Option holder a certificate or certificates representing the net shares of
Stock purchased upon such exercise as soon as practicable after payment for
those shares has been received by Homeplex. All shares that are purchased and
paid for in full upon exercise of the Option shall be fully paid and
non-assessable but may not be transferred, sold, assigned or conveyed by
Optionholder for six months from the date of shareholder approval as required by
Section 22 hereof.
5. TERMINATION OF OPTION. This Option, to the extent not previously
exercised, shall terminate upon the fifth anniversary of the Grant Date, or as
otherwise set forth in this Agreement.
6. DEATH OR DISABILITY OF HAMBERLIN. If Hamberlin's employment with
Homeplex is terminated pursuant to the Employment Agreement upon the death or
disablement of Hamberlin, the Optioned Shares that are vested as of the date of
death or Disablement Commencement Date (as defined in the Employment Agreement),
whichever is applicable, shall be exercisable within one year of the Date of
Termination (as defined in the Employment Agreement) or until the stated
expiration date of the Option, whichever occurs first, by an Option holder in
accordance with Section 4 hereof. If Hamberlin dies after a Consented
Termination, the Optioned Shares that are vested as of the date of death shall
be exercisable within one year of such date of death or until the stated
expiration date of the Option, whichever occurs first, by Hamberlin's
successors-in-interest.
7. NO PRIVILEGE OF STOCK OWNERSHIP. An Optionholder shall not have any of
the rights of a stockholder with respect to the Optioned Shares until such
Optionholder shall have exercised the option, paid the Option Price, and
received a stock certificate for the purchased shares of Stock.
8. COMPLIANCE WITH LAWS AND REGULATIONS. The exercise of this Option and
the issuance of the Stock upon such exercise shall be subject to compliance by
Homeplex and each Optionholder with all applicable requirements of law relating
thereto and with all applicable regulations of any stock exchange in which the
shares of the Stock may be listed at the time of such exercise and issuance. In
connection with the exercise of an Option hereunder, an Option holder shall
execute and deliver to Homeplex such representations in writing as may be
requested by Homeplex in order for it to comply with applicable requirements of
federal and state securities laws.
9. LIABILITY OF HOMEPLEX. The inability of Homeplex to obtain approval from
any regulatory body having authority deemed by Homeplex to be necessary to the
lawful issuance and sale of any Stock pursuant to this Agreement shall relieve
Homeplex of any liability with respect to the non issuance or sale of the Stock
as to which such approval shall not have been obtained. Homeplex, however, shall
use its best efforts to obtain all such approvals.
10. CAPITAL ADJUSTMENTS. The number of Optioned Shares shall be
proportionately adjusted for any increase or decrease in the number of
outstanding shares of Stock of Homeplex resulting from a subdivision or
consolidation of shares or any other capital adjustment or the payment of
a-stock dividend or any other increase or decrease in the number of such shares
effected without Homeplex's receipt of consideration therefor in money, services
or property.
11. MERGERS, ETC. If Homeplex is the surviving corporation in any merger or
consolidation (not including a Corporate Transaction), the Option granted herein
shall pertain to and apply to the securities to which a holder of the number of
shares of Stock subject to the Option or Award would have been entitled prior to
the merger or consolidation.
12. CORPORATE TRANSACTION. In the event of stockholder approval of a
Corporate Transaction that is not a Change in Control, all unvested Options
shall automatically accelerate and immediately vest so that each
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<PAGE> 267
outstanding Option shall, one week prior to the specified effective date for the
Corporate Transaction, become fully exercisable for all of the Optioned Shares.
Upon the consummation of the Corporate Transaction, all Options shall, to the
extent not previously exercised, terminate and cease to be outstanding.
"Corporate Transaction" shall mean (a) a merger or consolidation in which
Homeplex is not the surviving entity or (b) any reverse merger in which Homeplex
is the surviving entity.
13. ASSIGNMENT. The right to acquire Stock under this Agreement may not be
assigned, encumbered or otherwise transferred by Optionholder other than by will
or the laws of descent and distribution or pursuant to a qualified domestic
relations order as defined by the Internal Revenue Code of 1986, as amended,
Title 1 of the Employment Retirement Income Security Act, or the rules
thereunder.
14. SECURITIES RESTRICTIONS.
(a) LEGEND ON CERTIFICATES. All certificates representing shares of
Stock issued hereunder shall be endorsed with a legend reading as follows:
The shares of Common Stock evidenced by this certificate have been
issued to the registered owner in reliance upon written representations
that these shares have been purchased solely for investment. These
shares may not be sold, transferred or assigned unless in the opinion of
Homeplex and its legal counsel such sale, transfer or assignment will
not be in violation of the Securities Act of 1933, as amended, and the
rules and regulations thereunder.
(b) PRIVATE OFFERING FOR INVESTMENT ONLY. If the shares to be issued
to an Optionholder upon the exercise of any Option have not been registered
under the 1933 Act, the Arizona Act or the securities laws of any other
jurisdiction, those shares will be "restricted securities" within the
meaning of Rule 144 under the 1933 Act and must be held indefinitely
without any transfer, sale or other disposition unless (a) the shares are
subsequently registered under the 1933 Act, the Arizona Act and the
securities laws of any other applicable jurisdiction, or (b) the
Optionholder obtains an opinion of counsel which is satisfactory to counsel
for Homeplex that the shares may be sold in reliance on an exemption from
registration requirements. By the act of acting an Option, Hamberlin agrees
(i) that, any shares of Stock acquired will be solely for investment not
with any intention to resell or redistribute those shares and (ii) such
intention will be confirmed, by an appropriate certificate at the time the
Stock is acquired if requested by Homeplex. The neglect or failure to
execute such a certificate, however, shall not limit or negate the
foregoing agreement.
(c) REGISTRATION STATEMENT. If a registration statement covering the
shares of Stock issuable hereunder as filed under the Securities Exchange
Act of 1933, as amended, and as declared effective by the Securities
Exchange Commission (the "Registration"), the provisions of Sections 14(a)
and (b) shall terminate during the period of time that such registration
statement, as periodically amended, remains effective. The Company shall
use its best efforts to effect the Registration within six months after
shareholder approval is obtained as required by Section 22 hereof.
15. TAX WITHHOLDING.
(a) GENERAL. Homeplex's obligation to deliver Stock under this
Agreement shall be subject to Hamberlin's satisfaction of all applicable
federal, state and local income tax withholding requirements.
(b) SHARES TO PAY FOR WITHHOLDING. Homeplex may, in its discretion and
in accordance with the provisions of this Section 15(b) and such
supplemental rules as it may from time to time adopt (including any
applicable safe-harbor provisions of SEC Rule 16b-3), provide Hamberlin
with the right to use shares of Stock in satisfaction of all or part of the
federal, state and local income tax liabilities incurred by Hamberlin in
connection with the receipt of Stock ("Taxes"). Such right may be provided
to Hamberlin in either or both of the following formats:
(i) STOCK WITHHOLDING. Hamberlin may be provided with the election
to have Homeplex withhold, from the Stock otherwise issuable, a portion
of those shares of Stock with an aggregate fair market value equal to
the percentage of the applicable Taxes (not to exceed 100 percent)
designated by Hamberlin.
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(ii) STOCK DELIVERY. Homeplex may, in its discretion, provide
Hamberlin with the election to deliver to Homeplex, at the time the
Option is exercised, one or more shares of Stock previously acquired by
Hamberlin (other than pursuant to the transaction triggering the Taxes)
with an aggregate fair market value equal to the percentage of the taxes
incurred in connection with such Option exercise (not to exceed 100
percent) designated by Hamberlin.
16. BINDING EFFECT. This agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective heirs, executors,
administrators, successors and assigns.
17. DEFINED TERMS. All capitalized terms herein which are not otherwise
defined therein shall have the same meaning ascribed to such terms in the
Employment Agreement.
18. NOTICES. Any notice required to be given or delivered to Homeplex under
the terms of this Agreement shall be in writing and addressed to Homeplex in
care of the Corporate Secretary at its principal corporate offices. Any notice
required to be given or delivered to Hamberlin at the address indicated on the
signature page hereto. Any permitted assignee hereunder shall notify the other
party hereto of the permitted assignee's address for purposes of this notice
provision. All notices shall be deemed to have been given or delivered upon
personal delivery or upon deposit in the U.S. mail, postage prepaid return
receipt requested, and properly addressed to the party to be notified.
19. INTEGRATION, MODIFICATION AND AMENDMENT. This Agreement and the
Employment Agreement embody the full understanding of the parties with respect
to the subject matter hereof, superseding any and all prior agreements, and no
amendment or modification thereof shall be effective unless the same shall be in
writing and signed by both of said parties. Notwithstanding the foregoing, this
Agreement may not be amended or modified more than once every six months, other
than to comport with changes in the Internal Revenue Code, the Employee
Retirement Income Security Act, or the rules thereunder. In addition, any
amendment to this Agreement shall be required to be approved by the shareholders
if the amendment would: (a) materially increase the benefits accruing to
Hamberlin; (b) materially increase the number of shares of Stock which may be
issued hereunder; or (c) materially modify the requirements for Hamberlin's
eligibility for participation hereunder.
20. GOVERNING LAW. Except as the corporate law of the State of Maryland
expressly applies hereto, this Agreement shall be construed in accordance with,
and governed by, the laws of the State of Arizona, without regard to application
of conflicts of law principles.
21. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which, taken
together, shall constitute one and the same instrument.
22. SHAREHOLDER APPROVAL. The grant of this Option is subject to approval
by the shareholders of Homeplex. Such approval must be by a majority of the
votes cast provided that the total vote cast on the proposal represents over 50
percent in interest of all securities entitled to vote on the matter.
Notwithstanding any provision of this Agreement to the contrary, the Option may
not be exercised in whole or in part until such shareholder approval is
obtained. In the event that such shareholder approval is not obtained within
three years of the Grant Date, then the Option shall terminate and an
Optionholder hereunder shall have no further rights under this Agreement.
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IN WITNESS WHEREOF the parties hereto have executed this Agreement or
caused it to be executed on the day and year first above written.
HOMEPLEX MORTGAGE INVESTMENTS
CORPORATION
By: /s/ JAY HOFFMAN
---------------------------------
Name: Jay Hoffman
Its: President
/s/ ALAN D. HAMBERLIN
------------------------------------
Alan D. Hamberlin
Address:
------------------------------------
------------------------------------
5
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APPENDIX E
FAIRNESS OPINION OF FINANCIAL ADVISOR TO HOMEPLEX
<PAGE> 271
November 6, 1996
Board of Directors
Homeplex Mortgage Investments Corporation
5333 North Seventh St., Suite 219
Phoenix, Arizona 85015
Gentlemen:
You have asked our opinion as to the fairness from a financial point of
view to the holders of Homeplex Mortgage Investments Corporation ("Homeplex")
outstanding common stock, $0.01 par value per share, of the proposed merger of
Monterey Homes Arizona II, Inc. ("MHA-II") and Monterey Homes Construction II,
Inc. ("MHC-II") (collectively, "Monterey") with and into Homeplex, which will be
the surviving corporation of the merger (the "Merger"). Such terms are included
in the Agreement and Plan of Reorganization dated as of September 13, 1996 by
and among Homeplex, MHA-II, MHC-II and the shareholders of Monterey, and the
related merger agreements (together, the "Merger Agreement"). Under the terms of
the Merger Agreement and subject to the approval of the shareholders of
Homeplex, Homeplex shall issue a number of its shares of common stock equal to
(i) (x) the book value of Monterey (anticipated to be $2,500,000 after giving
effect to the distribution described in the Merger Agreement) multiplied by (y)
a factor of 3.0 and divided by (z) the fully diluted book value per share of
Homeplex common stock plus (ii) up to 800,000 additional shares of Homeplex
common stock if the trading price equals or exceeds certain levels over the next
five years. The consideration to be received is subject to certain adjustments
as more fully set forth in the Merger Agreement.
In connection with the opinion described below, we have reviewed publicly
available business and financial information relating to Homeplex and Monterey.
We also have, among other things: (i) reviewed the Merger Agreement (and the
related exhibits) and Registration Statement on Form S-4 including the Proxy
Statement/Prospectus relating to the annual meeting of shareholders of Homeplex
to be held December 18, 1996 in connection with the Merger Agreement; (ii)
reviewed the Annual Reports to Stockholders for the five years ended December
31, 1995, Annual Reports on Form 10-K for the five years ended December 31, 1995
and interim Reports to Stockholders and Quarterly Reports on Form 10-Q for the
six months ended June 30, 1995 and 1996 of Homeplex; (iii) reviewed the audited
financial statements for the three years ended December 31, 1995 and the
unaudited interim financial statements for the six months ended June 30, 1995
and 1996 of Monterey; (iv) discussed with certain members of senior management
of Monterey the past and current business operations, financial condition and
future prospects of Monterey; (v) reviewed certain internal financial analyses
and forecasts of Homeplex and Monterey prepared by respective managements; (vi)
reviewed historical market prices and trading volumes for Homeplex's common
stock; (vii) visited certain of Monterey's properties; (viii) compared certain
financial information for Monterey with similar information for certain other
companies the securities of which are publicly traded; and (ix) reviewed
selected financial terms of certain recent business combinations.
In addition, we have considered such other information and have conducted
such other analyses as we deemed appropriate under the circumstances. In
connection with our review, we have relied upon and assumed the accuracy and
completeness of the financial and other information publicly available or
furnished to us by Homeplex and Monterey or their representatives. We have not
independently verified the accuracy or completeness of such information. We have
not made or obtained any independent evaluations or appraisals of any of the
properties, assets or facilities of Homeplex or Monterey. With respect to
Monterey's financial projections, we have assumed that they have been reasonably
prepared on a basis reflecting the best currently available estimates and
judgments of Monterey's management as to the future financial performance of
Monterey, and we express no opinion with respect to such forecasts or the
assumptions on which they are based.
<PAGE> 272
Homplex Mortgage Investments Corporation
November 6, 1996
Page 2
Subject to the foregoing and based upon our experience as investment
bankers, the matters described above and other factors we deemed relevant, we
are of the opinion that as of the date hereof the consideration to be paid to
the shareholders of Monterey pursuant to the Merger Agreement is fair from a
financial point of view to the shareholders of Homeplex.
Very truly yours,
RAUSCHER PIERCE REFSNES, INC.
By: /s/ RICHARD L. DAVIS
---------------------------------
Richard L. Davis
Managing Director
<PAGE> 273
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under the provisions of the Maryland General Corporation Law, a
corporation's articles may, with certain exceptions, include any provision
expanding or limiting the liability of its directors and officers to the
corporation or its stockholders for money damages, but may not include any
provision that restricts or limits the liability of its directors or officers
to the corporation or its stockholders to the extent that (i) it is proved that
the person actually received an improper benefit or profit in money, property,
or services for the amount of the benefit or profit in money, property, or
services actually received; or (ii) a judgment or other final adjudication
adverse to the person is entered in a proceeding based on a finding in the
proceeding that the person's action, or failure to act, was the result of
active and deliberate dishonesty and was material to the cause of action
adjudicated in the proceeding. The Homeplex Charter contains a provision
limiting the personal liability of officers and directors to Homeplex and its
stockholders to the fullest extent permitted under Maryland law.
In addition, the provisions of the Maryland General Corporation Law
permit a corporation to indemnify its present and former directors and
officers, among others, against liability incurred, unless it is established
that (i) the act or omission of the director or officer was material to the
matter giving rise to the proceeding and was committed in bad faith or was the
result of active and deliberate dishonesty, or (ii) the director or officer
actually received an improper personal benefit in money, property, or services,
or (iii) in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful. The
Homeplex Charter provides that it will indemnify its directors, officers, and
others so designated by the Board of Directors to the full extent allowed under
Maryland law.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
Homeplex pursuant to the foregoing provisions, Homeplex has been informed that
in the opinion of the Commission such indemnification is against public policy
as expressed in the Securities Act and is therefore unenforceable.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
SEC EXHIBIT
REFERENCE NO. DESCRIPTION
------------- -----------
2 Agreement and Plan of Reorganization, dated as of September
13, 1996, by and among Homeplex, the Monterey Merging
Companies and the Monterey Stockholders (included in the Proxy
Statement/Prospectus as Annex A).
II-1
<PAGE> 274
3(a) Amended and Restated Articles of Incorporation of Homeplex.(1)
3(b) Amended and Restated Bylaws of Homeplex.(4)
3(c) Form of Articles of Merger, including Charter Amendment
(included in the Proxy Statement/Prospectus as Annex B).
4 Specimen Certificate representing $.01 par value Common
Stock.(1)
5(a) Opinion of Hughes & Luce, L.L.P. re: Legality.
5(b) Opinion of Hughes & Luce, L.L.P. re: Certain Tax Matters.
10(a) Subcontract Agreement between Homeplex and American Southwest
Financial Services, Inc.(1)
10(b) Form of Master Servicing Agreement.(1)
10(c) Form of Servicing Agreement.(1)
10(d) Stock Option Plan.(1)
10(e) Amendment to Stock Option Plan.(2)
10(f) Amended and Restated Employment Agreement and Addendum between
Homeplex and Alan D. Hamberlin (included in the Proxy
Statement/Prospectus as Annex D).
10(g) Form of Employment Agreements for Monterey Stockholders
(included in the Proxy Statement/Prospectus as Annex C).
10(h) Stock Option Agreement between Homeplex and Alan D. Hamberlin
(included in the Proxy Statement/Prospectus as Annex D).
10(i) Severance Agreement between Homeplex and Jay R. Hoffman.(5)
10(j) Indenture dated October 17, 1994, as amended, relating to 13%
Senior Subordinated Notes Due 2001.
10(k) Letter Loan Agreement dated August 28, 1996 by and between
Norwest Bank Arizona, N.A. and Monterey Management Tucson,
Inc., Monterey Homes Tucson Corporation, Monterey Management,
Inc. and Monterey Homes Corporation.
II-2
<PAGE> 275
10(l) Construction Loan Agreement dated December 5, 1995 by and
between Monterey Management, Inc., Monterey Management Tucson,
Inc., Monterey Homes Corporation and National Bank of Arizona.
10(m) Construction Loan Agreement dated March 22, 1996 by and
between Monterey Management, Inc., Monterey Management Tucson,
Inc., Monterey Homes Corporation and National Bank of Arizona.
10(n) Loan Agreement dated March 22, 1996 by and between Monterey
Management, Inc. and Bank One, Arizona, N.A.
10(o) Amended and Restated Loan Agreement dated August 8, 1995 by
and between Monterey Management, Inc., Monterey Homes
Corporation and Norwest Bank Arizona, N.A., as amended.
21 Subsidiaries.(3)
23(a) Consents of Hughes & Luce, L.L.P. (included in Exhibits 5(a)
and 5(b)).
23(b) Consent of Ernst & Young LLP.
23(c) Consent of KPMG Peat Marwick LLP.
23(d) Consent of Rauscher Pierce Refsnes, Inc.
24 Powers of Attorney (included on the signature page in Part II
of this Registration Statement).
99 Form of Proxy Card.
- ----------------------------
(1) Incorporated herein by reference to the Registrant's
Registration Statement on Form S-11 (No. 33-22092) filed July
19, 1988 and declared effective on July 20, 1988.
(2) Incorporated herein by reference to Registrant's Form 10-K for
the fiscal year ended December 31, 1990 filed March 31, 1991.
(3) Incorporated herein by reference to Registrant's Form 10-K for
the fiscal year ended December 31, 1991 filed March 31, 1992.
(4) Incorporated herein by reference to Registrant's Form 10-Q for
the quarter ended June 30, 1995 filed August 11, 1995.
(5) Incorporated herein by reference to Homeplex's Form 10-K for
the fiscal year ended December 31, 1995 filed March 31, 1996.
II-3
<PAGE> 276
(b) Financial Statements and Financial Statement Schedules filed as part
of this report:
None
(c) Reports, Opinions or Appraisals:
Fairness Opinion, dated as of November 6, 1996 by Rauscher Pierce
Refsnes, Inc. (included in the Proxy Statement/Prospectus as Appendix
E).
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes
(1) that, for purposes of determining any liability under the
Securities Act, each filing of the registrant's annual report
pursuant to Section 13(a) and 15(d) of the Exchange Act (and,
where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Exchange Act)
that is incorporated by reference in the Registration
Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(2) that prior to any public reoffering of the securities
registered hereunder through use of a prospectus which is a
part of this registration statement, by any person or party
who is deemed to be an underwriter within the meaning of Rule
145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable
registration form with respect to reofferings by persons who
may be deemed underwriters, in addition to the information
called for by the other items of the applicable form.
(3) that every prospectus: (i) that is filed pursuant to
paragraph (2) immediately preceding, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Act and is
used in connection with an offering of securities subject to
Rule 415, will be filed as a part of an amendment to the
registration statement and will not be used until such
amendment is effective, and that, for purposes of determining
any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(4) insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers, and
controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities
(other than the payment by the
II-4
<PAGE> 277
registrant of expenses incurred or paid by a director,
officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is
asserted by such director, officer, or controlling person in
connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
(b) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus
pursuant to Item 4, 10(b), 11 or 13 of this form, within one business
day of receipt of such request, and to send the incorporated documents
by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective
date of the registration statement through the date of responding to
the request.
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and
the company being acquired involved therein, that was not the subject
of and included in the registration statement when it became
effective.
II-5
<PAGE> 278
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Phoenix, State of
Arizona, on November 8, 1996.
HOMEPLEX MORTGAGE
INVESTMENTS CORPORATION
By: /s/ ALAN D. HAMBERLIN
-----------------------
Alan D. Hamberlin,
Chairman of the Board of Directors
and Chief Executive Officer
POWER OF ATTORNEY
Know all men by these presents, that each of the undersigned hereby
constitutes and appoints Alan D. Hamberlin and Jay R. Hoffman, and each of
them, his true and lawful attorney-in-fact and agent, with full power of
substitution for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments (including post- effective
amendments) to the registration statement, and to file the same with exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as they might or could do in person, hereby ratifying and confirming
all that said attorney-in-fact and agent, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this registration
statement has been signed on November 8, 1996 by the following persons in the
capacities indicated.
Signature Title
--------- -----
/s/ ALAN D. HAMBERLIN Chairman of the Board of Directors,
- ------------------------ Director and Chief Executive Officer
Alan D. Hamberlin (Principal Executive Officer)
/s/ JAY R. HOFFMAN Director, President, Secretary,
- --------------------------- Treasurer and Chief Financial and
Jay R. Hoffman Accounting Officer
II-6
<PAGE> 279
/s/ LARRY E. COX Director
- -------------------------
Larry E. Cox
/s/ MARK A. MCKINLEY Director
- -------------------------
Mark A. McKinley
/s/ GREGORY K. NORRIS Director
- -------------------------
Gregory K. Norris
II-7
<PAGE> 280
INDEX TO EXHIBITS
(a) Exhibits
SEC EXHIBIT
REFERENCE NO. DESCRIPTION
------------- -----------
2 Agreement and Plan of Reorganization, dated as of September
13, 1996, by and among Homeplex, the Monterey Merging
Companies and the Monterey Stockholders (included in the Proxy
Statement/Prospectus as Annex A).
3(a) Amended and Restated Articles of Incorporation of Homeplex.(1)
3(b) Amended and Restated Bylaws of Homeplex.(4)
3(c) Form of Articles of Merger, including Charter Amendment
(included in the Proxy Statement/Prospectus as Annex B).
4 Specimen Certificate representing $.01 par value Common
Stock.(1)
5(a) Opinion of Hughes & Luce, L.L.P. re: Legality.
5(b) Opinion of Hughes & Luce, L.L.P. re: Certain Tax Matters.
10(a) Subcontract Agreement between Homeplex and American Southwest
Financial Services, Inc.(1)
10(b) Form of Master Servicing Agreement.(1)
10(c) Form of Servicing Agreement.(1)
10(d) Stock Option Plan.(1)
10(e) Amendment to Stock Option Plan.(2)
10(f) Amended and Restated Employment Agreement and Addendum between
Homeplex and Alan D. Hamberlin (included in the Proxy
Statement/Prospectus as Annex D).
10(g) Form of Employment Agreements for Monterey Stockholders
(included in the Proxy Statement/Prospectus as Annex C).
10(h) Stock Option Agreement between Homeplex and Alan D. Hamberlin
(included in the Proxy Statement/Prospectus as Annex D).
INDEX TO EXHIBITS - PAGE 1
<PAGE> 281
10(i) Severance Agreement between Homeplex and Jay R. Hoffman.(5)
10(j) Indenture dated October 17, 1994, as amended, relating to 13%
Senior Subordinated Notes Due 2001.
10(k) Letter Loan Agreement dated August 28, 1996 by and between
Norwest Bank Arizona, N.A. and Monterey Management Tucson,
Inc., Monterey Homes Tucson Corporation, Monterey Management,
Inc. and Monterey Homes Corporation.
10(l) Construction Loan Agreement dated December 5, 1995 by and
between Monterey Management, Inc., Monterey Management Tucson,
Inc., Monterey Homes Corporation and National Bank of Arizona.
10(m) Construction Loan Agreement dated March 22, 1996 by and
between Monterey Management, Inc., Monterey Management Tucson,
Inc., Monterey Homes Corporation and National Bank of Arizona.
10(n) Loan Agreement dated March 22, 1996 by and between Monterey
Management, Inc. and Bank One, Arizona, N.A.
10(o) Amended and Restated Loan Agreement dated August 8, 1995 by
and between Monterey Management, Inc., Monterey Homes
Corporation and Norwest Bank Arizona, N.A., as amended.
21 Subsidiaries.(3)
23(a) Consents of Hughes & Luce, L.L.P. (included in exhibits 5(a)
and 5(b)).
23(b) Consent of Ernst & Young LLP.
23(c) Consent of KPMG Peat Marwick LLP.
23(d) Consent of Rauscher Pierce Refsnes, Inc.
24 Powers of Attorney (included on the signature page in Part II
of this Registration Statement).
99 Form of Proxy Card.
- ------------------------------
(1) Incorporated herein by reference to the Registrant's
Registration Statement on Form S-11 (No. 33-22092) filed July
19, 1988 and declared effective on July 20, 1988.
(2) Incorporated herein by reference to Registrant's Form 10-K for
the fiscal year ended December 31, 1990 filed March 31, 1991.
INDEX TO EXHIBITS - PAGE 2
<PAGE> 282
(3) Incorporated herein by reference to Registrant's Form 10-K for
the fiscal year ended December 31, 1991 filed March 31, 1992.
(4) Incorporated herein by reference to Registrant's Form 10-Q for
the quarter ended June 30, 1995 filed August 11, 1995.
(5) Incorporated herein by reference to Homeplex's Form 10-K for
the fiscal year ended December 31, 1995 filed March 31, 1996.
INDEX TO EXHIBITS - PAGE 3
<PAGE> 1
EXHIBIT 5(a)
November 8, 1996
Homeplex Mortgage Investments Corporation
5333 North 7th Street
Suite 219
Phoenix, AZ 85014
Gentlemen:
We have acted as counsel to Homeplex Mortgage Investments Corporation,
a Maryland corporation (the "Company"), in connection with the registration
under the Securities Act of 1933, as amended, of 4,700,000 shares (the
"Shares") of the Company's common stock, par value $0.01 per share (the "Common
Stock"), as described in the Company's Registration Statement on Form S-4 (the
"Registration Statement") filed with the Securities and Exchange Commission.
The Company proposes to issue the Shares to the stockholders of Monterey Homes
Arizona II, Inc., an Arizona corporation, and Monterey Homes Construction,
Inc., an Arizona corporation (collectively, "Monterey"), in connection with the
acquisition of Monterey by the Company.
In rendering this opinion, we have examined and relied upon executed
originals, counterparts or copies of such documents, records and certificates
(including certificates of public officials and officers of the Company) as we
considered necessary or appropriate for enabling us to express the opinions set
forth herein. In all such examinations, we have assumed the authenticity and
completeness of all documents submitted to us as originals and the conformity
to originals and completeness of all documents submitted to us as photostatic,
conformed, notarized or certified copies.
Based on the foregoing, we are of the opinion that the Shares, when
issued and sold to the Monterey stockholders as described in the Registration
Statement, will be validly issued, fully paid and nonassessable.
This opinion may be filed as an exhibit to the Registration Statement.
We also consent to the reference to this firm as having passed on the validity
of the Common Stock under the caption "Legal Matters" in the Registration
Statement. In giving this consent, we do not admit that we are included in the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended, or the rules and regulations of the Securities and
Exchange Commission promulgated thereunder.
Very truly yours,
Hughes & Luce, L.L.P.
<PAGE> 1
EXHIBIT 5(b)
November 8, 1996
Homeplex Mortgage Investments Corporation
5333 North Seventh Street, Suite 219
Phoenix, Arizona 85014
Re: Merger and Reorganization of Homeplex Mortgage Investments
Corporation, Monterey Homes Construction II, Inc., and
Monterey Homes Arizona II, Inc.
Ladies and Gentlemen:
You have requested our opinion on certain federal income tax
consequences of the mergers of two separate Arizona corporations, Monterey
Homes Construction II, Inc. ("MHC II") and Monterey Homes Arizona II, Inc.
("MHA II," together with MHC II individually a "Monterey Company" and
collectively either the "Monterey Companies" or "Monterey") with and into
Homeplex Mortgage Investments Corporation, a Maryland corporation ("Homeplex").
FACTS
In connection with rendering this opinion, you have asked us to rely
on the following facts. Homeplex is a publicly held entity whose shares of
common stock trade on the New York Stock Exchange. Homeplex qualified as a
real estate investment trust ("REIT") under Section 856 of the Internal Revenue
Code of 1986, as amended (the "Code") and had a valid, binding election in
effect to be taxed as a REIT for all of its tax years through and including the
year ending December 31, 1995. Homeplex's status as a REIT will terminate
retroactively to January 1, 1996, and Homeplex will file a federal income tax
return for 1996 as a regular C corporation. Homeplex has net operating loss
carryovers for federal income tax purposes that it is entitled to deduct in its
current taxable year without limitation (the "NOL Carryovers"). The authorized
capitalization of Homeplex consists of a single class of common stock $.01 par
value (the "HPX Common Stock"), of which 9,716,517 shares are outstanding. In
addition, Homeplex has issued to Homeplex employees options to purchase a total
of 285,769 shares of HPX Common Stock and dividend equivalent rights ("DERs")
that currently would result in the issuance of a total of 159,408 shares of HPX
Common Stock. 306,723 of these options and DERs have been issued to Alan D.
Hamberlin and 138,454 of these options and DERs have been issued to six other
employees. In addition, Alan D. Hamberlin will be issued additional options to
purchase another 750,000 shares of HPX Common Stock if approved by the
shareholders in a vote to be taken at the same time the Mergers are submitted
to the shareholders for approval. All of these options and DERs were, or will
be, issued on or after November 5, 1992 as part of the option holder's
<PAGE> 2
November 8, 1996
Page 2
compensation for performing services for Homeplex as an employee, are not
transferable, and are not and will not be traded on any established securities
market.
The transaction will take place pursuant to that certain written
Agreement and Plan of Reorganization entered into by and among Homeplex, the
Monterey Companies, and the shareholders of the Monterey Companies, William W.
Cleverly and Steven J. Hilton, dated as of September 13, 1996 (the "Plan of
Reorganization"). Prior to execution of the Plan of Reorganization, the
Monterey Companies paid a cash dividend to their shareholders of $9,500,000.
Pursuant to the Plan of Reorganization, each Monterey Company will be merged
with and into Homeplex (each, a "Merger," and collectively, the "Mergers") and
the shareholders of the Monterey Companies will exchange their common stock in
the Monterey Companies for a number of shares of HPX Common Stock determined
pursuant to formulas in the Plan of Reorganization and defined in the Plan of
Reorganization as the Merger Consideration Per Share and the Contingent Stock.
You have asked us to assume that the total number of shares of HPX Common Stock
to be issued in the Mergers will not exceed 3,900,000 shares plus 800,000
shares of Contingent Stock, and that the portions of the total HPX Common Stock
being issued with respect to MHC II and MHA II, respectively, is in the same
proportion as the portions of the $9,500,000 dividend paid by MHC II and MHA
II, respectively. In addition, Homeplex will issue options for the purchase of
500,000 shares of HPX Common Stock to each of William W. Cleverly and Steven J.
Hilton (options for 1,000,000 shares total) in connection with their employment
by Homeplex after the Mergers (the "Compensatory Options"). Upon the closing
of the Mergers and the issuance of all Contingent Stock required to be issued,
Homeplex will have outstanding no more than 14,416,517 shares of HPX Common
Stock, and options and DERs to acquire a total of no more than 2,195,177 shares
of HPX Common Stock (the "Options").
The Compensatory Options will be issued as part of the option holders'
compensation for providing services to Homeplex as an employee, are not
transferable, are not and will not be traded on any established securities
market, will be exercisable ratably in equal annual increments, shall expire
after five years, and are subject to early termination and forfeiture if the
optionee's employment with Homeplex terminates under certain circumstances.
DOCUMENTATION
In rendering this opinion, we have examined executed originals,
counterparts or copies of the Plan of Reorganization and each of the other
documents and agreements specifically referenced therein as we have considered
necessary or appropriate. In addition, we have examined and relied upon copies
of the Forms 10-K that have been filed by Homeplex with the Securities and
Exchange Commission and copies of the Schedules 13D filed with respect to
Homeplex with the Securities and Exchange Commission through the date one day
before the date of this opinion. We also have examined and relied upon
originals or copies of such records, certificates, representation letters and
other documents and instruments as we have considered
<PAGE> 3
November 8, 1996
Page 3
necessary or appropriate for enabling us to express the opinions herein set
forth (including certificates representing factual matters we received from
Homeplex and Monterey). In all such examinations, we have assumed the
authenticity and completeness of all documents submitted to us as originals and
the conformity to originals and completeness of all documents submitted to us
as photostatic, conformed, notarized, or certified copies. Where documents
contain factual representations, we have assumed that the representations are
true, correct and complete.
ASSUMPTIONS
In rendering this opinion, we are also relying upon the following
assumptions (some of which have been represented to us in writing):
(a) There is no plan or intention on the part of the shareholders
of Monterey to sell, exchange, or otherwise dispose of the shares of HPX Common
Stock to be received by them in the Mergers.
(b) Following the Mergers, Homeplex will continue the historic
business of each Monterey Company or use a significant portion of each Monterey
Company's historic business assets in a business.
(c) Homeplex has no plan or intention to sell or otherwise dispose
of any of the assets of the Monterey Companies acquired in the Mergers except
for dispositions made in the ordinary course of business.
(d) At the time of the Mergers, the HPX Common Stock and the
Options will be the only stock or other debt or equity security of Homeplex
issued and outstanding (other than debt securities outstanding prior to the
Mergers which are disclosed in Homeplex's published financial statements).
(e) Excluding the persons whose ownership of shares of beneficial
interest in Homeplex is reported on a Schedule 13D or 13G (or similar schedule)
filed with the Securities and Exchange Commission through the date one day
before the date of this opinion ("SEC Schedules"), and excluding William W.
Cleverly and Steven J. Hilton, no individual or entity (as defined in the
Treasury Regulations (the "Tax Regulations") promulgated under Section 382 of
the Code, hereinafter "Entity") owns, or will own as of the time of the
Mergers, five percent or more of the HPX Common Stock. No individual or Entity
who owns five percent or more of the HPX Common Stock has increased or
decreased the number of shares of HPX Common Stock it owns beyond the number
reported in the SEC Schedules, nor does, or will as of the time of the Mergers,
any person have any immediate or contingent right to acquire any of the shares
of HPX Common Stock owned, or any of the HPX Common Stock to be received in the
Mergers, by any such individual or Entity or by William W. Cleverly or Steven
J. Hilton pursuant to a purchase
<PAGE> 4
November 8, 1996
Page 4
agreement, option, pledge, security agreement or any other type of instrument,
other than pursuant to an option, pledge and/or security agreement in a typical
lending transaction subject to customary commercial conditions which is
described in section 1.382-4(d)(7)(ii) of the Tax Regulations. No ownership
interest in shares of HPX Common Stock or Options has been, or will be as of
the time of the Mergers, structured by any individual or Entity with a direct
or indirect ownership interest in HPX Common Stock or Options to avoid treating
an individual or Entity as a "5-percent shareholder" of Homeplex within the
meaning of the Tax Regulations, or to permit Homeplex to rely on the
presumption provided in section 1.382-2T(g)(5)(i)(B) of the Tax Regulations,
for a principal purpose of circumventing the limitation of Section 382 of the
Code. No group of persons whose combined ownership of HPX Common Stock
(determined both before and after the exercise of any Options owned by any
person in such group) equals or exceeds 5% of the outstanding HPX Common Stock
has made a coordinated acquisition of shares of HPX Common Stock or Options
pursuant to a formal or informal understanding among such group of persons.
(f) The shareholders of Monterey, and each individual or Entity to
whom stock owned by such shareholders may be directly or indirectly attributed
pursuant to Section 382 of the Code or the Tax Regulations, do not own, and
immediately before the Mergers will not own, any shares of HPX Common Stock
other than 10,000 shares owned by William W. Cleverly (defined as the "Cleverly
Stock"). As of the time of the Mergers, the HPX Common Stock to be acquired by
the Monterey shareholders in the Mergers and the Cleverly Stock will be (i) the
only HPX Common Stock owned by such shareholders, (ii) the only HPX Common Stock
whose ownership can be attributed to such shareholders pursuant to Section 382
of the Code or the Tax Regulations, and (iii) the only HPX Common Stock whose
ownership can be attributed (pursuant to Section 382 of the Code or the Tax
Regulations) to each individual or Entity to whom stock owned by such
shareholders may be directly or indirectly attributed pursuant to Section 382 of
the Code or the Tax Regulations.
(g) (i) Each transaction contemplated by the Plan of
Reorganization will be closed in accordance with its terms without modification
or waiver; (ii) the Plan of Reorganization and the documents and agreements
referenced therein constitute the only documents containing the substantive
terms of such transactions; (iii) all of the representations and warranties
contained in the Plan of Reorganization are true, correct and complete; (iv)
all of the covenants and conditions to closing contained in the Plan of
Reorganization will be strictly complied with and will not be waived in whole
or in part; and (v) the Plan of Reorganization has been duly authorized,
executed and delivered by all the parties thereto and is a valid and legally
enforceable obligation of each of the parties thereto.
OPINION
Based upon the foregoing and subject to the assumptions,
qualifications and limitations set forth herein, we are of the opinion that for
U.S. federal income tax purposes:
<PAGE> 5
November 8, 1996
Page 5
(1) Each Merger will constitute a reorganization within the
meaning of Section 368(a) of the Code.
(2) There has not been an "ownership change" of Homeplex within
the meaning of Section 382 of the Code prior to the date of this opinion.
(3) The issuance of HPX Common Stock to the Monterey shareholders
in the Mergers and the issuance of the Compensatory Options will not result in
an "ownership change" of Homeplex within the meaning of Section 382 of the
Code.
The foregoing opinions are subject to the following qualifications and
limitations:
(a) This opinion is based upon present federal income tax law,
including relevant statutes, regulations, and interpretations thereof by the
Internal Revenue Service and relevant courts, all of which are subject to
change.
(b) This opinion letter is solely for the information and benefit
of the addressees hereof and is not to be quoted, referred to, or relied on in
whole or in part by any other person without our prior written consent. This
opinion may be filed as an exhibit to the Registration Statement (Form S-4) of
Homeplex. We also consent to the reference to this firm as having passed on
certain federal income tax consequences of the Merger under the caption
"Certain Federal Income Tax Consequences" in such Registration Statement. In
giving this consent, we do not admit that we are included in the category of
persons whose consent is required under Section 7 of the Securities Act of
1933, as amended, or the rules and regulations of the Securities and Exchange
Commission promulgated thereunder.
(c) This opinion letter is limited to the matters expressly stated
herein as of the date hereof. We express no opinion as to the tax treatment of
the Monterey shareholders. We disavow any obligation to update this opinion
letter or advise you of any changes in our opinions in the event of changes in
applicable law or facts becoming effective after the date hereof or of any
additional or newly discovered information that is brought to our attention.
Very truly yours,
HUGHES & LUCE, L.L.P.
<PAGE> 1
EXHIBIT 10(j)
INDENTURE
$8,000,000
13% SENIOR SUBORDINATED NOTES
DUE 2001
AS OF OCTOBER 17, 1994
MONTEREY MANAGEMENT, INC.
AND
MONTEREY HOMES CORPORATION
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
ARTICLE I
<S> <C>
Definitions and Other Provisions
of General Application .............................................. 1
Section 1.1. Definitions ................................... 1
Section 1.2. Compliance Certificate and Opinions ........... 14
Section 1.3. Form of Documents Delivered to Trustee ........ 14
Section 1.4. Acts of Holders ............................... 15
Section 1.5. Notices, etc. to Trustee and Company .......... 15
Section 1.6. Notices to Holders; Waiver .................... 16
Section 1.7. Conflict with Trust Indenture Act ............. 16
Section 1.8. Effect of Headings and Tables of Contents ..... 16
Section 1.9. Successors and Assigns ........................ 16
Section 1.10. Separability Clause ........................... 16
Section 1.11. Benefits of Indenture ......................... 16
Section 1.12. Governing Law ................................. 17
ARTICLE 2
Note Form ........................................................... 17
Section 2.1. Form Generally ................................ 17
Section 2.2. Form of Face of Note .......................... 17
Section 2.3. Authentication ................................ 18
Section 2.4. Form of Reverse of Note ....................... 18
Section 2.5. Form of Trustee's Certificate of Authentication 22
ARTICLE 3
The Notes ........................................................... 22
Section 3.1. Title and Terms ............................... 22
Section 3.2. Denominations ................................. 23
Section 3.3. Execution, Authentication and Delivery ........ 23
Section 3.4. Temporary Notes ............................... 24
Section 3.5. Registration, Transfer and Exchange ........... 24
Section 3.6. Mutilated, Destroyed, Lost or Stolen Notes .... 25
Section 3.7. Persons Deemed Owners ......................... 26
Section 3.8. Cancellation .................................. 26
Section 3.9. Authentication and Delivery of Notes .......... 26
Section 3.10. Paying Agent to Hold Money in Trust ........... 26
Section 3.11. Payment of Interest; Interest Rights Preserved 27
</TABLE>
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<PAGE> 3
ARTICLE 4
<TABLE>
<S> <C>
Discharge Of Indenture ............................................................... 28
Section 4.1. Termination of Company's Obligations ........................... 28
Section 4.2. Application of Trust Money ..................................... 29
Section 4.3. Repayment to Company ........................................... 29
Section 4.4. Reinstatement .................................................. 30
Section 4.5. Survival of Certain Obligations ................................ 30
ARTICLE 5
Remedies ............................................................................. 30
Section 5.1. Events of Default .............................................. 30
Section 5.2. Interest Rate Upon Default ..................................... 32
Section 5.3. Acceleration of Maturity; Rescission and Annulment ............. 32
Section 5.4. Collection of Indebtedness and Suits for Enforcement by Trustee 32
Section 5.5. Trustee May File Proofs of Claim ............................... 33
Section 5.6. Trustee May Enforce Claims Without Possession of Notes ......... 34
Section 5.7. Application of Money Collected ................................. 34
Section 5.8. Limitation on Suits ............................................ 34
Section 5.9. Unconditional Right of Holders to Receive Principal, Premium and
Interest ....................................................... 35
Section 5.10. Restoration of Rights and Remedies ............................. 35
Section 5.11. Rights and Remedies Cumulative ................................. 35
Section 5.12. Delay or Omission Not Waiver ................................... 35
Section 5.13. Control by Holders ............................................. 36
Section 5.14. Waiver of Past Defaults ........................................ 36
Section 5.15. Undertaking for Costs .......................................... 36
Section 5.16. Waiver of Stay or Extension Laws ............................... 36
ARTICLE 6
The Trustee .......................................................................... 37
Section 6.1. Duties of Trustee .............................................. 37
Section 6.2. Rights of Trustee .............................................. 38
Section 6.3. Individual Rights of Trustee ................................... 38
Section 6.4. Trustee's Disclaimer ........................................... 39
Section 6.5. Notice of Defaults ............................................. 39
Section 6.6. Compensation and Indemnity ..................................... 39
Section 6.7. Replacement of Trustee ......................................... 40
Section 6.8. Successor Trustee by Merger, etc ............................... 40
Section 6.9. Eligibility; Disqualification .................................. 41
Section 6.10. Preferential Collection of Claims Against Company .............. 41
</TABLE>
-ii-
<PAGE> 4
ARTICLE 7
<TABLE>
<S> <C>
Holders' Lists and Reports by Trustee and Company ............................. 41
Section 7.1. Company to Furnish Trustee Names and Addresses of Holders 41
Section 7.2. Preservation of Information: Communications to Holders ... 41
Section 7.3. Reports by Trustee ....................................... 42
Section 7.4. Reports by Company ....................................... 43
ARTICLE 8
Consolidation, Merger, Conveyance or Transfer ................................. 43
Section 8.1. Company and Guarantor May Consolidate, etc., Only on
Certain
Terms .................................................... 43
Section 8.2. Successor Corporation Substituted ........................ 44
Section 8.3. Notes to be Secured in Certain Events .................... 44
ARTICLE 9
Supplemental Indentures ....................................................... 45
Section 9.1. Supplemental Indentures Without Consent of Holders ...... 45
Section 9.2. Supplemental Indentures with Consent of Holders ......... 45
Section 9.3. Execution of Supplemental Indentures .................... 46
Section 9.4. Effect of Supplemental Indentures ....................... 46
Section 9.5. Conformity with Trust Indenture Act ..................... 46
Section 9.6. Reference in Notes to Supplemental Indentures ........... 46
ARTICLE 10
Covenants ..................................................................... 47
Section 10.1. Payment of Notes ........................................ 47
Section 10.2. Commission Reports ...................................... 47
Section 10.3. Compliance Certificates ................................. 48
Section 10.4. Maintenance of Office or Agency ......................... 49
Section 10.5. Corporate Existence ..................................... 49
Section 10.6. Waiver of Stay, Extension or Usury Laws ................. 49
Section 10.7. Payment of Taxes and Other Claims ....................... 49
Section 10.8. Maintenance of Properties and Insurance; Line of Business 50
Section 10.9. Limitation on Incurrence of Additional Indebtedness ..... 50
Section 10.10. Limitation on Restricted Payments ....................... 51
Section 10.11. Limitation on Sale of Assets ............................ 53
Section 10.12. Limitation on Liens Securing Indebtedness ............... 54
Section 10.13. Limitation on Payment Restrictions Affecting Subsidiaries 54
Section 10.14. Limitation on Transactions with Affiliates .............. 55
Section 10.15. Limitation on Future Senior Subordinated Indebtedness ... 56
Section 10.16. Change of Control ....................................... 56
Section 10.18. Election of Outside Directors ........................... 59
</TABLE>
-iii-
<PAGE> 5
ARTICLE 11
<TABLE>
<S> <C>
Subordination of Notes ................................................................ 59
Section 11.1. Notes Subordinated to Senior Indebtedness ...................... 59
Section 11.2. No Payment an Notes in Certain Circumstances ................... 60
Section 11.3. Notes Subordinated to Prior Payment of All Senior Indebtedness on
Dissolution, Liquidation or Reorganization of the Company ...... 61
Section 11.4. Holders to Be Subrogated to Rights of Holders of Senior
Indebtedness ................................................... 62
Section 11.5. Obligations of the Company Unconditional ....................... 62
Section 11.6. Trustee Entitled to Assume Payments Not Prohibited in Absence of
Notice ......................................................... 63
Section 11.7. Application by Trustee of Assets Deposited With It ............. 63
Section 11.8. Subordination Rights Not Impaired by Acts or Omissions of the
Company or Holders of Senior Indebtedness ...................... 63
Section 11.9. Holders Authorize Trustee to Effectuate Subordination of Notes . 63
Section 11.10. Right of Trustee to Hold Senior Indebtedness ................... 64
Section 11.11. Article 11 Not to Prevent Events of Default .................... 64
Section 11.12. Payment ........................................................ 64
ARTICLE 12
Redemption of Notes ................................................................... 64
Section 12.1. Right of Redemption and Redemption Prices ....................... 64
Section 12.2. Notice of Redemption; Partial Redemption ........................ 65
Section 12.3. Payment of Notes called for Redemption .......................... 66
Section 12.4. Redemption Moneys to be Deposited with Trustee or Paying
Agents .......................................................f... 66
ARTICLE 13
Guarantee ............................................................................. 66
Section 13.1. Unconditional Guarantee ......................................... 66
Section 13.2. Guarantor May Consolidate, etc., on Certain Terms ............... 67
Section 13.3. Release of the Guarantor or a Subsidiary Guarantor .............. 68
Section 13.4. Limitation Guarantor's Liability ................................ 69
Section 13.5. Contribution .................................................... 69
Section 13.6. Execution and Delivery .......................................... 69
Section 13.7. Severability .................................................... 69
ARTICLE 14
Subordination of Guarantee ............................................................ 70
Section 14.1. Guarantee Subordinated to Senior Indebtedness .................... 70
Section 14.2. No Payment on Guarantee in Certain Circumstances ................. 70
Section 14.3. Guarantee Subordinated to Prior Payment of all Senior Indebtedness
on Dissolution, Liquidation or Reorganization of a Guarantor ..... 71
Section 14.4. Holders to be Subrogated to Rights of Holders of Senior
Indebtedness .................................................... 72
</TABLE>
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<PAGE> 6
<TABLE>
<S> <C> <C>
Section 14.5. Guarantee Unconditional ..................................... 72
Section 14.6. Trustee Entitled to Assume Payments Not Prohibited in Absence
of Notice ................................................... 72
Section 14.7. Application by Trustee of Assets Deposited With It .......... 73
Section 14.8. Subordination Rights Not Impaired by Acts or Omissions of
Guarantors or Holders of Senior Indebtedness ................ 73
Section 14.9. Holders Authorize Trustee to Effectuate Subordination of
Notes ....................................................... 73
Section 14.10. Right of Trustee to Hold Senior Indebtedness ................ 74
Section 14.11. Payment ..................................................... 74
Section 14.12. Article 14 Not to Prevent Events of Default ................. 74
</TABLE>
-v-
<PAGE> 7
MONTEREY MANAGEMENT, INC.
Reconciliation between Indenture
dated as of _____________, 1994 and Trust Indenture Act of 1939
<TABLE>
<CAPTION>
Trust Indenture Act Section Indenture Section
<S> <C>
Section 310 (a)(1) ................................................... 6.9
(a)(2) ................................................... 6.9
(a)(3) ................................................... Not Applicable
(a)(4) ................................................... Not Applicable
(a)(5) ................................................... 6.7
(b) ...................................................... 6.7, 6.9
(c) ...................................................... Not Applicable
Section 311 (a) ...................................................... 6.10
(b) ...................................................... 6.10
(c) ...................................................... Not Applicable
Section 312 (a) ...................................................... 7.1, 7.2(a)
(b) ...................................................... 7.2(b)
(c) ...................................................... 7.2(c)
Section 313 (a) ...................................................... 7.3
(b)(1) ................................................... Not Applicable
(b)(2) ................................................... 7.3
(c) ...................................................... 7.3
(d) ...................................................... 7.3
Section 314 (a) ...................................................... 7.4, 10.2,10.3
(b) ...................................................... Not Applicable
(c)(1) ................................................... 1.2
(c)(2) ................................................... 1.2
(c)(3) ................................................... Not Applicable
(d) ...................................................... Not Applicable
(e) ...................................................... 1.2
(f) ...................................................... Not Applicable
Section 315 (a) ...................................................... 6.1(b)
(b) ...................................................... 6.5
(c) ...................................................... 6.1(a)
(d)(1) ................................................... 6.1(c)
(d)(2) ................................................... 6.1(c)(2)
(d)(3) ................................................... 6.1(c)(3)
(e) ...................................................... 5.15
Section 316 (a) ...................................................... 1.1
(a)(1)(A) ................................................ 5.3, 5.13
(a)(1)(B) ................................................ 5.14
(a)(2) ................................................... Not Applicable
(b) ...................................................... 5.4
(c) ...................................................... Not Applicable
Section 317 (a)(1) ................................................... 5.4
(a)(2) ................................................... 5.5
(b) ...................................................... 3.10
Section 318 (a) ...................................................... 1.7
(c) ...................................................... 1.7
</TABLE>
NOTE: This reconciliation shall not, for any purpose, be deemed to be a part of
the Indenture.
-vi-
<PAGE> 8
INDENTURE
INDENTURE dated as of October 17, 1994, among MONTEREY MANAGEMENT,
INC., an Arizona corporation (hereinafter the "Company"), having its principal
office at 6263 North Scottsdale Road, Suite 220, Scottsdale, Arizona 85250, and
MONTEREY HOMES CORPORATION, an Arizona corporation (hereinafter, the
"Guarantor"), having its principal office at 6263 North Scottsdale Road, Suite
220, Scottsdale, Arizona 85250 and BANK ONE, ARIZONA, NA, having its principal
office at Corporate Trust Department A 804, 241 North Central Avenue, 25th
Floor, Phoenix, Arizona 85004, as Trustee (hereinafter, the "Trustee").
RECITALS OF THE COMPANY:
The Company is offering an issue of 80 Units, each unit consisting of
$100,000 Principal Amount of 13.0% Senior Subordinated Notes Due 2001
(hereinafter, the "Notes") and 5,000 Common Stock Purchase Warrants, for an
aggregate offering of $8,000,000. In connection therewith, the Company has duly
authorized the creation of the Notes of substantially the tenor and amount
hereinafter set forth, and, to provide therefor, the Company has duly authorized
the execution and delivery of this Indenture. The Common Stock Purchase Warrants
shall be governed by a Warrant Agreement entered into between the Company and
the transfer agent.
All things necessary to make the Notes, when executed by the Company
and authenticated and delivered by the Trustee hereunder and duly issued by the
Company, the valid obligations of the Company, and to make this Indenture a
valid agreement of the Company, in accordance with their and its terms, have
been done.
The Notes created by this Indenture are to consist of Notes in fully
registered form only, in a total principal amount of $8,000,000.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the Notes
by the Holders thereof, it is mutually covenanted and agreed, for the equal and
proportionate benefit of all Holders of the Notes, as follows:
ARTICLE I
DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION
SECTION 1.1. DEFINITIONS.
For all purposes of this Indenture, except as otherwise expressly
provided or unless the context otherwise requires:
-1-
<PAGE> 9
(1) the terms defined in this Article have the meanings assigned to
them in this Article, and include the plural as well as the singular;
(2) all other terms used herein which are defined in the Trust
Indenture Act, either directly or by reference therein, have the meanings
assigned to them therein;
(3) all accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with generally accepted accounting principles;
and
(4) the words "herein," "hereof" and "hereunder" and other words of
similar import refer to this Indenture as a whole and not to any particular
Article, Section or other subdivision.
"Adjusted Net Assets" of a Guarantor at any date shall mean the lesser
of (i) the amount by which the fair market value of the property of the
Guarantor under consideration exceeds the total amount of liabilities,
including, without limitation, contingent liabilities (after giving effect to
all other fixed and contingent liabilities incurred or assumed on such date),
but excluding liabilities under the Guarantee of the Guarantor at such date and
(ii) the amount by which the present fair saleable value of the assets of the
Guarantor at such date exceeds the amount that will be required to pay the
probable liability of the Guarantor on its debts (after giving effect to all
other fixed and contingent liabilities incurred or assumed on such date and
after giving effect to any collection from any Subsidiary of the Guarantor in
respect of the obligations of such Subsidiary under the Guarantee), excluding
debt in respect of the Guarantee of the Guarantor, as they become absolute and
matured.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing; provided, however, that the beneficial ownership of ten percent (10%)
of the Voting Stock of a Person shall be deemed to be control.
"Asset Sale" means any sale, lease, transfer, exchange or other
disposition (or series of related sales, leases, transfers, exchanges or
dispositions) of shares of Capital Stock of a Subsidiary (other than directors'
qualifying shares), or of property or assets or any interests therein (each
referred to for purposes of this definition as a "disposition") by the Company
or the Guarantor or any of their Subsidiaries, including any disposition by
means of a merger, consolidation or similar transaction (other than (i) by the
Company or the Guarantor to a Wholly Owned Subsidiary or by a Subsidiary to the
Company or the Guarantor or a Wholly Owned Subsidiary, (ii) a sale of land,
improved properties, services, inventories and assets in the ordinary course of
business of the Company's and the Guarantor's operations reasonably consistent
with past practices, and (iii) the disposition of all or substantially all of
the assets of the Company or the Guarantor in compliance with the covenant
captioned "Limitation on Sale of Assets"); provided, however, that any internal
reorganization of the Company and the Guarantor, and their respective
Subsidiaries into a single corporation or entity will not constitute an Asset
Sale.
"Average Life" means, as of the date of determination, with respect to
any Indebtedness, the quotient obtained by dividing (i) the sum of the product
of (x) the number of years from such date to the date of each successive
scheduled principal payment of such Indebtedness multiplied by (y) the amount of
such principal payment by (ii) the sum of all such principal payments.
-2-
<PAGE> 10
"Bank Credit Facility" means a revolving credit and/or letter of credit
facility, the proceeds of which are used for working capital and other general
corporate purposes entered into by one or more of the Company and/or its
Subsidiaries and certain financial institutions, as amended, extended or
refinanced from time to time.
"Board of Directors" means, with respect to any Person, either the
board of directors of such Person or any duly authorized committee of such
board, as the context indicates.
"Board Resolution" means a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Company to have been duly adopted by
the Board of Directors and to be in full force and effect on the date of such
certification, and delivered to the Trustee.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a legal holiday for banking institutions in Phoenix,
Arizona.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of corporate
stock or partnership interests and any and all warrants, options and rights with
respect thereto (whether or not currently exercisable), including each class of
common stock, preferred stock or capital stock equivalents of such Person.
"Capitalized Lease Obligations" of any Person, means the obligations
of such Person to pay rent or other amounts under a lease of property, real or
personal, that is required to be capitalized for financial reporting purposes in
accordance with GAAP, and the amount of such obligations shall be the
capitalized amount thereof determined in accordance with GAAP.
"Change of Control" means any event or series of events by which (i)
Messrs. William W. Cleverly and Steven J. Hilton would own an aggregate of less
than 50% of the total voting power of the Voting Stock of the Company if such
event or series of events occurs prior to or in connection with the Company
completing an initial public offering, if any, or if such event or series of
events occurs thereafter if a Person or Group beneficially owns, directly or
indirectly, more of the voting power of the Voting Stock of the Company than
Messrs. Cleverly and Hilton; (ii) the Company or the Guarantor consolidates with
or merges or amalgamates with or into another Person or conveys, transfers, or
leases all or substantially all of its assets to any Person, or any Person
consolidates with, or merges or amalgamates with or into the Company or the
Guarantor, in any such event pursuant to a transaction in which the outstanding
Voting Stock of the Company is changed into or exchanged for cash, securities or
other property, other than any such transaction where (A) the outstanding Voting
Stock of the Company is changed into or exchanged for Voting Stock of the
surviving corporation which is not Disqualified Stock and (B) the holders of the
Voting Stock of the Company or the Guarantor, as the case may be, immediately
prior to such transaction own, directly or indirectly, not less than a majority
of the Voting Stock of the surviving corporation immediately after such
transaction; or (iii) the shareholders of the Company or the Guarantor approve
any plan of liquidation or dissolution of the Company or the Guarantor;
provided, however, that any internal reorganization of the Company and the
Guarantor into a single corporation will not constitute a Change of Control.
"Closing Price" when used with reference to the Common Stock, means the
last sale price, determined in the regular way, of the Common Stock on the day
in question or, if no sale price is quoted on that day, the closing bid price of
the Common Stock on that day, in each case as reported by NASDAQ or any national
securities exchange. In the event the Common Stock is not listed on a national
-3-
<PAGE> 11
securities exchange or on NASDAQ, the Closing Price shall be the last or closing
bid price quoted on the principal mechanism then used to report transactions in
the Common Stock.
"Commission" means the Securities and Exchange Commission, as from
time to time constituted, as created under the Exchange Act, or if at any time
after the execution of this instrument such Commission is not existing and
performing the duties now assigned to it under the Trust Indenture Act, then the
body performing such duties on such date.
"Common Stock" means the Company's Common Stock, $.01 par value, and
shares of any class or classes resulting from any reclassification or
reclassifications thereof which have no preference in respect of dividends or of
amounts payable in the event of any voluntary or involuntary liquidation,
dissolution or winding-up of the Company, and which are not subject to
redemption by the Company, and also shall include stock of the Company of any
other class, whether now or hereafter authorized which generally ranks, or is
entitled to a participation, as to assets or dividends, substantially on a
parity with such Common Stock or other class of stock into which such Common
Stock may have been changed; provided, however, that warrants or other rights to
purchase Common Stock will not be deemed to be Common Stock.
"Company" means the Person named as the "Company" in the first
paragraph of this instrument until a corporation shall have become a successor
corporation pursuant to the applicable provisions of this Indenture, and
thereafter "Company" shall mean such successor corporation.
"Company Request" and "Company Order" mean, respectively, a written
request or order signed in the name of the Company by its Chairman of the Board,
President or a Vice President, and, by the Chief Financial Officer, Treasurer,
an Assistant Treasurer, Secretary, or an Assistant Secretary, and delivered to
the Trustee.
"Consolidated Coverage Ratio" means, for any Reference Period, the
ratio on a pro forma basis, according to GAAP, of (i) Consolidated EBITDA for
the Reference Period to (ii) Consolidated Interest Expense for such Reference
Period; provided, that, in calculating Consolidated EBITDA and Consolidated
Interest Expense (A) the incurrence of any Indebtedness (including the issuance
of the Notes) or issuance of any Disqualified Stock during the Reference Period
or subsequent to the Reference Period and on or prior to the date of the
transaction giving rise to the need to calculate the Consolidated Coverage Ratio
(the "Transaction Date") shall be assumed to have occurred on the first day of
such Reference Period, (B) the Consolidated Interest Expense attributable to
interest on any Indebtedness or dividends on any Disqualified Stock bearing a
floating interest (or dividend) rate shall be computed on a pro forma basis as
if the rate in effect on the Transaction Date were the average rate in effect
during the entire Reference Period, and (C) in determining the amount of
Indebtedness pursuant to the covenant captioned "Limitation of Incurrence of
Additional Indebtedness," the incurrence of Indebtedness or issuance of
Disqualified Capital Stock giving rise to the need to calculate the Consolidated
Coverage Ratio and, to the extent the net proceeds from the incurrence or
issuance thereof are used to retire Indebtedness, the application of the
proceeds therefrom shall be assumed to have occurred on the first day of the
Reference Period.
"Consolidated EBITDA" means the Consolidated Net Income of the Company
and the Guarantor and their Subsidiaries for the Reference Period, increased,
without duplication (to the extent deducted in determining Consolidated Net
Income), by the sum of: (i) all income taxes of the Company and the Guarantor
and their Subsidiaries paid or accrued for such period (other than income taxes
attributable to extraordinary gains or losses), (ii) all interest expense of the
Company and the Guarantor and their Subsidiaries paid or accrued for such period
(including amortization of original issue discount), (iii)
-4-
<PAGE> 12
depreciation and depletion of the Company and the Guarantor and their
Subsidiaries, (iv) amortization of the Company and the Guarantor and their
Subsidiaries, including, without limitation, amortization of capitalized debt
issuance costs and (v) any other non-cash charges to the extent deducted from
Consolidated Net Income, in each of the foregoing cases in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to the Company and
the Guarantor and their Subsidiaries, for the Reference Period, the aggregate
amount (without duplication) of (i) interest expensed in accordance with GAAP
(including, in accordance with the following sentence, interest attributable to
Capitalized Lease Obligations) during such period in respect of all Indebtedness
of the Company and the Guarantor and their Subsidiaries, including (A)
amortization of original issue discount on any Indebtedness, (B) the interest
portion of all deferred payment obligations, calculated in accordance with GAAP,
and (C) all commissions, discounts and other fees and charges owed with respect
to bankers' acceptance financing and currency and interest rate swap
arrangements, in each case to the extent attributable to such period), (ii)
capitalized interest to the extent not included in (i) above, and (iii)
dividend requirements of the Company and the Guarantor and their Subsidiaries
with respect to Disqualified Stock, whether in cash or otherwise (except
dividends paid solely in shares of Qualified Stock) paid (other than to the
Company or the Guarantor or any of their Subsidiaries), declared, accrued or
accumulated during such period, divided by the difference of one minus the
applicable actual combined federal, state, local and foreign income tax rate of
the Company and/or the Guarantor or any of their Subsidiaries (expressed as a
decimal), on a consolidated or combined basis, for the four quarters immediately
preceding the date of the transaction giving rise to the need to calculate
Consolidated Interest Expense, in each case to the extent attributable to such
period and excluding items eliminated in consolidation. For purposes of this
definition, (i) interest on a Capitalized Lease Obligation shall be deemed to
accrue at an interest rate reasonably determined by the Company and the
Guarantor to be the rate of interest implicit in such Capitalized Lease
Obligation in accordance with GAAP and (ii) interest expense attributable to any
Indebtedness represented by the guarantee by the Company or the Guarantor, or a
Subsidiary of either of them of an obligation of another Person shall be deemed
to be the interest expense attributable to the Indebtedness guaranteed.
"Consolidated Net Income" of the Company means, for any period, the
aggregate net income (or loss) of the Company and the Guarantor and their
Subsidiaries for such period on a consolidated or combined basis, determined in
accordance with GAAP, provided that (i) the net income for such period of any
other Person that is not a Subsidiary of the Company, the Guarantor or their
Subsidiaries, or that is accounted for by the equity method of accounting shall
be included only to the extent of the amount of dividends, payments or
distributions actually paid to the Company or the Guarantor, or their
Subsidiaries, by such other Person in such period; and (ii) the net income for
such period of any Subsidiary of the Company or the Guarantor, that is subject
to any payment restriction will be included only to the extent of the amount of
dividends, payments or distributions which (A) are actually paid by such
Subsidiary in such period to the Company (or another Subsidiary which is not
subject to a payment restriction) and (B) are not in excess of the amount which
such Subsidiary would be permitted to pay to the Company or the Guarantor, (or
another Subsidiary which is not subject to a payment restriction) in any future
period under the payment restrictions applicable to such Subsidiary, assuming
that the net income of such Subsidiary in each future period is equal to the net
income for such Subsidiary for such period. "Net Income" of any Person for any
period shall mean the net income (loss) of such Person for such period,
determined in accordance with GAAP, less (i) for any period during which the
Company continues to be taxed as an S Corporation under the Code, any Permitted
Tax Contributions' (defined in Section 10.10 hereof) during such period with
respect to the taxable income of such period, (ii) the net income (or loss) of
any other Person acquired in a pooling of interests transaction for any period
prior to the date of such acquisition; (iii) any net gain or loss on the sale or
other disposition by the Company
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<PAGE> 13
or the Guarantor or any of their Subsidiaries of assets not in the ordinary
course of business of the Company's or the Guarantor's operations and of the
Capital Stock of any Subsidiary of the Company; and (iv) extraordinary items.
"Consolidated Tangible Net Worth" means the total amounts shown on the
most recent quarterly balance sheet of the Company and the Guarantor, determined
on a consolidated or combined basis in accordance with GAAP, as (i) the equity
of the common stockholders plus the respective amounts reported on the Company's
and the Guarantor's most recent consolidated or combined balance sheets with
respect to any preferred stock (other than redeemable stock) then issued that by
its terms is not entitled to the payment of dividends unless such dividends may
be declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received upon
issuance of such preferred stock, less (ii) any write-ups (other than write-ups
of tangible assets of a going concern business made within twelve months after
the acquisition of such business) subsequent to the date of the Indenture in the
book value of any asset owned by the Company or the Guarantor or a consolidated
or combined subsidiary; provided, that Consolidated Tangible Net Worth shall not
reflect any gain or loss resulting from any asset disposition after the date of
the Indenture.
"Corporate Trust Office" means the principal office of the Trustee at
which at any particular time its corporate trust business shall be administered,
which office at the date of the execution of this Indenture is located at
Corporate Trust Department A 804, 241 North Central Avenue, 25th Floor, Phoenix,
Arizona 85004.
"Disinterested Director" means, with respect to an Affiliate
Transaction or series of related Affiliate Transactions, a member of the Board
of Directors of the Company who has no financial interest, and whose employer
has no financial interest, in such Affiliate Transaction or series of related
Affiliate Transactions.
"Disqualified Stock" means any Capital Stock of the Company or the
Guarantor or any Subsidiary of either of them which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event or with the passage of time,
matures or is mandatorily redeemable, pursuant to a sinking fund obligation or
otherwise, or is redeemable at the option of the holder thereof, in whole or in
part, on or prior to the Maturity Date or which is exchangeable or convertible
into debt securities of the Company or the Guarantor or any Subsidiary of either
of them, except to the extent that such exchange or conversion rights cannot be
exercised prior to the Maturity Date.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations of the SEC thereunder.
"GAAP" means generally accepted accounting principles as in effect in
the United States of America as of the Issue Date.
"Group" means the definition of "Group" set forth in Section 13(d)(3)
of the Exchange Act.
"Guarantee" means the guarantee given by any Guarantor pursuant to
Article 13 hereof, including a notation on the Notes substantially in the form
attached hereto as Exhibit A-1.
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<PAGE> 14
"Guarantor" means (i) Monterey Homes Corporation and (ii) any entity
that becomes a guarantor of the Notes in compliance with the provisions of
Article 13 hereof, including, but not limited to, any Subsidiary Guarantor.
"Holder" means a Person in whose name a Note is registered on the Note
Register.
"Indebtedness" means, without duplication, with respect to any Person,
(i) all obligations of such Person (A) in respect of borrowed money (whether or
not the recourse of the lender is to the whole of the assets of such person or
only to a portion thereof), (B) evidenced by bonds, notes, debentures or similar
instruments, (C) representing the balance deferred and unpaid of the purchase
price of any property or services (other than accounts payable or other
obligations arising in the ordinary course of business), (D) evidenced by
bankers' acceptances or similar instruments issued or accepted by banks, (E) for
the payment of money relating to a Capitalized Lease Obligation, or (F)
evidenced by a letter of credit or a reimbursement obligation of such Person
with respect to any letter of credit; (ii) all net obligations of such Person
under interest rate swap obligations and foreign currency hedges; (iii) all
liabilities of others of the kind described in the preceding clauses (i) or (ii)
that such Person has guaranteed or that are otherwise its legal liability except
the Guarantee of a Guarantor hereunder; (iv) Indebtedness (as otherwise defined
in this definition) of another Person secured by a Lien on any asset of such
Person, whether or not such Indebtedness is assumed by such Person, the amount
of such obligations being deemed to be the lesser of (1) the full amount of such
obligations so secured, and (2) the fair market value of such asset, as
determined in good faith by the Board of Directors of such Person, which
determination shall be evidenced by a Board Resolution; (v) with respect to such
Person, the liquidation preference or any mandatory redemption payment
obligations with respect to Disqualified Stock; and (vi) any and all deferrals,
renewals, extensions, refinancings and refundings (whether direct or indirect)
of, or amendments, modifications or supplements to, any liability of the kind
described in any of the preceding clauses (i), (ii), (iii), (iv), (v), or this
clause (vi), whether or not between or among the same parties.
"Indenture" means this instrument as originally executed or as it may
from time to time be supplemented or amended by one or more indentures
supplemental hereto entered into pursuant to the applicable provisions hereof.
"Investment" of any Person means (i) all investments by such Person in
any other Person in the form of loans, advances or capital contributions
(excluding advances to employees in the ordinary course of business), and (ii)
all guarantees of Indebtedness or other obligations of any other Person by such
Person, (iii) all purchases (or other acquisitions for consideration) by such
Person of Indebtedness, Capital Stock or other securities of any other Person
and (iv) all other items that would be classified as investments (including,
without limitation, purchases of assets outside the ordinary course of business)
or advances on a balance sheet of such Person prepared in accordance with GAAP.
"Insolvency or Liquidation Proceeding" means, with respect to any
Person, (i) an insolvency or bankruptcy case or proceeding, or any receivership,
liquidation, reorganization proceeding or other similar case or proceeding,
relative to such Person or to its creditors, as such, or its assets, or (ii) any
liquidation, dissolution, reorganization proceeding or winding up of such Person
(other than any reincorporation of such Person in another jurisdiction), whether
voluntary or involuntary and whether or not involving insolvency or bankruptcy,
or (iii) any assignment for the benefit of creditors or any other marshalling of
assets and liabilities of such Person.
"Interest Payment Date" means the Stated Maturity of an installment of
interest on the Notes.
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<PAGE> 15
"Issue Date" means the date on which the Notes are originally issued
under the Indenture.
"Lien" means, with respect to any Person, any mortgage, pledge, lien,
encumbrance, easement, restriction, covenant, right-of-way, charge or adverse
claim affecting title or resulting in an encumbrance against real or personal
property of such Person, or a security interest of any kind (including any
conditional sale or other title retention agreement, any lease in the nature
thereof, any option, right of first refusal or other similar agreement to sell,
in each case securing obligations of such Person, and any filing of or agreement
to give any financing statement under the Uniform Commercial Code (or equivalent
statute or statutes) of any jurisdiction).
"Maturity" or "Maturity Date" when used with respect to the Notes,
means the date on which the principal of such Notes become due and payable as
therein or herein provided, whether at the Stated Maturity or by declaration of
acceleration or otherwise.
"Net Available Proceeds" means, with respect to any Asset Sale of any
Person, cash proceeds received (including any cash proceeds received by way of
deferred payment of principal pursuant to a note or installment receivable or
otherwise, but only as and when received, and excluding any other consideration
until such time as such consideration is converted into cash) therefrom, in each
case net of all legal, title and recording tax expenses, commissions and other
fees and expenses incurred, and all federal, state or local taxes required to be
accrued as a liability as a consequence of such Asset Sale, and in each case net
of all Indebtedness which was secured by such assets, in accordance with the
terms of any Lien upon or with respect to such assets, or which must, by its
terms or in order to obtain a necessary consent to such Asset Sale or by
applicable law, be repaid out of the proceeds from such Asset Sale and which is
actually so repaid.
"Net Cash Proceeds" means, in the case of any sale by the Company or
the Guarantor of securities pursuant to the covenant captioned "Limitation on
Restricted Payments," the aggregate net cash proceeds received by the Company or
the Guarantor, after payment of expenses, commissions, discounts and any other
transaction costs incurred in connection therewith.
"Notes" means $8,000,000 principal amount of 13.0% Senior Subordinated
Notes Due 2001.
"Offering" means the private offering of the Notes.
"Officers' Certificate" means a certificate signed by the Chairman of
the Board, the President or a Vice President, and by the Chief Financial
Officer, Treasurer, an Assistant Treasurer, the Secretary or an Assistant
Secretary of the Company, and delivered to the Trustee.
"Opinion of Counsel" means a written opinion of counsel, acceptable to
the Trustee, who may (except as otherwise expressly provided in this Indenture)
be counsel for the Company.
"Outstanding" when used with respect to the Notes means, as of the date
of determination, all Notes theretofore authenticated and delivered under this
Indenture, except:
(i) Notes theretofore cancelled and delivered to the Trustee
or delivered to the Trustee for cancellation;
(ii) Notes for whose payment in the necessary amount has been
theretofore deposited with the Trustee or any Paying Agent (other than
the Company) in trust or set aside and
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<PAGE> 16
segregated in trust by the Company (if the Company shall act as its own
Paying Agent) for the Holders of such Notes; and
(iii) Notes in exchange for or in lieu of which other Notes
have been authenticated and delivered Pursuant to this Indenture;
provided, however, that in determining whether the Holders of the requisite
principal amount of Notes Outstanding have given any request, demand,
authorization, direction, notice, consent or waiver hereunder, Notes owned by
the Company or any other obligor upon the Notes or any Affiliate of the Company
or such other obligor shall be disregarded and deemed not to be Outstanding,
except that, in determining whether the Trustee shall be protected in relying
upon any such request, demand, authorization, direction, notice, consent or
waiver, only Notes which the Trustee actually knows to be so owned shall be so
disregarded. Notes so owned which have been pledged in good faith may be
regarded as Outstanding if the pledgee establishes to the satisfaction of the
Trustee the pledgee's right so to act with respect to such Notes and that the
pledgee is not the Company or any other obligor upon the Notes or any Affiliate
of the Company or such other obligor.
"Paying Agent" means Bank One, Arizona, NA, or any Person authorized
by the Company pursuant to this Indenture to pay the principal of (and premium,
if any) or interest on any Notes on behalf of the Company. For as long as Bank
One, Arizona, NA, is the Paying Agent, there shall be no Co-Paying Agent
appointed without the consent of Bank One, Arizona, NA.
"Permitted Business Investments" means (i) Investments by the Company
or the Guarantor or any other Wholly Owned Subsidiary in a Person which
immediately prior to the making of such Investment is a Wholly-Owned Subsidiary;
(ii) Investments in the Company by any Wholly Owned Subsidiary; and (iii)
Investments by the Company or the Guarantor or a Subsidiary of the Company or
the Guarantor in a Person if as a result of such Investment such Person becomes
a Subsidiary of the Company, the Guarantor or a Subsidiary of either; provided
further, that if such Person does not become a Subsidiary of the Company, the
Guarantor or a Subsidiary of either, it must nonetheless be engaged in an
activity or business which would be considered to be the Principal Business of
the Company or the Guarantor.
"Permitted Company Refinancing Indebtedness" means Indebtedness of the
Company, the net proceeds of which are used to renew, extend, refinance, refund
or repurchase outstanding Indebtedness of the Company existing at the date of
the Indenture or other Indebtedness permitted under the Indenture, provided that
(i) if the Indebtedness (including the Notes) being renewed, extended,
refinanced, refunded or repurchased is subordinated in right of payment to the
Notes, then such Indebtedness is subordinated in right of payment to, as the
case may be, the Notes, at least to the same extent as the Indebtedness being
renewed, extended, refinanced, refunded or repurchased, (ii) such Indebtedness
is scheduled to mature either after the Maturity Date or no earlier than the
Indebtedness being renewed, extended, refinanced, refunded or repurchased, and
(iii) such Indebtedness has an Average Life at the time such Indebtedness is
incurred that is equal to or greater than the remaining Average Life of the
Indebtedness being renewed, extended, refinanced, refunded or repurchased;
provided, further, that such Indebtedness (to the extent that such Indebtedness
constitutes Permitted Company Refinancing Indebtedness) is in an aggregate
principal amount not in excess of the amount (or, if such Indebtedness is issued
at a price less than the principal amount thereof, the aggregate amount of gross
proceeds therefrom is not in excess of the aggregate principal amount) then
outstanding of the Indebtedness being renewed, extended, refinanced, refunded or
repurchased (or if the Indebtedness being renewed, extended, refinanced,
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<PAGE> 17
refunded or repurchased was issued at a price less than the principal amount
thereof, then not in excess of the amount of liability in respect thereof
determined in accordance with GAAP).
"Permitted Financial Investments" means the following kinds of
instruments if, in the case of instruments referred to in clauses (i)-(iv)
below, on the date of purchase or other acquisition of any such instrument by
the Company or the Guarantor or any Subsidiary of either of them, the remaining
term to maturity is not more than one year: (i) readily marketable obligations
issued or unconditionally guaranteed as to principal and interest by the United
States of America or by any agency or authority controlled or supervised by and
acting as an instrumentality of the United States of America; (ii) repurchase
obligations for instruments of the type described in clause (i) for which
delivery of the instrument is made against payment; (iii) obligations
(including, but not limited to, demand or time deposits, bankers' acceptances
and certificates of deposit) issued by a depository institution or trust company
incorporated or doing business under the laws of the United States of America,
any state thereof or the District of Columbia or a branch or subsidiary of any
such depository institution or trust company operating outside the United
States, provided, that such depository institution or trust company has, at the
time of the Company's or the Guarantor's or any of their Subsidiary's investment
therein or contractual commitment providing for such investment, capital,
surplus or undivided profits (as of the date of such institution's most recently
published financial statements), in excess of $100,000,000; (iv) commercial
paper issued by any corporation, if such commercial paper has, at the time of
the Company's or the Guarantor's or any of their Subsidiary's investment therein
or contractual commitment providing for such investment, credit ratings of A-1
by Standard & Poor's Corporation and P-1 by Moody's Investors Service, Inc.; and
(v) money market mutual or similar funds having assets in excess of
$100,000,000.
"Permitted Investments" means Permitted Business Investments and
Permitted Financial Investments.
"Permitted Liens" means (i) Liens existing on the Issue Date; (ii)
Liens now or hereafter securing Senior Indebtedness; (iii) Liens now or
hereafter securing any interest rate hedging obligations (A) that the Company or
the Guarantor is required to enter into with respect to a Bank Credit Facility
or (B) that are entered into for the purpose of managing interest rate risk with
respect to Indebtedness of the Company and the Guarantor and their Subsidiaries,
provided that such interest rate obligations under clauses (A) and (B) do not
have an aggregate notional amount which exceeds the aggregate principal amount
of Indebtedness of the Company and the Guarantor and their Subsidiaries; (iv)
Liens securing Permitted Company Refinancing Indebtedness, the proceeds of which
are used to refinance secured Indebtedness of the Company or the Guarantor or
their Subsidiaries; provided, that such Liens extend to or cover only the
property or assets currently securing the Indebtedness being refinanced or
additional property or assets provided there is no breach of the covenants
regarding additional Indebtedness caused thereby; (v) Liens for taxes,
assessments and governmental charges not yet delinquent or being contested in
good faith and for which adequate reserves have been established to the extent
required by GAAP, (vi) mechanics', workmen's materialmen's, operator's or
similar Liens arising in the ordinary course of business, (vii) Liens in
connection with workmen's compensation, unemployment insurance or other social
security, old age pension or public liability obligations, (viii) Liens,
deposits or pledges to secure the performance of bids, tenders, contracts (other
than contracts for the payment of money), leases, public or statutory
obligations, surety, stay, appeal, indemnity, performance or other similar
bonds, or other similar obligations arising in the ordinary course of business;
(ix) survey exceptions, encumbrances, easements or reservations of, or rights of
others for, rights or way, zoning or other restrictions as to the use of real
properties, and minor defects in title which, in the case of any of the
foregoing, were not incurred or created to secure the payment of borrowed money
or the deferred purchase price of property
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<PAGE> 18
or services, and in the aggregate do not materially adversely affect the value
of such properties or materially impair the use or the purposes for which such
properties are held by the Company or any Subsidiaries, (x) judgment and
attachment Liens not giving rise, or that would not give rise, to an Event of
Default or Liens created by or existing from any litigation or legal proceeding
that are currently being contested in good faith by appropriate proceedings and
for which adequate reserves have been made, (xi) (A) Liens upon any property of
any Person existing at the time of acquisition thereof by the Company or a
Subsidiary, (B) Liens upon any property of a Person existing at the time such
Person is merged or consolidated with the Company or any Subsidiary or existing
at the time of the sale or transfer of any such property of such Person to the
Company or any Subsidiary, or (C) Liens upon any property of a Person existing
at the time such Person becomes a Subsidiary; provided, that in each case such
Lien has not been created in contemplation of such sale, merger, consolidation,
transfer or acquisition, and provided further that in each such case no such
Lien shall extend to or cover any property of the Company or any Subsidiary
other than the property being acquired and improvements thereon, (xii) Liens on
deposits to secure public or statutory obligations or in lieu or surety or
appeal bonds entered into in the ordinary course of business, (xiii) Liens in
favor of collecting or payor banks having a right of setoff, revocation, refund
or chargeback with respect to money or instruments of the Company or any
Subsidiary on deposit with or in possession of such bank, and (xiv) purchase
money security interests granted in connection with the acquisition of fixed
assets in the ordinary course of business and consistent with past practices,
provided, that (A) such Liens attach only to the property so acquired with the
purchase money indebtedness secured thereby and (B) such Liens secure only
Indebtedness that is not in excess of 100% of the purchase price of such fixed
assets.
"Permitted Subsidiary Refinancing Indebtedness" means Indebtedness of
any Subsidiary, the net proceeds of which are used to renew, extend, refinance,
refund or repurchase outstanding Indebtedness of such Subsidiary, provided that
(i) if the Indebtedness (including any guarantee thereof) being renewed,
extended, refinanced, refunded or repurchased is pari passu with or subordinated
in right of payment to the Guarantee, then such Indebtedness is pari passu with
or subordinated in right of payment to, as the case may be, the Guarantee at
least to the same extent as the Indebtedness being renewed, extended,
refinanced, refunded or repurchased, (ii) such Indebtedness is scheduled to
mature either after the Maturity Date or no earlier than the Indebtedness being
renewed, extended, refinanced, refunded or repurchased, and (iii) such
Indebtedness, has an Average Life at the time such Indebtedness is incurred that
is equal to or greater than the remaining Average Life of the Indebtedness being
renewed, extended, refinanced, refunded or repurchased; provided further, that
such Indebtedness (to the extent that such Indebtedness constitutes Permitted
Subsidiary Refinancing Indebtedness) is in an aggregate principal amount (or, if
such Indebtedness is issued at a price less than the principal amount thereof,
the aggregate amount of gross proceeds therefrom is) not in excess of the
aggregate principal amount then outstanding under the Indebtedness being
renewed, extended, refinanced, refunded or repurchased (or if the Indebtedness
being renewed, extended, refinanced, refunded or repurchased was issued at a
price less than the principal amount thereof, then not in excess of the amount
of liability in respect thereof determined in accordance with GAAP).
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or any agency, political subdivision or instrumentality thereof.
"Placement Agent" means Friedman, Billings, Ramsey & Co., Inc., located
at 1001 Nineteenth Street North, Arlington, Virginia 22209, or such other
address as indicated in the notice to the Company or the Trustee given by the
Placement Agent in accordance with the provisions of this Indenture.
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<PAGE> 19
"Post-Commencement Interest" means all interest accrued or accruing
after the commencement of any Insolvency or Liquidation Proceeding in accordance
with and at the contract rate (including, without limitation, any rate
applicable upon default) specified in the agreement or instrument creating,
evidencing, or governing any Senior Indebtedness, whether or not, pursuant to
applicable law or otherwise, the claim for such interest is allowed as a claim
in such Insolvency or Liquidation Proceeding.
"Principal Business" means any business related, directly or
indirectly, to providing mortgage services, building, financing and selling of
homes, including all subcontracting trades, suppliers, financing and servicing
of debt and acquisition of real property which is intended substantially for
residential development within a multi-use development.
"Qualified Stock" means any Capital Stock that is not Disqualified
Stock.
"Reference Period" means, with respect to any Person, the four (4) full
fiscal quarters ended immediately preceding any date upon which any
determination is to be made pursuant to the terms of the Notes or the Indenture.
"Representative" means the indenture trustee or other trustee, agent or
representative of holders of any Senior Indebtedness.
"Responsible Officer" when used with respect to the Trustee means the
chairman or vice-chairman of the board of directors, the chairman or
vice-chairman of any executive committee of the board of directors, the
president, any vice president (whether or not designated by a number or a word
or words added before or after the title "vice president"), the secretary, any
assistant secretary, the chief financial officer, treasurer, any assistant
treasurer, the cashier, any assistant cashier, any trust officer or assistant
trust officer, the controller or any assistant controller or any other officer
of the Trustee customarily performing functions similar to those performed by
any of the above designated officers and also means, with respect to a
particular corporate trust matter, any other officer to whom such matter is
referred because of his knowledge of and familiarity with the particular
subject.
"Restricted Payments" means, with respect to any Person, any of the
following: (i) any dividend or other distribution in respect of such Person's
Capital Stock (other than (A) dividends or distributions payable solely in
Capital Stock (other than Disqualified Stock) and (B) in the case of
Subsidiaries of the Company or the Guarantor, dividends or distributions payable
to the Company or the Guarantor or to a Subsidiary of the Company or the
Guarantor); (ii) the purchase, redemption or other acquisition or retirement for
value of any option, warrant, or other right to acquire shares of Capital Stock,
of the Company or the Guarantor or any of their Subsidiaries; (iii) the making
of any principal payment on, or the purchase, defeasance, repurchase, redemption
or other acquisition or retirement for value, prior to any scheduled maturity,
scheduled repayment or scheduled sinking fund payment, of any Indebtedness which
is subordinated in right of payment to the Notes and (iv) the making by such
Person of any Investment other than a Permitted Investment.
"Senior Indebtedness" means any Indebtedness of the Company (whether
outstanding on the date hereof or hereafter incurred), unless such Indebtedness
is pari passu with or contractually subordinate or junior in right of payment to
the Notes, except Indebtedness to any Affiliate of the Company and the Guarantor
which shall be junior and subordinate to the Notes, and except Indebtedness
evidenced by any series of Notes authorized to be issued hereunder in addition
to and on parity with the Notes.
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<PAGE> 20
"Stated Maturity" when used with respect to any Note or any installment
of interest thereon means the date specified in such Note as the fixed date on
which the principal of such Note or such installment of interest is due and
payable.
"Subordinated Indebtedness of the Company" means any Indebtedness of
the Company (whether outstanding on the date hereof or hereafter incurred) which
is contractually subordinate or junior in right of payment to the Notes and
which has a scheduled payment date which is after the Maturity Date.
"Subsidiary" means any subsidiary of the Company or, as the context
indicates, any subsidiary of the Guarantor. A "subsidiary" of any Person means
(i) a corporation a majority of whose Voting Stock is at the time, directly or
indirectly, owned by such person, by one or more subsidiaries of such Person or
by such Person and one or more subsidiaries of such Person, (ii) a partnership
in which such Person or a subsidiary of such Person is, at the date of
determination, a general or limited partner of such partnership, but only if
such person or its subsidiary is entitled to receive more than fifty percent of
the assets of such partnership upon its dissolution, or (iii) any other Person
(other than a corporation or partnership) in which such Person, directly or
indirectly, at the date of determination thereof, has (x) at least a majority
ownership interest or (y) the power to elect or direct the election of a
majority of directors or other governing body of such Person.
"Subsidiary Guarantor" means (i) each of the Company's material
Subsidiaries that becomes a guarantor of the Notes in compliance with the
provisions of Article 13 hereof; and (ii) each of the material Subsidiaries
executing a supplemental indenture in which Subsidiary agrees to be bound by the
terms of this Indenture.
"Trading Day" means a day on which a quote for the Common Stock is
published on the principal exchange or other market mechanism used to report
transactions in or prices of the Common Stock.
"Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939
(15 U.S. Code Sections 77aaa and 77bbbb) as in effect on the date of this
Indenture and as thereafter amended from time to time, except as provided in
Section 9.5.
"Trustee" means the Person named as the "Trustee" in the first
paragraph of this instrument until a successor Trustee shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Trustee" shall mean such successor Trustee.
"U.S. Government Obligations" means securities that are (i) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (ii) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America and payment of which is unconditionally guaranteed as a full faith and
credit obligation by the United States of America, which, in either case under
clauses (i) or (ii) are not callable or redeemable at the option of the issuer
thereof.
"U.S. Legal Tender" means such coin or currency of the United States as
at the time of payment shall be legal tender for the payment of public and
private debts.
"Voting Stock" means, with respect to any Person, securities of any
class or classes of Capital Stock in such Person entitling the holders thereof
(whether at all times or only so long as no senior class
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<PAGE> 21
of stock has voting power by reason of any contingency) to vote in the election
of members of the Board of Directors or other governing body of such Person.
"Wholly Owned Subsidiary" means a Subsidiary, all the Capital Stock
(other than directors, qualifying shares, if applicable) of which is owned by
the Company or the Guarantor or another Wholly Owned Subsidiary.
SECTION 1.2. COMPLIANCE CERTIFICATE AND OPINIONS.
Upon any application or request by the Company to the Trustee to take
any action under any provision of this Indenture, the Company shall furnish to
the Trustee an Officers' Certificate stating that all conditions precedent, if
any, provided for in this Indenture relating to the proposed action have been
complied with and an Opinion of Counsel stating that in the opinion of such
counsel all such conditions precedent, if any, have been complied with, except
that in the case of any such application or request as to which the furnishing
of such documents is specifically required by any provision of this Indenture
relating to such particular application or request, no additional certificate or
opinion need be furnished.
Every certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture shall include:
(1) a statement that each individual signing such certificate or
opinion has read such covenant or condition and the definitions herein relating
thereto;
(2) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of each such individual, he has
made such examination or investigation as is necessary to enable him to express
an informed opinion as to whether or not such covenant or condition has been
complied with; and
(4) a statement as to whether, in the opinion of each such individual,
such condition or covenant has been complied with.
SECTION 1.3. FORM OF DOCUMENTS DELIVERED TO TRUSTEE.
In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be based,
insofar as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any certificate or Opinion of Counsel may be based to such counsel's
best knowledge, based upon a certificate or opinion of or representations by,
an officer or officers of the Company, stating that the information contained in
such certificate or opinion of, or representations by an officer or officers of
the Company is in the
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<PAGE> 22
possession of the Company, unless such counsel knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to such matters are erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
SECTION 1.4. ACTS OF HOLDERS.
(a) Any request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Indenture to be given or taken by
Holders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Holders in person or by an agent duly
appointed in writing; and, except as herein otherwise expressly provided, such
action shall become effective when such instrument or instruments are delivered
to the Trustee, and, where it is hereby expressly required, to the Company. Such
instrument or instruments (and the action embodied therein and evidenced
thereby) are herein sometimes referred to as the "Act" of the Holders signing
such instrument or instruments. Proof of execution of any such instrument or of
a writing appointing any such agent shall be sufficient for any purpose of this
Indenture and (subject to Section 6.1 hereof) conclusive in favor of the Trustee
and the Company, if made in the manner provided in this Section.
(b) Proof of the fact and date of the execution by any Person of any
such instrument or writing shall be sufficient for any purposes of this
Indenture if made in accordance with such reasonable rules and regulations as
may be prescribed by the Trustee or in such manner as shall be satisfactory to
the Trustee.
(c) The ownership of Notes shall be proved by the Note Register.
(d) Any request, demand, authorization, direction, notice, consent,
waiver or other action by the Holder of any Note shall bind every future Holder
of the same Note and the Holder of every Note issued upon the transfer thereof
or in exchange therefor or in lieu thereof, in respect of anything done or
suffered to be done by the Trustee or the Company in reliance thereon, whether
or not notation of such action is made upon such Note.
SECTION 1.5. NOTICES, ETC. TO TRUSTEE AND COMPANY.
Any request, demand, authorization, direction, notice, consent, waiver
or Act of Holders or other document provided or permitted by this Indenture to
be made upon, given or furnished to, or filed with,
(1) the Trustee by any Holder or by the Company shall be sufficient for
every purpose hereunder if made, given, furnished or filed in writing to or with
the Trustee at its Corporate Trust Office,
(2) the Company by the Trustee or by any, Holder shall be sufficient
for every purpose hereunder if in writing and mailed. first-class postage
prepaid, to the Company addressed to it at the address of its principal office
specified in the first paragraph of this Indenture or at any other address
previously furnished in writing to the Trustee by the Company, or
(3) any Subsidiary Guarantor or the Guarantor by the Trustee or by any
Holder shall be sufficient for every purpose hereunder if in writing and mailed,
first-class postage prepaid, to the
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<PAGE> 23
Guarantor addressed to it at the address of its principal office specified in
the first paragraph of this instrument or at any other address previously
furnished in writing to the Trustee by the Guarantor, and with respect to any
Subsidiary Guarantor, addressed in care of Guarantor.
SECTION 1.6. NOTICES TO HOLDERS; WAIVER.
Where this Indenture provides for notice to Holders, such notice shall
be sufficiently given (unless otherwise herein expressly provided) if in writing
and mailed, first-class postage prepaid, to each Holder of such Notes, at his
address as it appears on the Note Register, not later than the latest date, and
not earlier than the earliest date, prescribed for the giving of such notice,
with a copy thereof to the Trustee. Where this Indenture provides for notice in
any manner, such notice may be waived in writing by the Person entitled to
receive such notice, either before or after the event, and such waiver shall be
the equivalent of such notice. Waivers of notice by Holders shall be filed with
the Trustee, but such filing shall not be a condition precedent to the validity
of any action taken in reliance upon such waiver. In any case where notice to
Holders is given by mail, neither the failure to mail such notice, nor any
defect in any notice so mailed to any particular Holder shall affect the
sufficiency of such notice with respect to other Holders, and any notice which
is mailed in the manner herein provided shall be conclusively presumed to have
been duly given.
SECTION 1.7. CONFLICT WITH TRUST INDENTURE ACT.
If any provision hereof limits, qualifies or conflicts with another
provision which is required to be included in this Indenture by any of the
provisions of the TIA, such required provision shall control.
SECTION 1.8. EFFECT OF HEADINGS AND TABLES OF CONTENTS.
The Article and Section headings herein and the Table of Contents are
for convenience only and shall not affect the construction hereof.
SECTION 1.9. SUCCESSORS AND ASSIGNS.
All covenants and agreements by the Company and the Guarantor in this
Indenture shall bind their respective successors and assigns, whether so
expressed or not.
SECTION 1.10. SEPARABILITY CLAUSE.
In case any provision in this Indenture or in the Notes shall be
invalid, illegal or unenforceable, the validity, legality or enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
SECTION 1.11. BENEFITS OF INDENTURE.
Nothing in this Indenture or in the Notes, express or implied, shall
give to any Person, other than the parties hereto and their successors hereunder
and the Holders of Notes, any benefit or any legal or equitable right, remedy or
claim under this Indenture.
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<PAGE> 24
SECTION 1.12. GOVERNING LAW.
This Indenture shall be construed in accordance with and governed by
the laws of the State of Arizona applicable to contracts made and to be
performed entirely in that state.
ARTICLE 2
NOTE FORM
SECTION 2.1. FORM GENERALLY.
The Notes, which shall be registered Notes without coupons, and the
Trustee's certificate of authentication shall be in substantially the forms set
forth in this Article, with such appropriate insertions, omissions,
substitutions and other variations as are required or permitted by this
Indenture and may have such letters, numbers or other marks of identification
and such legends or endorsements placed thereon, as may be required to comply
with the rules of any securities exchange, or as may, consistently herewith, be
determined by the officers executing such Notes, as evidenced by their signing
of the Notes.
The definitive Notes shall be printed, lithographed, engraved or
produced by any combination of these methods on steel engraved borders or may be
produced in any other manner permitted by the rules of any securities exchange,
all as determined by the officers executing such Notes, as evidenced by their
signing of such Notes.
SECTION 2.2. FORM OF FACE OF NOTE.
MONTEREY MANAGEMENT, INC.
13.0% SENIOR SUBORDINATED NOTE
DUE 2001
$_______________ No.__________
MONTEREY MANAGEMENT, INC., a corporation duly organized and existing
under the laws of the State of Arizona (herein called the "Company," which term
includes any successor corporation under the Indenture hereinafter referred to),
for value received, hereby promises to pay to _____________________________, or
registered assigns. the principal sum of______________________________________
DOLLARS on October 15, 2001, and to pay interest thereon from the later of the
date on which this Note is first issued (the "Date of Issue") or the most recent
Interest Payment Date to which interest has been paid or duly provided for, as
the case may be, semiannually on October 15 and April 15 in each year,
commencing April 15, 1995, at the rate of 13.0% per annum, until the principal
hereof is paid or duly provided for. The interest so payable, and punctually
paid or duly provided for, on any Interest Payment Date will, subject to certain
exceptions as provided in the Indenture hereinafter referred to, be paid to the
person in whose name this Note is registered at the close of business on October
1 or April 1 (or if such day is not a Business Day then at the close of business
on the Business Day next preceding such day) next preceding such Interest
Payment Date. Interest so payable will be calculated on the basis of a 360-day
year of twelve 30-day months. Payments of the principal of (and premium, if any)
and interest on this Note will be made at the office or agency of the Company
maintained for that purpose in Phoenix,
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<PAGE> 25
Arizona, or in such other office or agency as may be established by the Company
pursuant to said Indenture, in such coin or currency of the United States of
America as at the time of payment is legal tender for payment of public and
private debts; provided, however, that at the option of the Company payment of
interest may be made (subject to collection) by check mailed to the address of
the person entitled thereto as such address shall appear on the Note Register.
Reference is hereby made to the further provisions of this Note set
forth on the reverse side hereof which further provisions shall for all purposes
have the same effect as though fully set forth at this place.
This Note shall not be valid or become obligatory for any purpose until
the certificate of authentication hereof shall have been manually signed by the
Trustee under the Indenture.
IN WITNESS WHEREOF, MONTEREY MANAGEMENT, INC. has caused this Note to
be signed in its name by the manual or facsimile signature of its President and
attested by the manual or facsimile signature of its Secretary.
Dated:_____________________________
MONTEREY MANAGEMENT, INC.
By:_______________________________
ITS PRESIDENT
ATTEST:
___________________________________
SECRETARY
SECTION 2.3. AUTHENTICATION.
The Trustee, upon the execution and delivery of this Indenture, the
execution and delivery to it by the Company of the Notes, as hereinabove
provided, shall from time to time authenticate Notes as necessary to issue the
Notes or reissue upon a transfer by the registered holder thereof.
SECTION 2.4. FORM OF REVERSE OF NOTE.
MONTEREY MANAGEMENT, INC.
13.0% SENIOR SUBORDINATED NOTE
DUE 2001
This Note is one of a duly authorized issue of the Notes of the Company
designated as its 13.0% Senior Subordinated Note Due 2001 (herein called the
"Notes"), limited in aggregate principal amount to $8,000,000 issued and to be
issued under an Indenture dated as of October 17, 1994 (hereinafter called the
"Indenture"), by and among the Company, Monterey Homes Corporation, as guarantor
("Guarantor")
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<PAGE> 26
and Bank One, Arizona, NA, as Trustee (herein called the "Trustee," which term
includes any successor Trustee under the Indenture), to which Indenture and all
indentures supplemental thereto reference is hereby made for a statement of the
respective rights thereunder of the Company, the Guarantor, the Trustee and the
Holders of the Notes, and the terms upon which the Notes are, and are to be,
authenticated and delivered.
The Indenture permits, with certain exceptions, as therein provided,
the amendment thereof and the modification of the rights and obligations of the
Company, the Guarantor, and the rights of the Holders of the Notes under the
Indenture at any time by the Company and the Guarantor, with the consent of the
Holders of a majority in aggregate principal amount of the Notes at the time
Outstanding, as defined in the Indenture. The Indenture also contains provisions
permitting the Holders of a majority in aggregate principal amount of the Notes
at the time Outstanding, as defined in the Indenture, on behalf of the Holders
of all the Notes, to waive compliance by the Company or the Guarantor with
certain provisions of the Indenture and certain past defaults under the
Indenture and their consequences. The Indenture also contains provisions with
certain exceptions, as therein provided, which permit the amendment thereof in
order to correct certain matters without the consent of the Holders. Any such
consent or waiver by the Holder of this Note shall be conclusive and binding
upon such Holder and upon all future Holders of this Note and of any Note issued
upon the registration or transfer hereof or in exchange therefor or in lieu
hereof, whether or not notation of such consent or waiver is made upon this
Note.
No reference herein to the Indenture and no provisions of this Note or
of the Indenture shall alter or impair the obligation of the Company or the
Guarantor, which is absolute and unconditional, to pay the principal of (and
premium if any) and interest on this Note at the times, places and rate, and in
the coin and currency, herein prescribed.
As provided in the Indenture and subject to certain limitations therein
set forth, this Note is transferable on the Note Register of the Company, upon
surrender of this Note for registration of transfer at the office or agency of
the Company to be maintained for that purpose in Phoenix, Arizona, or at such
other office or agency as may be established by the Company for such purpose
pursuant to the Indenture, duly endorsed by, or accompanied by written
instrument of transfer in form satisfactory to the Company and the Note
Registrar duly executed by the Holder hereof or his attorney duly authorized in
writing, and thereupon one or more new Notes, of authorized denominations and
for the same aggregate principal amount, will be issued to the designated
transferee or transferees. The Company has appointed the Trustee as the Note
Registrar and Paying Agent for the Notes.
The Notes may be redeemed at the option of the Company, in whole or in
part (in any integral multiple of $1,000), at any time on or after October 15,
1998, on not less than 30 days, nor more than 60 days, notice mailed to the
registered Holders thereof at their last registered addresses, at the following
redemption prices (expressed as percentages of the principal amount), together
with accrued and unpaid interest to and including the date fixed for redemption,
if redeemed during the 12-month period beginning October 15 of the following
years:
<TABLE>
<CAPTION>
Years Redemption Price
<C> <C>
1998 106.500%
1999 103.250%
2000 and thereafter 100.0%
</TABLE>
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<PAGE> 27
In addition, the Notes may be redeemed at the option of the Company
upon completion by the Company of an initial public offering in excess of $10.0
million at a purchase price equal to 100% of the principal amount to be
redeemed, plus the interest rate the Notes then bear, together with accrued and
unpaid interest to and including the dated fixed for redemption upon notice as
set forth in the Indenture; provided, however, the Company cannot redeem Notes
aggregating more than 25% of the outstanding principal balance of the Notes
pursuant to the provisions hereof.
In addition, in the event that the Company's and Guarantor's
Consolidated Tangible Net Worth at the end of each of any two consecutive fiscal
quarters is less than $2,000,000, the annual rate of interest on the Notes shall
be increased by one percent (1%) from the annual rate of interest the Notes then
bear, which adjusted rate of interest shall remain in effect from the deficiency
date until the end of the fiscal quarter in which the Company's and the
Guarantor's Consolidated Tangible Net Worth is equal to or exceeds $2,000,000.
In the event that the Company's and the Guarantor's Consolidated Tangible Net
Worth at the end of each of two consecutive fiscal quarters is less than
$1,500,000, the annual rate of interest on the Notes shall be increased by four
percent (4%) from the annual rate of interest the Notes then bear unless the
annual interest rate has already been and remains increased by one percent (1%)
in accordance with the immediately preceding sentence, in which case the annual
rate of interest shall be increased by three percent (3%) from the annual rate
of interest the Notes then bear, such adjusted rate of interest in either
situation remaining in effect from the Deficiency Date until the end of the
fiscal quarter in which the Company's and the Guarantor's Consolidated Tangible
Net Worth exceeds $1,500,000.
If fewer than all of the Notes are to be redeemed, the Trustee shall
select the particular Notes (or the portions thereof) to be redeemed either by
lot, pro rata or by such other method as the Trustee shall deem fair and
appropriate, but in any such event, in such manner as complies with applicable
legal requirements; provided, however, that the principal portion redeemed shall
not be less than the smallest authorized denomination of the Notes. On or after
the redemption date, interest will cease to accrue on Notes or portions thereof
called for redemption.
If the Company fails to maintain its and the Guarantor's Consolidated
Tangible Net Worth, as described in Section 10.17 of the Indenture, then the
Company shall offer to purchase Notes in an aggregate principal amount equal to
10% of the principal amount of the Notes, at the time such offer is made, at a
purchase price equal to 100% of the aggregate principal amount of such Note,
plus accrued and unpaid interest to the date of purchase. In no event shall the
Company's failure to meet the Minimum Consolidated Tangible Net Worth at the end
of any fiscal quarter cause the making of more than one offer to purchase
Notes. Upon a Change of Control (as defined in Section 1.1 of the Indenture),
the Company, as described in Section 10.16 of the Indenture, will be required
to offer to purchase all of the Notes at 101% of the principal amount thereof,
plus accrued interest, if any, to the date of purchase. In addition, in the
event that the Company sells assets, under certain circumstances, as described
in Section 10.11 of the Indenture, the Company will be required to make an
offer to purchase a certain principal amount of the Notes, on a pro rata basis
of all Notes tendered, at 100% of the principal amount thereof, plus accrued
interest, if any, to the date of purchase.
If an Event of Default as defined in the Indenture shall occur and be
continuing, the principal of all or a portion of the Notes may become or be
declared due and payable in the manner and with the effect provided in the
Indenture. If an Event of Default on the Notes shall occur, the rate of interest
shall be the rate set forth on the face of this Note, plus 4% per annum, which
amount shall accrue on the indebtedness evidenced by the Notes from such date
for such period of time until the default is cured.
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<PAGE> 28
The Notes are issuable only in registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000, as provided in the
Indenture and subject to certain limitations therein set forth. Notes are
exchangeable for a like aggregate principal amount of Notes of a different
authorized denomination, as requested by the Holder surrendering the same.
No service charge shall be made for any such transfer or exchange, but
the Company may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith.
The Company, the Trustee and any agent of the Company or the Trustee
may treat the person in whose name this Note is registered as the owner hereof
for all purposes, whether or not this Note be overdue, and neither the Company,
the Trustee, nor any such agent shall be affected by notice to the contrary.
ASSIGNMENT FORM
To assign this Note, fill in the form below:
I or we assign and transfer this Note to:
_______________________________________________________________________________
(Insert assignee's social security or tax identification no.)
_______________________________________________________________________________
_______________________________________________________________________________
(Print or type assignee's name, address and zip code)
and irrevocably appoint _____________________________________ as agent to
transfer this Note on the books of the Company. The agent may substitute another
to act for him.
Date:___________________ Your Signature:_______________________________
(Sign exactly as your name appears on
the other side of this Note)
Signature Guarantee:____________________________________________________
By_______________________________________
The signature should be guaranteed by an eligible
guarantor institution (a bank, stockbroker, savings
and loan association of credit union with membership
in an approved signature guarantee medallion
program) pursuant to Rule 17Ad-15 of the Securities
Exchange Act of 1934.
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<PAGE> 29
FORM OF OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Company
pursuant to Section 10.11, 10.16 or Section 10.17 of the Indenture, check the
appropriate box:
Section 10.11 [ ] Section 10.16 [ ] Section 10.17 [ ]
If you want to have only part of this Note purchased by the Company
pursuant to Section 10.11, Section 10.16 or Section 10.17 of the Indenture,
state the amount (in integral multiples of $1,000):
$______________________
Date:___________________________ Your Signature:___________________________
(Sign exactly as your name appears
on the other side of this Note)
Signature Guarantee:________________________________________________________
By______________________________________
The signature should be guaranteed by an
eligible guarantor institution (a bank,
stockbroker, savings and loan association or
credit union with membership in an
approved signature guarantee medallion
program) pursuant to Rule 17Ad-15 of the
Securities Exchange Act of 1934.
Section 2.5. Form of Trustee's Certificate of Authentication.
This is one of the Notes referred to in the within mentioned Indenture.
BANK ONE, ARIZONA, NA, as Trustee
By:_____________________________
AUTHORIZED REPRESENTATIVE
ARTICLE 3
THE NOTES
SECTION 3.1. TITLE AND TERMS.
The aggregate principal amount of Notes which may be authenticated and
delivered under this Indenture is limited to $8,000,000, except for Notes
authenticated and delivered upon transfer of, or in exchange for, or in lieu of
other Notes pursuant to Sections 3.4, 3.5, 3.6, 9.6 and 12.2. The Notes issued
hereunder shall consist of $8,000,000 of 13.0% Senior Subordinated Notes Due
2001. Forthwith upon the execution and delivery of this Indenture, or from time
to time thereafter, Notes up to a maximum aggregate principal amount of
$8,000,000 may be executed by the Company and delivered to the Trustee for
authentication, and shall thereupon be authenticated and delivered by the
Trustee upon Company order, without any further action by the Company.
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<PAGE> 30
The Notes shall be known and designated as the "13.0% Senior
Subordinated Notes Due 2001" of the Company. Their Stated Maturity shall be
October 15, 2001 and they shall bear interest at the rate of 13.0% per annum
from their Date of Issue or from the most recent Interest Payment Date to which
interest has been paid or duly provided for, as the case may be, payable
semiannually on October 15 and April 15, commencing April 15, 1995, until the
principal thereof is paid or duly provided for. The Notes are subject to
redemption by the Company prior to maturity as set forth in Article 12 and are
subject to tender for purchase as provided in Sections 10.11, 10.16 and 10.17
hereof. The Holder of any Note at the close of business on any Record Date
(as hereinafter defined) with respect to any Interest Payment Date shall be
entitled to receive the interest payable thereon on such Interest Payment Date
notwithstanding the cancellation of such Note upon any transfer or exchange
thereof subsequent to such record date and prior to such Interest Payment Date,
unless there be a default in payment of interest by the Company in which case
such defaulted interest shall be paid to the Person in whose name such Note is
registered (a) on the date of payment of such defaulted interest or (b) at the
election of the Company, on a special record date ("Special Record Date"), which
shall be not less than five Business Days preceding the date of payment of such
defaulted interest, established for such purpose by notice given by or on behalf
of the Company to the Holders not less than ten Business Days preceding the date
so established. The term "Record Date" as used herein with respect to any
Interest Payment Date (other than any date on which defaulted interest is paid)
shall mean the September 1 or March 1 (or if that day is not a Business Day, the
next preceding Business Day) next preceding such Interest Payment Date.
The principal of (and premium, if any) and interest on the Notes shall
be payable at the office or agency of the Paying Agent in Phoenix, Arizona;
provided, however, that interest may be payable at the option of the Paying
Agent by check mailed to the address of the person entitled thereto as such
address shall appear on the Note Register.
The Notes shall be subordinated in right of payment to Senior
Indebtedness of the Company as provided in Article 11.
The Notes shall be senior in right of payment to all Subordinated
Indebtedness of the Company.
SECTION 3.2. DENOMINATIONS.
The Notes may be issued in denominations of $1,000 and any integral
multiple thereof.
SECTION 3.3. EXECUTION, AUTHENTICATION AND DELIVERY.
The Notes shall be executed on behalf of the Company by its President
or one of its Vice Presidents under its corporate seal reproduced thereon and
attested by its Secretary or one of its Assistant Secretaries. The President of
the Guarantor shall sign the Guarantee of the Guarantor on behalf of the
Guarantor. The signature of any of these officers on the Notes may be manual or
facsimile.
Notes bearing the manual or facsimile signatures of individuals who
were at any time the proper officers of the Company or a Subsidiary Guarantor,
as the case may be, shall bind the Company and such Subsidiary Guarantor,
respectively, notwithstanding that such individuals or any of them have ceased
to hold such offices prior to the authentication and delivery of such Notes or
did not hold such offices at the date of such Notes.
At any time and from time to time after the execution and delivery of
this Indenture, the Company may deliver Notes executed by the Company to the
Trustee, together with a Company Order
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<PAGE> 31
for the authentication and delivery of such Notes; and the Trustee in accordance
with such Order shall authenticate and deliver such Notes as in this Indenture
provided and not otherwise.
Each Note shall be dated the date of its authentication.
No Note shall be entitled to any benefit under this Indenture or be
valid or obligatory for any purpose, unless there appears on such Note a
certificate of authentication substantially in the form provided for herein
executed by the Trustee by the manual signature of one of its authorized
representatives, and such certificate upon any Note shall be conclusive
evidence, and the only evidence, that such Note has been duly authenticated and
delivered hereunder.
SECTION 3.4. TEMPORARY NOTES.
Pending the preparation of definitive Notes, the Company may execute,
and upon Company Order the Trustee shall authenticate and deliver, temporary
Notes which are printed, lithographed, typewritten, mimeographed or otherwise
produced in any denomination, substantially of the tenor of the definitive Notes
in lieu of which they are issued, with such appropriate insertions, omissions,
substitutions and other variations as the officers executing such Notes may
determine, as evidenced by their signing of such Notes.
If temporary Notes are issued, the Company will cause definitive Notes
to be prepared without unreasonable delay. After the preparation of definitive
Notes, the temporary Notes shall be exchangeable for definitive Notes upon
surrender of the temporary Notes at the office or agency of the Trustee in
Phoenix, Arizona, without charge or any other cost to the Holder. Upon surrender
for cancellation of any one or more temporary Notes the Company shall execute
and the Trustee shall authenticate and deliver in exchange therefor a like
principal amount of definitive Notes of authorized denominations. Until so
exchanged the temporary Notes shall in all respects be entitled to the same
benefits under this Indenture as definitive Notes.
SECTION 3.5. REGISTRATION, TRANSFER AND EXCHANGE.
The Company shall cause to be kept at the Corporate Trust Office of the
Trustee a register (herein sometimes referred to as the "Note Register") in
which, subject to such reasonable regulations as it may prescribe, the Company
shall provide for the registration of and registration of transfers of Notes as
herein provided. The Trustee is hereby appointed the Note Registrar and Paying
Agent for the purpose of registering Notes and transfers of Notes as herein
provided and for the purpose of paying the principal of and interest and any
other amount due on the Notes. The Company agrees to pay the Trustee's then
customary fees for services rendered in connection with the registration of
transfers or exchanges of the Notes.
Upon surrender for registration of transfer of any Note at the office
or agency of the Trustee in Phoenix, Arizona, the Company shall execute, and the
Trustee shall authenticate and deliver, in the name of the designated transferee
or transferees, one or more of new Notes of a like aggregate principal amount,
all as requested by the transferor.
At the option of the Holder, Notes may be exchanged for other Notes of
any authorized denominations, of a like aggregate principal amount, upon
surrender of the Notes to be exchanged at such office or agency, and upon
payment of any tax or governmental charge payable in connection therewith, if
the Company shall so require. Whenever any Notes are so surrendered for
exchange, the Company
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<PAGE> 32
shall execute, and the Trustee shall authenticate and deliver, the Notes which
the Holder making the exchange is entitled to receive.
All Notes surrendered upon any exchange or transfer provided for in
this Indenture shall be promptly cancelled by the Trustee and thereafter
disposed of as directed by a Company Order.
All Notes issued in exchange for or upon transfer of Notes shall be the
valid obligations of the Company, evidencing the same debt, and entitled to the
same benefits under this Indenture, as the Notes surrendered for such exchange
or transfer.
Every Note presented or surrendered for transfer or exchange shall (if
so required by the Company or the Trustee) be duly endorsed, or be accompanied
by a written instrument of transfer in form satisfactory to the Company and the
Note Registrar duly executed, by the Holder thereof or his attorney duly
authorized in writing.
The Company may require payment of a sum sufficient to cover any tax or
other governmental charge that may be imposed in connection with any transfer or
exchange of Notes, other than exchanges expressly provided for in this Indenture
to be made at the Company's own expense, or without expense or without charge to
Holders.
Until a registration statement for the Notes shall have been declared
effective by the Commission under the Securities Act of 1933, as amended, each
Note shall bear a legend substantially in the form attached hereto as Exhibit A.
SECTION 3.6. MUTILATED, DESTROYED, LOST OR STOLEN NOTES.
A mutilated Note may be surrendered and thereupon the Company shall
execute and the Trustee shall authenticate and deliver in exchange therefor a
new Note of like tenor and principal amount and bearing a number not
contemporaneously outstanding.
If there be delivered to the Company and to the Trustee
(i) evidence to their satisfaction of the destruction, loss or theft of
any Note, and
(ii) such security or indemnity as may be required by them to save each
of them harmless,
then, in the absence of notice to the Company or the Trustee that such Note has
been acquired by a bona fide purchaser, the Company shall execute and upon its
request the Trustee shall authenticate and deliver in lieu of any such
destroyed, lost or stolen Note, a new Note of like tenor and principal amount
and bearing a number not contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Note has become
or is about to become due and payable, the Company in its discretion may,
instead of issuing a new Note, pay such Note.
Upon the issuance of any new Note under this Section, the Company may
require the payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in relation thereto and any other expenses (including
the fees and expenses of the Trustee) connected therewith.
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Every new Note issued pursuant to this Section in lieu of any
destroyed, lost or stolen Note shall constitute an original additional
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Note shall be at any time enforceable by anyone, and shall be entitled to
all the benefits of this Indenture equally and proportionately with any and all
other Notes duly issued hereunder.
The provisions of this Section are exclusive and shall preclude (to the
extent lawful) all other rights and remedies with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Notes.
SECTION 3.7. PERSONS DEEMED OWNERS.
Subject to the express provisions of Section 3.11 of this Indenture,
the Company, the Trustee and any agent of the Company may treat the Person in
whose name any Note is registered as the owner of such Note for the purpose of
receiving payment of principal of (and premium, if any) and interest on such
Note and for all other purposes whatsoever whether or not such Note be overdue,
and neither the Company, the Trustee nor any agent of the Company shall be
affected by notice to the contrary.
SECTION 3.8. CANCELLATION.
All Notes surrendered for payment, registration of transfer or exchange
shall, if surrendered to the Company or any agent of the Company be delivered
to the Trustee and, if not already cancelled, shall be promptly cancelled by it.
The Company may at any time deliver to the Trustee for cancellation any Notes
previously authenticated and delivered hereunder which the Company may have
acquired in any manner whatsoever, and all Notes so delivered shall be promptly
cancelled by the Trustee. No Notes shall be authenticated in lieu of or in
exchange for any Notes cancelled as provided in this Section, except as
expressly permitted by this Indenture. All cancelled Notes held by the Trustee
shall be disposed of as directed by a Company Order.
SECTION 3.9. AUTHENTICATION AND DELIVERY OF NOTES.
Forthwith upon the execution and delivery of this Indenture, or from
time to time thereafter, the Notes may be executed by the Company and delivered
to the Trustee for authentication, and shall thereupon be authenticated and
delivered by the Trustee upon Company Order, without any further action by the
Company.
SECTION 3.10. PAYING AGENT TO HOLD MONEY IN TRUST.
The Company shall require the Paying Agent to hold in trust for the
benefit of Holders all money held by such Paying Agent for the payment of
principal of, premium, if any, or interest on the Notes (whether such money
shall have been paid to it by the Company or any Guarantor), and to notify the
Trustee of any Default by the Company or any Guarantor in making any such
payment. While any such Default continues, the Trustee may require the Paying
Agent to pay all money held by it to the Trustee. Except as provided in the
immediately preceding sentence, the Company at any time may require a Paying
Agent to pay all money held by it to the Trustee and to account for any funds
disbursed. Upon such payment over to the Trustee and accounting for any funds
disbursed, such Paying Agent (if other than the Company, the Guarantor or a
Subsidiary) shall have no further liability for the money. If the Company, the
Guarantor or a Subsidiary acts as Paying Agent, it shall segregate and hold as
separate trust funds for the benefit of the Holders all money held by it as
Paying Agent.
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SECTION 3.11 PAYMENT OF INTEREST; INTEREST RIGHTS PRESERVED.
Interest on any Note which is payable, and is punctually paid or duly
provided for, on any Interest Payment Date shall be paid to the Person in whose
name that Note (or one or more Predecessor Notes) is registered at the close of
business on the Record Date for such interest specified in Article 3.
Any interest on any Note which is payable, but is not punctually paid
or duly provided for, on any Interest Payment Date (herein called "Defaulted
Interest") shall forthwith cease to be payable to the registered Holder on the
relevant Record Date by virtue of having been such Holder; and such Defaulted
Interest may be paid by the Company, at its election in each case, as provided
in Clause (1) or Clause (2) below:
(1) The Company may elect to make payment of any Defaulted
Interest to the Persons in whose names the Notes (or their respective
Predecessor Notes) are registered at the close of business on a Special
Record Date for the payment of such Defaulted Interest, which shall be
fixed in the following manner. The Company shall notify the Trustee in
writing of the amount of Defaulted Interest proposed to be paid on each
Note and the date of the proposed payment (which date shall not be
earlier then thirty (30) days after the date of deposit of funds for
such payment), and at the same time the Company shall deposit with the
Trustee an amount of money equal to the aggregate amount proposed to be
paid in respect of such Note for such deposit prior to the date of the
proposed payment, such money when deposited to be held in trust for the
benefit of the Persons entitled to such Defaulted Interest as in this
Clause provided. Thereupon the Trustee shall fix a Special Record Date
for the payment of such Defaulted Interest which shall be not more than
fifteen (15) nor less than five (5) Business Days prior to the date of
the proposed payment and not less than ten (10) days after the receipt
by the Trustee of the notice of the proposed payment. The Trustee shall
promptly notify the Company of such Special Record Date and, in the
name and at the expense of the Company, shall cause notice of the
proposed payment of such Defaulted Interest and the Special Record Date
therefor to be mailed, first-class postage prepaid, to each Holder at
his address as it appears in the Note Register, not less than ten (10)
Business Days prior to such Special Record Date. The Trustee may, in
its discretion, in the name and at the expense of the Company, cause a
similar notice to be published at least once in a newspaper of general
circulation in the City of Phoenix, but such publication shall not be a
condition precedent to the establishment of such Special Record Date.
Notice of the proposed payment of such Defaulted Interest and the
Special Record Date therefor having been mailed as aforesaid, such
Defaulted Interest shall be paid to the Persons in whose names the
Notes (or their respective Predecessor Notes) are registered on such
Special Record Date and shall no longer be payable pursuant to the
following Clause (2).
(2) The Company may make payment of any Defaulted Interest in
any other lawful manner not inconsistent with the requirements of any
securities exchange on which the Notes may be listed, and upon such
notice as may be required by such exchange, if, after notice given by
the Company to the Trustee of the proposed payment pursuant to this
Clause, such payments shall be deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section, each Note
delivered under this Indenture upon transfer of or in exchange for or in lieu of
any other Note shall carry the rights to interest accrued and unpaid, and to
accrue, which were carried by such other Note.
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ARTICLE 4
DISCHARGE OF INDENTURE
SECTION 4.1. TERMINATION OF COMPANY'S OBLIGATIONS.
(a) This Indenture shall cease to be of further effect (subject to
Section 4.5) when all outstanding Notes theretofore authenticated and issued
hereunder have been delivered (other than any Notes which shall have been
destroyed, lost or stolen and which shall have been replaced or paid as provided
in Section 3.6) to the Trustee for cancellation and the Company or the Guarantor
has paid all sums payable hereunder and under the Notes.
(b) In addition to the provisions of Section 4.1(a) at the Company's
option, the Company and any Guarantor shall be deemed to have been discharged
from its obligations with respect to the Notes and the provisions of this
Indenture (subject to Section 4.5) on the 91st day after the applicable
conditions set forth below have been satisfied, except as to (i) rights of
registration, transfer, substitution and exchange of Notes and the Company's
right of optional redemption, (ii) rights of Holders to receive payments of
principal of, premium, if any, and interest on the Notes, and (iii) the rights,
obligations and immunities of the Trustee under the Indenture:
(1) the Company or any Guarantor shall have deposited or
caused to be deposited irrevocably with the Trustee in trust,
specifically pledged as security for, and dedicated solely to, the
benefit of the Holders (i) U.S. Legal Tender or (ii) U.S. Government
Obligations, which through the payment of interest and principal in
respect thereof in accordance with their terms will provide (without
any reinvestment of such interest or principal), not later than one day
before the due date of any payment, U.S. Legal Tender or (iii) a
combination of (i) and (ii), in an amount sufficient, after payment of
all federal, state and local taxes or the charges or assessments in
respect thereto payable by the Trustee in the opinion (with respect to
(ii) and (iii)) of a nationally recognized firm of independent public
accountants expressed in a written certification thereof delivered to
the Trustee at or prior to the time of such deposit, to pay and
discharge each installment of principal of, premium, if any, and
interest on the outstanding Notes on the dates such installments are
due;
(2) the Company shall have delivered to the Trustee an
Officers' Certificate certifying as to whether the Notes are then
listed on a national securities exchange;
(3) if the Notes are then listed on a national securities
exchange, the Company shall have delivered to the Trustee an Officers'
Certificate to the effect that the Company's exercise of its option
under this Section would not cause the Notes to be delisted;
(4) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit which (A) is not cured by such
deposit, (B) shall occur as a result of such deposit, or (C) shall
occur on or before the 91st day after the date of such deposit and such
deposit will not result in a breach or violation of, or constitute a
default under, any other instrument to which the Company, any Guarantor
or any Subsidiary is a party or by which any of them is bound, as
evidenced to the Trustee in an Officers' Certificate delivered to the
Trustee concurrently with such deposit;
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(5) the Company shall have delivered to the Trustee an Opinion
of Counsel to the effect that Holders will not recognize income, gain
or loss for federal income tax purposes as a result of the Company's
exercise of its option under this Section and will be subject to
federal income tax on the same amount and in the same manner and at the
same time as would have been the case if such option had not been
exercised, and, in the case of the Notes being discharged, accompanied
by a ruling to that effect received from or published by the Internal
Revenue Service (it being understood that (A) such Opinion of Counsel
shall also state that such ruling is consistent with the conclusions
reached in such Opinion of Counsel and (B) the Trustee shall be under
no obligation to investigate the basis of correctness of such ruling);
(6) the Company shall have delivered to the Trustee an Opinion
of Counsel to the effect that the Company's exercise of its option
under this Section will not result in any of the Company, the Trustee
or the trust created by the Company's or any Guarantor's deposit of
funds hereunder becoming or being deemed to be an "investment company"
under the Investment Company Act of 1940, as amended;
(7) 90 days shall have passed (or any greater period of time
required by applicable bankruptcy or insolvency laws then in effect)
following the irrevocable deposit of trust funds pursuant to Section
4.l(b)(1) hereof, such that said funds will not be subject to any
bankruptcy or insolvency laws affecting creditors rights generally;
(8) the deposit of funds or securities as provided In Section
4.1(b)(1) hereof shall constitute the grant of a first priority
security interest in such funds or securities by the Company or any
Guarantor to the Trustee for and on behalf of the Holders, and the
possession thereof by Trustee shall perfect such first priority
security interest;
(9) the Company or any Guarantor shall have paid or duly
provided for payment of all amounts then due to the Trustee pursuant to
Section 6.6; and
(10) the Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that all
conditions precedent provided for in this Section relating to the
satisfaction and discharge of this Indenture have been complied with.
SECTION 4.2. APPLICATION OF TRUST MONEY.
The Trustee shall hold in trust money or U.S. Government Obligations
deposited with it pursuant to Section 4.1. It shall apply the deposited money
and the money from U.S. Government Obligations through the Paying Agent and in
accordance with the provisions of the Notes and this Indenture to the payment of
principal of, premium, if any, and interest on the Notes as and when due.
SECTION 4.3. REPAYMENT TO COMPANY.
The Trustee and the Paying Agent shall promptly pay to the Company, or
any Guarantor, as the case may be, upon the written request of the Company,
accompanied by a certificate of independent accountants, acceptable to the
Trustee, indicating the amount of the excess of any money or securities held by
them at any time in excess of amounts required to pay principal of or interest
on the Notes and to pay the expenses of the Trustee as set forth in Section 6.6.
The Trustee and the Paying Agent shall pay to the Company or any Guarantor, as
the case may be, upon request any money held by them for the payment of
principal or interest that remains unclaimed for two years after the payment was
due on
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the Notes; Provided, however, that the Trustee or Paying Agent before being
required to make any such repayment, may at the expense of the Company cause to
be published once in a newspaper of general circulation in the City of Phoenix
or mail to each such Holder notice that such money remains unclaimed and that,
after a date specified therein, which shall not be less than 30 days from the
date of such publication or mailing any unclaimed balance of such money then
remaining will be paid to the Company or any Guarantor, as the case may be.
After repayment to the Company or any Guarantor, as the case may be, any Holder
entitled to such money shall thereafter, as an unsecured general creditor, look
(unless an applicable abandoned property law designates another Person) only to
the Company or any Guarantor, as the case may be, for payment, and all liability
of the Trustee or such Paying Agent with respect to such trust money, and all
liability of the Company or any Guarantor, as the case may be, as trustee
thereof, shall thereupon cease.
SECTION 4.4. REINSTATEMENT.
If the Trustee or Paying Agent is unable to apply any money or U.S.
Government Obligations in accordance with Section 4.1 by reason of any legal
proceeding or by reason of any order or judgment of any court or governmental
authority enjoining, restraining or otherwise prohibiting such application, the
Company's and the Guarantor(s)' obligations under this Indenture and the Notes
shall be revived and reinstated as though no deposit had occurred pursuant to
Section 4.1 until such time as the Trustee or Paying Agent is permitted to apply
all such money or U.S. Government Obligations in accordance with Section 4.1;
provided, however, that if the Company or the Guarantor(s) has made any payment
of interest on or principal of any Notes because of the reinstatement of its
obligations, the Company or the Guarantor(s) shall be subrogated to the rights
of the Holders of such Notes to receive such payment from the money or U.S.
Government Obligations held by the Trustee or Paying Agent.
SECTION 4.5. SURVIVAL OF CERTAIN OBLIGATIONS.
Notwithstanding the satisfaction and discharge of this Indenture and of
the Notes referred to in Section 4.1(a) and (b), the respective obligations of
the Company, any Guarantor and the Trustee under Sections 3.3, 3.5, 3.6, 3.8,
3.10, 3.11, 4.2, 4.3, 4.4, 6.6, 10.4, 10.5 and 10.11 shall survive until the
Notes are no longer outstanding, and thereafter the obligations of the Company
and the Trustee under Sections 4.2, 4.3, 4.4 and 6.6 shall survive.
ARTICLE 5
REMEDIES
SECTION 5.1. EVENTS OF DEFAULT.
An "Event of Default" occurs upon:
(1) default by the Company or any Guarantor in the payment of principal
of, or premium, if any, on the Notes when due and payable at Maturity, upon
redemption, or upon repurchase pursuant to Section 10.11, 10.16 or 10.17
(whether or not such payment shall be prohibited by the provisions of
Articles 11 or 14), upon acceleration or otherwise;
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(2) default by the Company, the Guarantor or any Subsidiary Guarantor
in the payment of any installment of interest on the Notes when due and payable
and continuance of such default for thirty (30) days (whether or not such
payment shall be prohibited by the provisions of Articles 11 or 14);
(3) default on any other Indebtedness of the Company, the Guarantor or
any Subsidiary Guarantor if such default results in the acceleration of the
maturity of any such Indebtedness having a principal amount of $2,000,000 or
more individually or, taken together with the principal amount of any other such
Indebtedness in default or the maturity of which has been so accelerated, in the
aggregate;
(4) default in the performance, or breach, of any other covenant or
agreement of the Company, the Guarantor or any Subsidiary Guarantor in this
Indenture, the Notes or the Guarantee and failure to remedy such default within
a period of thirty (30) days after written notice thereof from the Trustee or
Holders of 25% in principal amount of the then outstanding Notes;
(5) the entry by a court of one or more judgments or orders against the
Company, the Guarantor or any Subsidiary of either of them in an aggregate
amount in excess of $1,000,000 (net of applicable insurance coverage by a third
party insurer which is acknowledged in writing by such insurer) that has not
been vacated, discharged, satisfied or stayed pending appeal within sixty (60)
days from the entry thereof;
(6) the Guarantee of the Guarantor shall cease to be in full force or
effect (other than a release of a Guarantee in accordance with Section 13.3) or
any Guarantor shall deny or disaffirm its obligation with respect thereto
(7) the Company, the Guarantor or any Subsidiary Guarantor pursuant to
or within the meaning of any bankruptcy law:
(A) commences a voluntary case or proceeding,
(B) consents to the entry of an order for relief against it in
an involuntary case or proceeding,
(C) consents to the appointment of a Custodian of it or for
all or substantially all of its property,
(D) makes a general assignment for the benefit of its
creditors, or
(E) admits in writing that it generally is unable to pay its
debts as the same become due; or
(8) a court of competent jurisdiction enters an order or decree under
any bankruptcy law that:
(A) is for relief (with respect to the petition commencing
such case) against the Company, the Guarantor or any Subsidiary Guarantor in an
involuntary case or proceeding,
(B) appoints a Custodian of the Company, the Guarantor or any
Subsidiary Guarantor for all or substantially all of its respective property, or
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(C) orders the liquidation of the Company, the Guarantor or
any Subsidiary Guarantor, and the order or decree remains unstayed and in effect
for 60 days.
The term "bankruptcy law" means Title 11, U.S. Code or any similar
federal or state law for the relief of debtors. The term "Custodian" means any
receiver, trustee, assignee, liquidator or similar official under any bankruptcy
law.
SECTION 5.2. INTEREST RATE UPON DEFAULT. If an Event of Default on the
Notes shall occur, the annual rate of interest shall increase to four percent
(4%) over the interest rate the Notes then bear, which amount shall accrue on
the indebtedness evidenced by the Notes from such date for such period of time
until the default is cured.
SECTION 5.3. ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT.
If an Event of Default occurs and is continuing, then and in every such
case the Trustee or the Holders of not less than twenty-five (25%) percent in
principal amount of the Notes Outstanding may declare the unpaid principal,
premium, if any, and accrued and unpaid interest of all the Notes to be due and
payable immediately, by a notice in writing to the Company (and to the Trustee
if given by Holders), and upon any such declaration such principal, premium, if
any, and accrued and unpaid interest shall become immediately due and payable,
notwithstanding anything contained in this Indenture or the Notes or the
Guarantee to the contrary. If an Event of Default specified in Section 5.1(7) or
5.1(8) above occurs, all unpaid principal of, and accrued interest on, the Notes
then outstanding will become due and payable, without any declaration or other
act on the part of the Trustee or any Holder.
At any time after such a declaration of acceleration has been made and
before a judgment or decree for payment of the money due has been obtained by
the Trustee as hereinafter in this Article provided, the Holders of a majority
in principal amount of the Notes Outstanding, by written notice to the Company
and the Trustee, may rescind and annul such declaration and its consequences if
(1) the Company has paid or deposited with the Trustee a sum sufficient
to pay
(A) all overdue installments of interest on all Notes,
(B) the principal of (and premium, if any, on) any Notes which
have become due otherwise than by such declaration of acceleration and
interest thereon at the rate borne by the Notes,
(C) to the extent that payment of such interest is lawful,
interest upon overdue installments of interest at the rate borne by the
Notes, and
(D) all sums paid or advanced by the Trustee hereunder and the
reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel; and
(2) all Events of Default, other than the nonpayment of the principal
of Notes which have become due solely by such acceleration, have been cured or
waived as provided in Section 5.14.
No such rescission shall affect any subsequent default or impair any right
consequent thereon.
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SECTION 5.4. COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY
TRUSTEE.
The Company covenants that if
(1) default is made in the payment of any installment of interest on
any Note when such interest becomes due and payable and such default continues
for a period of thirty (30) days, or
(2) default is made on the payment of the principal of (or premium, if
any, on) any Note at the Maturity thereof, or upon repurchase pursuant to
Section 10.11, 10.16 or 10.17 (whether or not such payment shall be
prohibited by the provisions of Articles 11 or 14), upon acceleration or
otherwise, the Company will, upon demand of the Trustee, pay to it, for the
benefit of the Holders of such Notes, the whole amount then due and payable on
such Notes for principal (and premium, if any) and interest, with interest upon
the overdue principal (and premium, if any) and, to the extent that payment of
such interest shall be legally enforceable, upon overdue installments of
interest, at the rate borne by the Notes; and, in addition thereto, such further
amount as shall be sufficient to cover the costs and expenses of collection,
including the reasonable compensation, expenses, disbursements and advances of
the Trustee, its agents and counsel.
If the Company fails to pay such amounts forthwith upon such demand,
the Trustee, in its own name and as trustee of an express trust, may institute a
judicial proceeding for the collection of the sums so due and unpaid, and may
prosecute such proceeding to judgment or final decree, and may enforce the same
against the Company, the Guarantor, or any other obligor upon the Notes and
collect the moneys adjudged or decreed to be payable in the manner provided by
law out of the property of the Company, the Guarantor, or any other obligor upon
the Notes, wherever situated.
If an Event of Default occurs and is continuing, the Trustee may in its
discretion proceed to protect and enforce its rights and the rights of the
Holders by such appropriate judicial proceedings as the Trustee shall deem most
effectual to protect and enforce any such rights, whether for the specific
enforcement of any covenant or agreement in this Indenture or in aid of the
exercise of any power granted herein, or to enforce any other proper remedy.
Section 5.5. Trustee May File Proofs of Claim.
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to the Company, the Guarantor, or any other obligor
upon the Notes or the property of the Company, the Guarantor, or of such other
obligor or their creditors, the Trustee (irrespective of whether the principal
of the Notes shall then be due and payable as therein expressed or by
declaration or otherwise and irrespective of whether the Trustee shall have made
any demand on the Company for the payment of overdue principal or interest)
shall be entitled and empowered, by intervention in such proceeding or
otherwise,
(i) to file and prove a claim for the amount of principal (and
premium, if any) and interest owing and unpaid in respect of the Notes
and to file such other papers or documents as may be necessary or
advisable in order to have the claims of the Trustee (including any
claim for the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel) and of the Holders
allowed in such judicial proceeding, and
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(ii) to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute the same;
and any receiver, assignee, trustee, liquidator, sequestrator (or other similar
official) in any such judicial proceeding is hereby authorized by each Holder to
make such payments to the Trustee, and in the event that the Trustee shall
consent to the making of such payments directly to the Holders, to pay to the
Trustee any amount due to it for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, and any other
amounts due the Trustee under Section 6.6.
The Trustee shall not be required to join the Holders as necessary parties
to any such judicial proceeding; provided, however, that nothing herein
contained shall be deemed to authorize the Trustee to authorize and consent to
or accept, or adopt on behalf of any Holder any plan of reorganization,
arrangement, adjustment or composition affecting the Notes or the rights of any
Holder thereof, or to authorize the Trustee to vote in respect of the claim of
any Holder in any such proceeding.
SECTION 5.6. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF NOTES.
All rights of action and claims under this Indenture, the Notes or the
Guarantee may be prosecuted and enforced by the Trustee without the possession
of any of the Notes or the Guarantee or the production thereof in any proceeding
relating thereto, and any such proceeding instituted by the Trustee shall be
brought in its own name as trustee of an express trust, and any recovery of
judgment shall, after provision for the payment of the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel, be
for the ratable benefit of the Holders of the Notes in respect of which such
judgment has been recovered.
SECTION 5.7. APPLICATION OF MONEY COLLECTED.
Any money collected by the Trustee pursuant to this Article shall be
applied in the following order, at the date or dates fixed by the Trustee and,
in case of the distribution of such money on account of principal (or premium,
if any) or interest, upon presentation of the Notes and the notation thereon of
the payment if only partially paid and upon surrender thereof if fully paid;
FIRST: To the payment of all amounts due the Trustee under Section 6.6;
SECOND: To the payment of the amounts then due and unpaid upon the Notes
for principal (and premium, if any) and interest, in respect of which or for the
benefit of which such money has been collected, ratably, without preference or
priority of any kind, according to the amounts due and payable on such Notes,
for principal (and premium, if any) and interest; and
THIRD: To the Company.
SECTION 5.8. LIMITATION ON SUITS.
No Holder of any Note shall have any right to institute any proceeding,
judicial or otherwise, with respect to this Indenture, or for the appointment of
a receiver or trustee, or for any other remedy hereunder, unless
(1) such Holder has previously given written notice to the Trustee of a
continuing Event of Default;
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Trustee or to Holders may be exercised from time to time and as often as may be
deemed expedient by the Trustee or by the Holders, as the case may be.
SECTION 5.13. CONTROL BY HOLDERS.
The Holders of a majority in principal amount of the Outstanding Notes
shall have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee, provided that
(1) such direction shall not be in conflict with any rule of law or with
this Indenture; and
(2) the Trustee may take any other action deemed proper by the Trustee
which is not inconsistent with such direction.
SECTION 5.14. WAIVER OF PAST DEFAULTS.
The Holders of not less than a majority in principal amount of the
Outstanding Notes may on behalf of the Holders of all the Notes waive any past
default hereunder and its consequences, except a default
(1) in the payment of the principal of (or premium, if any) or interest on
any Note, or
(2) in respect of a covenant or provision hereof which under Article 9
cannot be modified or amended without the consent of the Holder of each
Outstanding Note affected.
Upon any such waiver, such default shall cease to exist, and any Event of
Default arising therefrom shall be deemed to have been cured, for every purpose
of this Indenture; but no such waiver shall extend to any subsequent or other
default or impair any right consequent thereon.
SECTION 5.15. UNDERTAKING FOR COSTS.
All parties to this Indenture agree, and each Holder of any Note by his
acceptance thereof shall be deemed to have agreed, that any court may in its
discretion require, in any suit for the enforcement of any right or remedy under
this Indenture, or in any suit against the Trustee for any action taken or
omitted by it as Trustee, the filing by any party litigant in such suit of an
undertaking to pay the costs of such suit, and that such court may in its
discretion assess reasonable costs, including reasonable attorneys' fees,
against any party litigant in such suit, having due regard to the merits and
good faith of the claims or defenses made by such party litigant; but the
provisions of this Section shall not apply to any suit instituted by the Trustee
or any Holder for the enforcement of the payment of the principal of (or
premium, if any) or interest on any Note on or after the Stated Maturity
expressed in such Note or any other suit instituted by the Trustee for the
enforcement of any rights or remedy under this Indenture, or any suit by Holders
of more than 10% in principal amount of the then Outstanding Notes.
SECTION 5.16. WAIVER OF STAY OR EXTENSION LAWS.
The Company and the Guarantor each covenant (to the extent that it or they
may lawfully do so) that it or they will not at any time insist upon, or plead,
or in any manner whatsoever claim or take the benefit or advantage of, any stay
or extension law wherever enacted, now or at any time hereafter in force, which
may affect the covenants or the performance of this Indenture; and the Company
and the
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Guarantor each (to the extent that it or they may lawfully do so) hereby
expressly waive all benefit or advantage of any such law, and covenants that it
or they will not hinder, delay or impede the execution of any power herein
granted to the Trustee, but will suffer and permit the execution of every such
power as though no such law had been enacted.
ARTICLE 6
THE TRUSTEE
SECTION 6.1. DUTIES OF TRUSTEE.
(a) If an Event of Default has occurred and is continuing, the Trustee
shall exercise such rights and powers vested in it by this Indenture and use the
same degree of care and skill in such exercise as a prudent person would
exercise or use under the circumstances in the conduct of such person's own
affairs.
(b) Except during the continuance of an Event of Default:
(1) The Trustee need perform only those duties that are specifically
set forth (or incorporated by reference) in this Indenture and no others.
(2) In the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness
of the opinions expressed therein, upon certificates or opinions furnished
to the Trustee and conforming to the requirements of this Indenture.
However, in the case of any such certificates or opinions which by any
provision hereof are specifically required to be furnished to the Trustee,
the Trustee shall be under a duty to examine such certificates and
opinions to determine whether or not they conform to the requirements of
this Indenture.
(c) The Trustee may not be relieved from liability for its own negligent
action, its own negligent failure to act, or its own willful misconduct, except
that:
(1) This paragraph (c) does not limit the effect of paragraph (b) of
this Section.
(2) The Trustee shall not be liable for any error of judgment made
in good faith by an authorized representative of the Trustee, unless it is
proved that the Trustee was negligent in ascertaining the pertinent facts.
(3) The Trustee shall not be liable with respect to action it takes
or omits to take in good faith in accordance with a direction received by
it pursuant to Section 5.13, and the Trustee shall be entitled from time
to time to request such a direction.
(d) Every provision of this Indenture that in any way relates to the
Trustee is subject to this Section.
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(e) No provision of this Indenture shall require the Trustee to expend or
risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder, or in the exercise of any of its
rights and powers, unless it shall have reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk or liability is
reasonably assured to it.
(f) The Trustee shall not be liable for interest on any money received by
it except as the Trustee may agree in writing with the Company. Money held in
trust by the Trustee need not be segregated from other funds except to the
extent required by law.
SECTION 6.2. RIGHTS OF TRUSTEE.
Subject to Section 6. 1:
(a) The Trustee may rely on and shall be protected in acting or refraining
from acting upon any document believed by it to be genuine and to have been
signed or presented by the proper person. The Trustee shall not be bound to make
any investigation into the facts or matters stated in any resolution,
certificate, statement, instrument, opinion, report, notice, request, direction,
consent, order, bond, debenture or other paper or document, but the Trustee, in
its discretion, may make such further inquiry or investigation into such facts
or matters as it determines to be necessary, and, if the Trustee shall determine
to make such further inquiry or investigation, it shall be entitled to examine
the books, records and premises of the Company, personally or by agent or
attorney, to the extent reasonably required by such inquiry or investigation.
(b) Before the Trustee acts or refrains from acting, it may require an
Officers' Certificate or an Opinion of Counsel. The Trustee shall not be liable
for any action it takes or omits to take in good faith in reliance on such
certificate or opinion if the certificate or opinion conforms to any applicable
requirements of this Indenture.
(c) The Trustee may act through agents and shall not be responsible for
the misconduct or negligence of any agent appointed with due care.
(d) The Trustee shall not be liable for any error of judgment made in good
faith by a Responsible Officer of the Trustee, unless it shall be proved that
the Trustee was negligent in ascertaining the pertinent facts.
(e) The Trustee shall not be charged with knowledge of an Event of Default
unless a Responsible Officer of the Trustee obtains written notice of such Event
of Default.
(f) The recitals contained herein and in the Notes, except the Trustee's
certificates of authentication, shall be taken as the statements of the Company
and the Guarantor, and the Trustee assumes no responsibility for the correctness
of the same. The Trustee makes no representation as to the validity or
sufficiency of this Indenture, the Guarantee or the Notes. The Trustee shall not
be accountable for the use or application by the Company of any of the Notes or
the proceeds thereof.
SECTION 6.3. INDIVIDUAL RIGHTS OF TRUSTEE.
The Trustee in its individual, or any other capacity, may become the owner
or pledgee of Notes and may otherwise deal with the Company or the Guarantor
with the same rights it would have if it were
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not Trustee. Any Note Registrar or Paying Agent may do the same with like
rights. However, the Trustee must comply with Section 6.9 and 6.10.
SECTION 6.4. TRUSTEE'S DISCLAIMER.
The Trustee makes no representation as to the validity or adequacy of this
Indenture or the Notes, it shall not be accountable for the Company's use of the
proceeds from the Notes, and it shall not be responsible for any statement in
the Notes other than its certificate of authentication.
SECTION 6.5. NOTICE OF DEFAULTS.
If a Default occurs and is continuing and if it is known to the Trustee,
the Trustee shall mail to each Holder pursuant to Section 1.6 a notice of the
Default within 90 days after it occurs, unless such default shall have been
cured or waived. Except in the case of a Default in any payment of principal or
interest on any Note, the Trustee may withhold the notice if and so long as the
board of directors, executive committee or a trust committee of its directors
and/or Responsible Officers in good faith determines that withholding the notice
is in the interests of Holders.
SECTION 6.6. COMPENSATION AND INDEMNITY.
The Company and the Guarantor jointly and severally agree to pay the
Trustee from time to time reasonable compensation for its services (which
compensation shall not be limited by any provision of law in regard to the
compensation of a trustee of an express trust). The Company and the Guarantor
jointly and severally agree to reimburse the Trustee upon request for all
reasonable out-of-pocket expenses, disbursements and advances incurred by it,
except any such expense, disbursement or advance as may be attributable to its
negligence, bad faith or willful misconduct. Such expenses may include the
reasonable compensation and expenses of the Trustee's agents and counsel.
The Trustee shall not be under any obligation to institute any suit, or
take any remedial action under this Indenture, or to enter any appearance or in
any way defend any suit in which it may be a defendant, or to take any steps in
the execution of the trusts created hereby or thereby or in the enforcement of
any rights and powers under this Indenture, unless it shall be indemnified to
its satisfaction against any and all reasonable expenses, disbursements and
advances incurred or made by the Trustee in accordance with any provisions of
this Indenture, including compensation for services, costs, expenses, outlays,
counsel fees and other disbursements, and against all liability not due to its
negligence or willful misconduct. The Company and the Guarantor jointly and
severally agree to indemnify the Trustee for, from and against any loss or
liability incurred by the Trustee in connection with the acceptance and
administration of the trust and its duties hereunder as Trustee, Note Registrar
and/or Paying Agent, including the reasonable costs and expenses of defending
itself against any claim or liability in connection with the exercise or
performance of any of its powers or duties hereunder. The Trustee shall notify
the Company and the Guarantor of any claim for which it may seek indemnity;
however, unless the position of the Company is prejudiced by such failure, the
failure of the Trustee to promptly notify the Company shall not limit its right
to indemnification. The Company shall defend each such claim and the Trustee
shall cooperate in the defense. The Trustee may retain separate counsel, but the
Company shall only be required to reimburse the Trustee for the reasonable fees
and expenses of such counsel if (a) the Company has not assumed the defense of
such action; (b) a conflict of interest between the Company and the Trustee
exists; or (c) a court of competent jurisdiction orders such reimbursement. The
Company need not pay for any settlement made without its consent.
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Neither the Company nor the Guarantor shall be obligated to reimburse any
expense or indemnify against any loss or liability successfully alleged to have
been incurred by the Trustee through the Trustee's negligence, bad faith or
willful misconduct.
To secure the payment obligations of the Company and the Guarantor in this
Section, the Trustee shall have a claim prior to that of the Holders of the
Notes on all money or property held or collected by the Trustee, except that
held in trust pursuant to Article 4 of this Indenture to pay principal of and
interest on particular Notes.
When the Trustee incurs expenses or renders services after the occurrence
of any Event of Default specified in Sections 5.1(7) or (8), the expenses and
the compensation for the services are intended to constitute expenses of
administration with respect to any Insolvency or Liquidation Proceeding.
SECTION 6.7. REPLACEMENT OF TRUSTEE.
The Trustee may resign by so notifying the Company and the Guarantor in
writing. The Holders of a majority in principal amount of the Notes may remove
the Trustee by so notifying the Trustee, in writing. The Company may remove the
Trustee if:
(1) the Trustee fails to comply with Section 6.9;
(2) the Trustee is adjudged a bankrupt or an insolvent;
(3) a receiver or other public officer takes charge of the Trustee
or its property; or
(4) the Trustee becomes incapable of acting as Trustee hereunder.
If the Trustee resigns or is removed or if a vacancy exists in the office
of Trustee for any reason, the Company shall promptly appoint a successor
Trustee. Within one year after the successor Trustee takes office, the Holders
of a majority in principal amount of the Notes may appoint a successor Trustee
to replace the successor Trustee appointed by the Company.
A successor Trustee shall deliver a written acceptance of its appointment
to the retiring Trustee and to the Company and the Guarantor. Immediately after
that, the retiring Trustee shall transfer all property held by it as Trustee to
the successor Trustee, and subject to the rights of the retiring Trustee under
Section 6.6, the resignation or removal of the retiring Trustee shall become
effective, and the successor Trustee shall have all the rights, powers and
duties of the Trustee under this Indenture. A successor Trustee shall
mail notice of its succession to each Holder.
If a successor Trustee does not take office within 30 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Company or the
Holders of majority in principal amount of the Notes may petition any court of
competent jurisdiction for the appointment of a successor Trustee.
If the Trustee fails to comply with Section 6.9, any Holder may petition
any court of competent jurisdiction for the removal of the Trustee and the
appointment of a successor Trustee. Any successor Trustee shall comply with TIA
Section 310(a)(1), (2) and (5) and the requirements of Section 6.9 hereof.
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SECTION 6.8. SUCCESSOR TRUSTEE BY MERGER, ETC.
If the Trustee consolidates, merges or converts into, or transfers all or
substantially all of its corporate trust assets to, another corporation, the
successor corporation without any further act shall be the successor Trustee;
provided such corporation or association shall be otherwise eligible and
qualified under this Article.
SECTION 6.9. ELIGIBILITY; DISQUALIFICATION.
This Indenture shall always have a Trustee who satisfies the requirements
of TIA Section 310(a)(1). The Trustee shall always have a combined capital and
surplus of at least $100,000,000 as set forth in its most recent published
annual report of condition. The Trustee shall also comply with TIA Section
310(b).
SECTION 6.10. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY.
The Trustee shall comply with TIA Section 311 (a), excluding any creditor
relationship listed in TIA Section 311(b). A Trustee who has resigned or been
removed shall be subject to TIA Section 311(a) to the extent indicated therein.
ARTICLE 7
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
SECTION 7.1. COMPANY TO FURNISH TRUSTEE NAMES AND ADDRESSES OF HOLDERS.
The Company will furnish or cause to be furnished to the Trustee
semi-annually, not less than fifteen (15) days nor more than thirty (30) days
after each Interest Payment Date, and at such other times as the Trustee may
request in writing, within fifteen (15) days after receipt by the Company of any
such request, a list in such form as the Trustee may reasonably require
containing all the information in the possession or control of the Company, or
any of its Paying Agents other than the Trustee, as to the name and addresses of
the Holders, obtained since the date of which the next previous list, if any,
was furnished; provided, however, that no such list need be furnished so long as
the Trustee is the Note Registrar. Any such list may be dated as of a date not
more than 15 days prior to the time such information is furnished or caused to
be furnished and need not include information received after such date.
SECTION 7.2. PRESERVATION OF INFORMATION: COMMUNICATIONS TO HOLDERS
(a) The Trustee shall preserve, in as current a form as is reasonably
practicable, all information as to the names and addresses of Holders (A)
contained in the most recent list furnished to it as provided in Section 7.1,
and (B) received by it in the capacity of Paying Agent or Note Registrar (if so
acting) hereunder.
The Trustee may (i) destroy any list furnished to it as provided in
Section 7.1 upon receipt of a new list so furnished, (ii) destroy any
information received by it as Paying Agent or Note Registrar (if so acting)
hereunder upon delivering to itself as Trustee, not earlier than fifteen (15)
days after an Interest Payment Date of the Notes, a list containing the names
and addresses of the Holders obtained from such
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information since the delivery of the next previous list, if any, and (iii)
destroy any list delivered to itself as Trustee which was compiled from
information received by it as Paying Agent or Note Registrar (if so acting)
hereunder upon the receipt of a new list so delivered.
(b) If three (3) or more Holders (hereinafter referred to as "applicants")
apply in writing to the Trustee, and furnish to the Trustee reasonable proof
that each such applicant has owned a Note for a period of at least six (6)
months preceding the date of such application, and such application states that
the applicants desire to communicate with other Holders with respect to their
rights under this Indenture or under the Notes and is accompanied by a copy of
the form of proxy or other communication which such applicants propose to
transmit, then the Trustee shall, within five Business Days after the receipt of
such application, at its election, either
(i) afford such applicants access to the information preserved at
the time by the Trustee in accordance with Section 7.2(a), or
(ii) inform such applicants as to the approximate number of Holders
whose names and addresses appear in the information preserved at the time
by the Trustee in accordance with Section 7.2(a), and as to the
approximate cost of mailing to such Holders the form of proxy or other
communication, if any, specified in such application.
If the Trustee shall elect not to afford such applicants access to such
information, the Trustee shall, upon the written request of such applicants,
mail to each Holder whose name and address appear in the information preserved
at the time by the Trustee in accordance with Section 7.2(a), a copy of the form
of proxy or other communication which is specified in such request, with
reasonable promptness after a tender to the Trustee of the material to be mailed
and of payment, or provision for the payment, of the reasonable expenses of
mailing, unless within five days after such tender, the Trustee shall mail to
such applicants and file with the Commission, together with a copy of the
material to be mailed, a written statement to the effect that, in the opinion of
the Trustee, such mailing would be contrary to the best interests of the Holders
or would be in violation of applicable law. Such written statement shall specify
the basis of such opinion. If the Commission, after opportunity for a hearing
upon the objections specified in the written statement so filed, shall enter an
order refusing to sustain any of such objections or if, after the entry of an
order sustaining one or more of such objections, the Commission shall find,
after notice and opportunity for hearing, that all the objections so sustained
have been met and shall enter an order so declaring, the Trustee shall mail
copies of such material to all such Holders with reasonable promptness after the
entry of such order and the renewal of such tender; otherwise the Trustee shall
be relived of any obligation or duty to such applicants respecting their
application.
(c) Each and every Holder of the Notes, by receiving and holding the same,
agrees with the Company and the Trustee that neither the Company nor the Trustee
nor any Paying Agent nor any Note Registrar shall be held accountable by reason
of the disclosure of any such information as to the names and addresses of the
Holders in accordance with Section 7.2(b).
SECTION 7.3. REPORTS BY TRUSTEE.
Within sixty (60) days after each September 15, beginning with September
15, 1994, the Trustee shall mail to each Holder a brief report dated as of such
September 15 that complies with TIA Section 313(a), but only if such report is
required in any year under TIA Section 313(a). The Trustee also shall comply
with TIA Section 313(b), Section 313(c) and Section 313(d). A copy of each
report at the time of its mailing to Holders shall be filed with the SEC and
each stock exchange on which the Notes are listed. The Company shall notify
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the Trustee in writing if the Notes become listed on any national securities
exchange or of any delisting thereof.
SECTION 7.4. REPORTS BY COMPANY.
The Company will
(1) file with the Trustee and the Placement Agent, within fifteen (15)
days after the Company is required to file the same with the Commission, copies
of the annual reports and of the information, documents, and other reports (or
copies of such portions of any of the foregoing as the Commission may from time
to time by rules and regulations prescribe) which the Company may be required to
file with the Commission pursuant to Section 13 or Section 15(d) of the Exchange
Act; or, if the Company is not required to file information, documents or
reports pursuant to either of said Sections, then it will file with the
Trustee, the Commission and the Placement Agent in accordance with rules and
regulations prescribed from time to time by the Commission, such of the
supplementary and periodic information, documents and reports which may be
required pursuant to Section 13 of the Exchange Act in respect of a security
listed and registered on a National Securities Exchange or the National
Association of Securities Dealers Automated Quotations System as may be
prescribed from time to time in such rules and regulations;
(2) file with the Trustee, the Commission and the Placement Agent, in
accordance with rules and regulations prescribed from time to time by the
Commission, such additional information, documents and reports with respect to
compliance by the Company with the conditions and covenants of this Indenture as
may be required from time to time by such rules and regulations; and
(3) transmit to the Holders (with a copy to the Placement Agent), within
thirty (30) days after the filing thereof with the Trustee, in the manner and to
the extent provided in Section 7.2(c), copies of its annual report and quarterly
reports on Form 10-Q and such summaries of any information, documents and
reports required to be filed by the Company pursuant to paragraphs (1) and (2)
of this Section as may be required by rules and regulations prescribed from time
to time by the Commission.
ARTICLE 8
CONSOLIDATION, MERGER, CONVEYANCE OR TRANSFER
SECTION 8.1. COMPANY AND GUARANTOR MAY CONSOLIDATE, ETC., ONLY ON CERTAIN
TERMS.
The Company and/or Guarantor shall not consolidate with or merge into any
other corporation or convey or transfer or lease its or their properties and
assets substantially as an entirety to any Person, unless:
(1) the corporation formed by such consolidation or into which the Company
and/or Guarantor is merged or the Person which acquires by conveyance, transfer
or lease the properties or assets of the Company and/or Guarantor substantially
as an entirety shall be a corporation organized and existing under the laws of
the United States of America or any State or the District of Columbia, and
shall, by an indenture supplemental hereto, executed and delivered to the
Trustee, in form satisfactory to the Trustee, expressly assume the due and
punctual payment of the principal of (and premium, if any)
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and interest on all Notes and the performance of every covenant of this
Indenture on the part of the Company and/or Guarantor to be performed or
observed;
(2) immediately before and after giving effect to such transaction, no
Event of Default, and no event which, after notice or lapse of time, or both,
would become an Event of Default, shall have happened and be continuing;
(3) immediately after giving effect to such transaction on a pro forma
basis, the Consolidated Tangible Net Worth of the Company and/or Guarantor (or
the surviving or transferee entity) is equal to or greater than the Consolidated
Tangible Net Worth of the Company and/or Guarantor immediately before such
transaction;
(4) immediately after giving effect to such transaction on a pro forma
basis, the Company (or the surviving or transferee entity) would be able to
incur $1.00 of additional Indebtedness under the test described in Section 10.9,
provided, however, that the provisions of this clause (4) shall not apply to a
merger of the Company and/or Guarantor with and into a Wholly-Owned Subsidiary
thereof, and
(5) the Company and/or Guarantor delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel each stating that such consolidation,
merger, conveyance or transfer and such supplemental indenture comply with this
Article and such supplemental indenture is binding and enforceable against the
surviving or transferee entity and that all conditions precedent herein provided
for relating to such transaction have been complied with.
SECTION 8.2. SUCCESSOR CORPORATION SUBSTITUTED.
Upon any consolidation or merger, or any conveyance, transfer or lease of
the properties and assets of the Company and/or the Guarantor substantially as
an entirety in accordance with Section 8.1, the successor corporation formed by
such consolidation or into which the Company and/or the Guarantor is merged or
into which such conveyance, transfer or lease is made shall succeed to, and be
substituted for, and may exercise every right and power of, the Company and/or
the Guarantor under this Indenture with the same effect as if such successor
corporation had been named as the Company or the Guarantor, as the case may be,
herein and thereafter (except in the case of a lease) the predecessor
corporation will be relieved of all further obligations and covenants under this
Indenture and the Notes.
SECTION 8.3. NOTES TO BE SECURED IN CERTAIN EVENTS.
If, upon any such consolidation of the Company and/or Guarantor with or
merger of the Company and/or Guarantor with or into any other corporation, or
upon any conveyance, lease or transfer of the property of the Company and/or
Guarantor substantially as an entirety to any other Person, any property or
assets of the Company and/or Guarantor would thereupon become subject to any
Lien of Subordinated Indebtedness of the Company, or the Guarantor, then unless
such Lien could be created pursuant to Section 10.12 without equally and
ratably securing the Notes, the Company and/or Guarantor, prior to or
simultaneously with such consolidation, merger, conveyance, lease or transfer,
will as to such property or assets, secure the Notes Outstanding (together with,
if the Company and/or Guarantor shall so determine, any other Indebtedness of
the Company and/or Guarantor or any Subsidiary now existing or hereinafter
created which is not subordinate in right of payment to the Notes) prior to the
Indebtedness which upon such consolidation, merger, conveyance, lease or
transfer is to become secured as to such property or assets by such Lien, or
will cause such Notes to be so secured.
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ARTICLE 9
SUPPLEMENTAL INDENTURES
SECTION 9.1. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF HOLDERS.
Without the consent of any Holders, the Company, when authorized by a
Board Resolution, the Trustee, and the Guarantor, any time and from time to
time, may enter into one or more indentures supplemental hereto, in form
satisfactory to the Trustee, for any of the following purposes:
(1) to evidence the succession of another corporation to the Company, and
the assumption by any such successor of the covenants of the Company herein and
in the Notes contained; or
(2) to add to the covenants of the Company, for the benefit of the
Holders, or to surrender any right or power herein conferred upon the Company;
or
(3) to cure any ambiguity, to correct or supplement any provision herein
which may be inconsistent with any other provision herein, or to make any other
provisions with respect to matters or questions arising under this Indenture
which shall not be inconsistent with the provisions of this Indenture, provided
such action shall not adversely affect the interest of the Holders; or
(4) to add to the conditions, limitations, and restrictions on the
authorized amount, terms, or purposes of issue, authentication, and delivery of
Notes, as herein set forth, additional conditions, limitations, and restrictions
thereafter to be observed, provided such action shall not adversely affect the
interest of the Holders; or
(5) to reflect the addition or release of any Subsidiary Guarantor, as
provided for by this Indenture; or
(6) to modify, eliminate, or add to the provisions of this Indenture to
such extent as shall be necessary to effect the qualifications of this Indenture
under the TIA, or under any similar federal statute hereafter enacted, and to
add to this Indenture such other provisions as may be expressly permitted by the
TIA, excluding, however, the provisions referred to in Section 316(a)(2) of the
Trust Indenture Act or any corresponding provision in any similar federal
statute hereafter enacted.
SECTION 9.2. SUPPLEMENTAL INDENTURES WITH CONSENT OF HOLDERS.
With the consent of Holders of not less than a majority in principal
amount of the Outstanding Notes by Act of said Holders delivered to the Company
and the Trustee, the Company, when authorized by a Board Resolution, the Trustee
and the Guarantor may enter into an indenture or indentures supplemental hereto
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of this Indenture or of modifying in any
manner the rights of the Holders under this Indenture; provided, however, that
no such supplemental indenture shall, without the consent of the Holder of each
Outstanding Note affected thereby:
(1) change the Maturity Date of the principal of, or any installment of
interest on, any Note, or reduce the principal amount thereof or the interest
thereon or any premium payable upon the redemption thereof, or change any place
of payment where, or the coin or currency in which, any Note
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or the interest thereon is payable, or impair the right to institute suit for
the enforcement of any such payment on or after the Maturity Date, or, in the
case of redemption, on or after the date of the redemption;
(2) reduce the percentage in principal amount of the Outstanding Notes,
the consent of whose Holders is required for any such supplemental Indenture, or
the consent of whose Holders is required for any waiver (of compliance with
certain provisions of this Indenture or certain defaults hereunder or their
consequences) provided for in this Indenture;
(3) modify any of the provisions of this Section or Section 5.14 except
to increase any such percentage or to provide that certain other provisions of
this Indenture cannot be modified or waived without the consent of the Holder of
each Note affected thereby;
(4) subordinate the Indebtedness evidenced by the Notes to any
Indebtedness of the Company other than Senior Indebtedness, as provided in
Article II, or
(5) reduce the redemption price, including premium, if any, payable upon
the repurchase of any Note pursuant to Section 10.11, 10.16 or 10.17 or change
the time at which any Note may or shall be repurchased thereunder.
After an amendment under this Section 9.2 becomes effective, the Company
shall mail to the Holders affected thereby a notice briefly describing the
amendment or supplement. Any failure of the Company to mail such notice, or
defect therein, shall not, however, impair or effect the validity of any such
amendment or supplement.
SECTION 9.3. EXECUTION OF SUPPLEMENTAL INDENTURES.
In executing, or accepting the additional trusts created by, any
supplemental indenture permitted by this Article or the modifications thereby of
the trusts created by this Indenture the Trustee shall be entitled to receive,
and (subject to Section 6.1) shall be fully protected in relying upon, an
Opinion of Counsel stating that the execution of such supplemental indenture is
authorized or permitted by this Indenture. The Trustee may, but shall not be
obligated to, enter into any such supplemental indenture which affects the
Trustee's own rights, duties or immunities under this Indenture or otherwise.
SECTION 9.4. EFFECT OF SUPPLEMENTAL INDENTURES.
Upon the execution of any supplemental indenture under this Article, this
Indenture shall be modified in accordance therewith, and such supplemental
indenture shall form a part of this Indenture for all purposes; and every Holder
of Notes theretofore or thereafter authenticated and delivered hereunder shall
be bound thereby.
SECTION 9.5. CONFORMITY WITH TRUST INDENTURE ACT.
Every supplemental indenture executed pursuant to this Article shall
conform to the requirements of the TIA as then in effect.
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SECTION 9.6. REFERENCE IN NOTES TO SUPPLEMENTAL INDENTURES.
Notes authenticated and delivered after the execution of any supplemental
indenture pursuant to this Article may, and shall if required by the Trustee,
bear a notation in form approved by the Trustee as to any matter provided for in
such supplemental indenture. If the Company shall so determine, new Notes so
modified as to conform, in the opinion of the Trustee and the Board of
Directors, to any such supplemental indenture may be prepared and executed by
the Company and authenticated and delivered by the Trustee in exchange for
Outstanding Notes.
ARTICLE 10
Covenants
SECTION 10.1. PAYMENT OF NOTES.
The Company shall pay the principal of, premium, if any, and interest on,
the Notes on the dates and in the manner provided in the Notes and this
Indenture. Principal, premium and interest shall be considered paid on the date
due if the Trustee or Paying Agent holds on that date money deposited by the
Company designated for and sufficient to pay all principal, premium and interest
then due.
The Company shall pay interest (including post-petition interest in any
proceeding under any bankruptcy law) on overdue principal, and premium, if any,
at the rate borne by the Notes to the extent lawful; and it shall pay interest
(including post-petition interest in any proceeding under any bankruptcy law) on
overdue installments of interest (without regard to any applicable grace period)
at the same rate to the extent lawful.
SECTION 10.2. COMMISSION REPORTS.
(a) The Company shall file with the Trustee and with the Placement Agent
within fifteen (15) days after it files the same with the Commission, copies of
the annual reports and the information, documents and other reports (or copies
of any such portions of any of the foregoing as the Commission may by rules and
regulations prescribe) that the Company is required to file with the Commission
pursuant to Section 13 or 15(d) of the Exchange Act. If the Company is not
subject to the requirements of such Section 13 or 15(d), the Company shall file
with the Trustee and with the Placement Agent within 15 days after it would have
been required to file the same with the Commission, financial statements,
including any notes thereto (and with respect to annual reports, an auditors'
report by a firm of established national reputation), and a "Management's
Discussion and Analysis of Financial Condition and Results of Operations," both
comparable to that which the Company would have been required to include in such
annual reports, information, documents or other reports if the Company had been
subject to the requirements of such Section 13 or 15(d). The Company, the
Guarantor (to the extent its financial statements are not consolidated with
those of the Company) and each Subsidiary Guarantor shall also comply with the
provisions of TIA Section 314(a).
(b) If the Company is required to furnish annual or quarterly reports to
its stockholders pursuant to the Exchange Act, the Company shall cause any
annual report furnished to its stockholders generally and any quarterly or other
financial reports furnished by it to its stockholders generally to be filed with
the Trustee and mailed to the Holders at their addresses appearing in the
register of Notes
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maintained by the Note Registrar and to the Placement Agent at their addresses
set forth herein. If the Company is not required to furnish annual or quarterly
reports to its stockholders pursuant to the Exchange Act, the Company shall
cause its financial statements referred to in Section 10.3(b), including any
notes thereto (and with respect to annual reports, an auditors' report by a firm
of established national reputation), and a "Management's Discussion and Analysis
of Financial Condition and Results of Operations" to be so mailed to the Holders
and to the Placement Agent at their addresses set forth herein within ninety
(90) days after the end of each of the Company's fiscal years and within sixty
(60) days after the end of each of the Company's first three fiscal quarters.
(c) The Company shall provide the Trustee and the Placement Agent with a
sufficient number of copies of all reports and other documents and information
that the Company or the Trustee may be required to deliver to Holders under this
Section.
SECTION 10.3. COMPLIANCE CERTIFICATES.
(a) The Company and the Guarantor shall deliver to the Trustee, within
ninety (90) days after the end of each fiscal year of the Company, an Officers'
Certificate stating that a review of the activities of the Company, the
Guarantor and their Subsidiaries during the preceding fiscal year has been made
under the supervision of the signing Officers with a view to determining whether
the Company and the Guarantor have kept, observed, performed and fulfilled their
respective obligations under this Indenture, and further stating, as to each
such Officer signing such certificate, that, to the best of such Officer's
knowledge, the Company and the Guarantor and each Subsidiary Guarantor have
kept, observed, performed and fulfilled each and every covenant contained in
this Indenture and are not in default in the performance or observance of any of
the terms, provisions and conditions hereof (or, if a Default or Event of
Default shall have occurred, describing all such Defaults or Events of Default
of which such Officer may have knowledge and what action the Company and the
Guarantor are taking or propose to take with respect thereto) and that, to the
best of such Officer's knowledge, no event has occurred and remains in existence
by reason of which payments on account of the principal of, premium, if any, or
interest, if any, on the Notes are prohibited or, if such event has occurred, a
description of the event and what action the Company and the Guarantor and each
Subsidiary Guarantor are taking or propose to take with respect thereto. Such
Officers' Certificate shall comply with TIA Section 314(a)(4). Such Officer's
Certificate may state the foregoing on behalf of the Company, the Guarantor and
each Subsidiary Guarantor, provided such Officers' Certificate is signed by the
respective officers of the Company and the Guarantor.
(b) So long as not contrary to the then current recommendations of the
American Institute of Certified Public Accountants, the year-end financial
statements delivered pursuant to Section 10.2 shall be accompanied by a written
statement of the Company's independent public accountants (which shall be a firm
of established national reputation) that in making the examination necessary for
certification of such financial statements nothing has come to their attention
that would lead them to believe that the Company or the Guarantor has violated
any provisions of Articles 8 or 10 of this Indenture (to the extent such
provisions relate to accounting matters) or, if any such violation has
occurred, specifying the nature and period of existence thereof, it being
understood that such accountants shall not be liable directly or indirectly to
any Person for any failure to obtain knowledge of any such violation.
(c) The Company and the Guarantor will, so long as any of the Notes are
Outstanding, deliver to the Trustee within five (5) days of any Officer becoming
aware of any Default or Event of Default or Default in the performance of any
covenant, agreement or condition contained in this
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Indenture, an Officer's Certificate specifying such Default or Event of Default
and what action the Company and/or the Guarantor or any Subsidiary Guarantor
proposes to take with respect thereto.
SECTION 10.4. MAINTENANCE OF OFFICE OR AGENCY.
The Company and the Guarantor will maintain in Phoenix, Arizona, an office
or agency where Notes may be surrendered for registration of transfer or
exchange or for presentation for payment and where notices and demands to or
upon the Company or the Guarantor in respect of the Notes and this Indenture may
be served. The Company and the Guarantor will give prompt written notice to the
Trustee of the location, and any change in the location, of such office or
agency. If at any time the Company or the Guarantor shall fail to maintain any
required office or agency or shall fail to furnish the Trustee with the address
thereof, such surrenders, presentations, notices and demands may be made or
served at the Corporate Trust Office of the Trustee.
The Company may also from time to time designate one or more other offices
or agencies where the Notes may be presented or surrendered for any or all such
purposes and may from time to time rescind such designations; provided, that no
such designation or rescission shall in any manner relieve the Company of its
obligation to maintain an office or agency in Phoenix, Arizona, for such
purposes. The Company will give prompt written notice to the Trustee of any such
designation or rescission and of any change in the location of any such other
office or agency.
SECTION 10.5. CORPORATE EXISTENCE.
The Company and the Guarantor will do or cause to be done all things
necessary to preserve and keep in full force and effect their respective
corporate existence and the corporate, partnership or other existence of each
Subsidiary thereof and all rights (charter and statutory) and franchises of the
Company and/or the Guarantor and the Subsidiaries thereof, provided, that the
Company shall not be required to preserve the corporate existence of any
Subsidiary which is not a material Subsidiary Guarantor, or any such right or
franchise, if the Board of Directors of the Company shall determine that the
preservation thereof is no longer desirable in the conduct of the business of
the Company and that the loss thereof is not disadvantageous in any material
respect to the Holders.
SECTION 10.6. WAIVER OF STAY, EXTENSION OR USURY LAWS.
The Company, the Guarantor and each material Subsidiary Guarantor
covenants (to the extent that it may lawfully do so) that it will not at any
time insist upon, plead, or in any manner whatsoever claim or take the benefit
or advantage of, any stay, extension, or usury law or other law, which would
prohibit or forgive the Company or any material Subsidiary Guarantor and the
Guarantor from paying all or any portion of the principal of, premium, if any,
or interest on the Notes as contemplated herein, wherever enacted, now or at any
time hereafter in force, or which may affect the covenants or the performance of
this Indenture; and (to the extent that it may lawfully do so) the Company and
each material Subsidiary Guarantor and the Guarantor hereby expressly waives all
benefit or advantage of any such law, and covenants that it will not hinder,
delay or impede the execution of any power herein granted to the Trustee, but
will suffer and permit the execution of every such power as though no such law
had been enacted.
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SECTION 10.7. PAYMENT OF TAXES AND OTHER CLAIMS.
The Company and the Guarantor shall pay or discharge or cause to be paid
or discharged, before the same shall become delinquent, (a) all taxes,
assessments and governmental charges levied or imposed upon the Company or the
Guarantor, as the case may be, or any Subsidiary thereof or upon the income,
profits or property of the Company or the Guarantor, as the case may be, or any
Subsidiary and (b) all lawful claims for labor, materials and supplies which, if
unpaid, might by law become a Lien upon the property of the Company or the
Guarantor, as the case may be, or any Subsidiary thereof; provided, however,
that the Company and the Guarantor shall not be required to pay or discharge or
cause to be paid or discharged any such tax, assessment, charge or claim whose
amount, applicability or validity is being contested in good faith by
appropriate proceedings.
SECTION 10.8. MAINTENANCE OF PROPERTIES AND INSURANCE; LINE OF BUSINESS.
(a) The Company and the Guarantor shall cause all properties used or held
for use in the conduct of their respective businesses or the business of any
Subsidiary thereof to be maintained and kept in good condition, repair and
working order (ordinary wear and tear excepted) and supplied with all necessary
equipment and shall cause to be made all necessary repairs, renewals,
replacements, betterments and improvements thereof, all as in the judgment of
the Company or the Guarantor, as the case may be, may be necessary so that the
business carried on in connection therewith may be properly and advantageously
conducted at all times; provided, however, that nothing in this Section shall
prevent the Company or the Guarantor from discontinuing the operation or
maintenance of any such property, or disposing of it, if such discontinuance or
disposal is, in the reasonable judgment of the Company and/or the Guarantor, as
the case may be, desirable in the conduct of their respective businesses and not
disadvantageous in any material respect to the Holders.
(b) The Company and the Guarantor shall each provide or cause to be
provided, for itself and each of its respective Subsidiaries, insurance
(including appropriate self-insurance) against loss or damage of the kinds that,
in the reasonable, good faith opinion of the Company and/or the Guarantor are
adequate and appropriate for the conduct of the respective businesses of the
Company and the Guarantor and such Subsidiaries in a prudent manner, with
reputable insurers or with the government of the United States or an agency or
instrumentality thereof, in such amounts, with such deductibles, and by such
methods as shall be customary, in the reasonable good faith opinion of the
Company and/or the Guarantor, for corporations similarly situated in the
industry.
(c) For as long as any Notes are outstanding, the Company shall not, and
shall not permit any of its Subsidiaries to, engage in any business or activity
other than the Principal Business.
SECTION 10.9. LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS.
(a) The Company and the Guarantor will not, and will not permit any of
their respective Subsidiaries, directly or indirectly, to issue, incur, assume,
guarantee, become liable, contingently or otherwise, with respect to or
otherwise become responsible for the payment of (collectively, "incur")
additional Indebtedness after the issuance of the Notes and the date of this
Indenture; provided, however, that if no Default or Event of Default with
respect to the Notes shall have occurred and be continuing at the time or as a
consequence at the incurrence of such Indebtedness, the Company, the Guarantor
or their Subsidiaries may incur Indebtedness if, on a pro forma basis, after
giving effect to such incurrence and the application of the proceeds therefrom,
(i) the Consolidated Coverage Ratio would have been equal to or greater than 2
to 1 and (ii) the Indebtedness to Consolidated Net Worth ratio with respect to
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Indebtedness incurred is not greater than 9.0 to I on or prior to September 30,
1995, not greater than 6.75 to 1 on or prior to September 30, 1996, not greater
than 4.5 to 1 on or prior to September 30, 1997 and not greater than 3.0 to 1 on
or prior to September 30, 1998 with respect to Indebtedness incurred thereafter.
(b) Notwithstanding the foregoing, (i) the Guarantor may incur the
Guarantee of the Notes; (ii) the Company may incur Permitted Company Refinancing
Indebtedness; (iii) any Subsidiary may incur Permitted Subsidiary Refinancing
Indebtedness; (iv) the Company may incur Indebtedness to any Wholly-Owned
Subsidiary, and any Subsidiary may incur Indebtedness solely to the Company or
to any Wholly-Owned Subsidiary of the Company, and (v) the Company and the
Guarantor may incur additional Indebtedness pursuant to their secured lines of
credit to satisfy obligations to vendors and subcontractors for construction
work in progress performed by the Company and Guarantor during the term of this
Indenture and to purchase lots pursuant to purchase agreements or options with
respect to which the Company has received nonrefundable deposits. Such
construction work in progress shall include homes and land improvements in
process and future construction of homes pursuant to purchase contracts with
non-refundable deposits.
(c) Any Indebtedness of a Person existing at the time such Person becomes
a Subsidiary (whether by merger, consolidation, acquisition or otherwise) shall
be deemed to be incurred by such Subsidiary at the time it becomes a Subsidiary.
SECTION 10.10. LIMITATION ON RESTRICTED PAYMENTS.
(a) The Company and the Guarantor will not, and will not permit any of
their respective Subsidiaries to, directly or indirectly, make any Restricted
Payment, unless:
(i) no Default or Event of Default shall have occurred (or an event
that through the passage of time or the giving of notice, or both, would
become an Event of Default) and be continuing at the time of or
immediately after giving effect to such Restricted Payment;
(ii) at the time of and immediately after giving effect to such
Restricted Payment, the Company would be able to incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to
Section 10.9(a); and
(iii) immediately after giving effect to such Restricted Payment,
the aggregate of all Restricted Payments declared or made after the Issue
Date does not exceed the sum of (A) 50% of the Consolidated Net Income of
the Company and the Guarantor and their respective Subsidiaries (or in the
event such Consolidated Net Income shall be a deficit, minus 100% of such
deficit) during the period (treated as one accounting period) subsequent
to December 31, 1993 and ending on the last day of the fiscal quarter
immediately preceding the date of such Restricted Payment; (B) the
aggregate Net Cash Proceeds, and the fair market value of the property
other than cash (as determined in good faith by the Company's and/or the
Guarantor's Board of Directors, as the case may be, and evidenced by a
resolution of such Board), received by the Company or the Guarantor during
such period from any person other than a Subsidiary of the Company or the
Guarantor as a result of the issuance or sale of Capital Stock of the
Company or the Guarantor, as the case may be, (other than any Disqualified
Stock), other than in connection with the conversion of Indebtedness or
Disqualified Stock; plus (C) the
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aggregate Net Cash Proceeds, and the fair market value of property other
than cash (as determined in good faith by the Company's or the Guarantor's
Board of Directors and evidenced by a resolution of such Board), received
by the Company or the Guarantor during such period from any person other
than a Subsidiary of the Company or the Guarantor as a result of the
issuance or sale of any Indebtedness or Disqualified Stock to the extent
that at the time the determination is made such Indebtedness or
Disqualified Stock, as the case may be, has been converted into or
exchanged for Capital Stock of the Company or the Guarantor (other than
Disqualified Stock).
(b) Notwithstanding the foregoing, and provided that no Default or Event
of Default has occurred (or an event that through the passage of time or the
giving of notice, or both, would become an Event of Default) and is continuing
at the time, or shall occur as a result, of any of the actions contemplated in
clause (i) above, the above limitations will not prevent (i) the payment of any
dividend within sixty (60) days after the date of declaration thereof, if at
such date of declaration such payment complied with the provisions hereof; (ii)
the purchase, redemption, acquisition or retirement of any shares of Capital
Stock of the Company or the Guarantor in exchange for, or out of the net
proceeds of the substantially concurrent sale of, other shares of Capital Stock
(other than Disqualified Stock) of the Company or the Guarantor; (iii) the
defeasance, redemption or retirement of Indebtedness of the Company which is
pari passu or subordinate in right of payment to the Notes, in exchange for, by
conversion into, or out of the net proceeds of the substantially concurrent
issue or sale of Capital Stock (other than Disqualified Stock) of the Company or
the Guarantor; or (iv) distributions by the Company or the Guarantor to their
respective shareholders which, subsequent to the Issue Date, do not exceed:
(A) an amount equal to the sum, for all federal income taxable years of
the Company and the Guarantor ending subsequent to the Issue Date and during
which the Company and the Guarantor are qualified as "S" corporations under
Subchapter S of the Internal Revenue of 1986, as amended (the "Code"), of the
greater of (x) the sum of (I) the product of (i) all items of income, less all
items of deduction allocable to the Company's and the Guarantor's shareholders
for federal income tax purposes for each such year as a result of the Company's
and the Guarantor's S Corporation status, multiplied by (ii) the highest
individual federal income tax rate for each taxable year, minus (II) all items
of credit allocable to the Company's and the Guarantor's shareholders for
federal income tax purposes for each year, and (y) the amount determined under
clause 10.10(a)(iii)(A) hereof for federal alternative minimum tax purposes
("Permitted Federal Tax Distributions");
(B) an amount equal to the sum, for all state and local income taxable
years of the Company ending subsequent to the Issue Date of the greater of, for
each such year (x) the sum of (I) the product of (i) all items of income, less
all items of deduction allocable to the Company's shareholders for state and
local income tax purposes for each such taxable year under the provisions of the
relevant local revenue and taxation code (the "Local Code"), consistent with
Subchapter S of the Code or any comparable term under the Local Code, multiplied
by the highest individual income tax rate under the Local Code, minus (II) all
items of credit allocable to the Company's and the Guarantor's shareholders for
Local Code purposes for each taxable year and (y) the amount determined under
clause 10.10(a)(iii)(A) hereof for alternative minimum tax purposes under the
Local Code (together with Permitted Federal Tax Distributions, "Permitted Tax
Distributions"); and
(C) an amount equal to the balance of the Company's and the Guarantor's
accumulated adjustments account (as defined in the Code) as of the date the
Company or the Guarantor makes an initial public offering, if it should do so;
provided that such amount does not exceed the net proceeds
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from any such initial public offering and is made within one month prior to or
after such initial public offering.
No distributions shall be made pursuant to subparagraphs (A), (B) or (C)
of clause (iv) above (1) unless and until the Company and/or the Guarantor has
entered into a binding agreement with each shareholder requiring each
shareholder to refund to the Company and/or the Guarantor any amount distributed
thereby under clause (iv) that is later found to be in excess of the amount
permitted to the distributed thereunder and (2) if such a refund is in fact
required, that all refunds required actually have been received by the Company.
Not later than the date of making any Restricted Payment, the Company
and/or the Guarantor, as the case may be, shall deliver to the Trustee an
Officers' Certificate stating that such Restricted Payment is permitted and
setting forth the basis upon which the calculations required by the covenants
contained in this Section 10.10 were computed, which calculations may be based
upon the Company's and/or the Guarantor's latest available financial statements.
SECTION 10.11. LIMITATION ON SALE OF ASSETS.
(a) The Company and the Guarantor will not, and will not permit any
respective Subsidiary thereof to, make any Asset Sales unless:
(i) the Company or the Guarantor (or their Subsidiaries, as the case
may be) receives consideration at the time of such sale or other
disposition at least equal to the fair market value thereof (as determined
in good faith by the Company's or the Guarantor's Board of Directors, as
the case may be, and evidenced by a resolution of such Board in the case
of any Asset Sales or series of related Asset Sales); and
(ii) the Net Available Proceeds received by the Company or the
Guarantor (or their respective Subsidiaries, as the case may be) from such
Asset Sale are applied in accordance with paragraph (b) or (c) hereof.
(b) The Company may, within three hundred sixty (360) days following the
receipt of Net Available Proceeds from any Asset Sale, apply such Net Available
Proceeds to: (i) the repayment of Indebtedness of the Company under the Bank
Credit Facility or other Senior Indebtedness of the Company, or Senior
Indebtedness of the Guarantor, provided that any such repayment shall result in
a permanent reduction in any revolving credit or other commitment relating
thereto equal to the principal amount so repaid; or (ii) make an investment in
capital assets used in the Principal Business.
(c) If, upon completion of the 360-day period, any portion of the Net
Available Proceeds of any Asset Sale shall not have been applied by the Company
as described in clauses 10.11(a)(i) or (ii) and such remaining Net Available
Proceeds, together with any remaining net cash proceeds from any prior Asset
Sale (such aggregate constituting "Excess Proceeds"), exceeds $1,000,000, then
the Company will be obligated to make an offer (the "Net Proceeds Offer") to
purchase Notes having an aggregate principal amount equal to the Excess Proceeds
(such purchase to be made on a pro rata basis if the amount available for such
repurchase is less than the principal amount of the Notes tendered in such Net
Proceeds Offer) at a purchase price of 100% of the principal amount thereof plus
accrued interest, if any, to the date of repurchase (the "Net Proceeds Payment
Date"). Upon the completion of Net Proceeds Offer, the amount of Excess Proceeds
will be reset to zero.
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(d) Notice of a Net Proceeds Offer to purchase the Notes will be made on
behalf of the Company not less than twenty-five (25) Business Days nor more than
sixty (60) Business Days before the Net Proceeds Payment Date. Notes tendered to
the Company pursuant to a Net Proceeds Offer will cease to accrue interest after
the Net Proceeds Payment Date. For purposes of this covenant, the term "Net
Proceeds Offer Amount" means the principal of Outstanding Notes in an aggregate
principal amount equal to any remaining Net Available Proceeds (rounded to the
next lowest $1,000). If the Net Proceeds Payment Date is on or after an interest
payment Record Date and on or before the related Interest Payment Date, any
accrued interest will be paid to the person in whose name a Note is registered
at the close of business on such Record Date, and no additional interest will be
payable to Holders who tender Notes pursuant to the Net Proceeds Offer, except
to the extent that less than the entire principal amount tendered thereby is
purchased by the Company. Any such Net Proceeds Offer shall comply with all
applicable provisions of federal and state laws regulating such offers,
including, but not limited to, Section 14(e) of the Exchange Act and Rule 14e-1
thereunder, and any provision of this Indenture which conflicts with such laws
shall be deemed to be suspended by the provisions of such laws.
(e) On the Net Proceeds Payment Date, the Company will (i) accept for
payment Notes or portions thereof pursuant to the Net Proceeds Offer in an
aggregate principal amount equal to the Net Proceeds Offer Amount or such lesser
amount of Notes as has been tendered, (ii) deposit with the Paying Agent money
sufficient to pay the purchase price of all Notes or portions thereof so
tendered in an aggregate principal amount equal to the Net Proceeds Offer Amount
or such lesser amount of Notes as has been tendered and (iii) deliver, or cause
to be delivered to the Trustee, the Notes so accepted together with an Officers'
Certificate identifying the Notes or portions thereof tendered to and accepted
by the Company. If the aggregate principal amount of Notes tendered exceeds the
Net Proceeds Offer Amount, the Trustee will select the Notes to be purchased (in
integral multiples of $1,000) pro rata or by lot based on the principal amount
of Notes so tendered. The Paying Agent will promptly mail or deliver to Holders
so accepted payment in an amount equal to the purchase price, and the Company
will execute and the Trustee will promptly authenticate and mail or make
available for delivery to such Holders a new Note equal in principal amount to
any unpurchased portion of the Notes surrendered. Any Notes not so accepted will
be promptly mailed or delivered to the Holder thereof at the Company's expense.
For purposes of this Section, the Trustee will act as the Paying Agent.
(f) During the period between any Asset Sale and the application of the
Net Available Proceeds therefrom in accordance with this Section, all Net
Available Proceeds shall be maintained by the Company in a segregated account
and shall be invested in Permitted Financial Investments.
SECTION 10.12. LIMITATION ON LIENS SECURING INDEBTEDNESS.
The Company and the Guarantor will not, and will not permit any Subsidiary
thereof to, create, incur, assume or suffer to exist any Liens (other than
Permitted Liens) upon any of their respective properties securing (i) any
Indebtedness of the Company (other than Senior Indebtedness of the Company),
unless the Notes are equally and ratably secured or (ii) any Indebtedness of the
Guarantor (other than Senior Indebtedness of such Guarantor) unless the
Guarantee is equally and ratably secured; provided, however, that if such
Indebtedness is expressly subordinated to the Notes or the Guarantee, the Lien
securing such Indebtedness will be subordinated and junior to the Lien securing
the Notes or the Guarantee, with the same relative priority as such Subordinated
Indebtedness of the Company or the Guarantor will have with respect to the Notes
or the Guarantee, as the case may be, and provided further that the terms and
conditions of any Lien securing the Notes shall be acceptable to the Trustee.
The Trustee shall not be required to foreclose or realize on any Lien securing
the Notes if in the judgment
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of the Trustee, to do so would expose the Trustee to liability for which the
Trustee believes it would not be adequately indemnified.
SECTION 10.13. LIMITATION ON PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES.
The Company and the Guarantor shall not, and shall not permit any of their
respective Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any consensual encumbrance or restriction on
the ability of any Subsidiary to (i) pay dividends or make any other
distributions on its Capital Stock, or any other interest or participation in or
measured by its profits owned by the Company or the Guarantor or a Subsidiary
of the Company or the Guarantor, (ii) pay any Indebtedness owed to the Company
or the Guarantor or a Subsidiary of the Company or the Guarantor; (iii) make
loans or advances to the Company or the Guarantor or a Subsidiary of the Company
or the Guarantor, except for such loans or advances in the ordinary course of
business and to the Company and to the Guarantor; or (iv) transfer any of its
properties or assets to the Company or the Guarantor or a Subsidiary of the
Company or the Guarantor (each, a "Payment Restriction"), except for (A)
encumbrances or restrictions with respect to Senior Indebtedness in effect on
the Issue Date; (B) consensual encumbrances or consensual restrictions binding
upon any Person at the time such Person becomes a Subsidiary of the Company or
the Guarantor (unless the agreement creating such consensual encumbrance or
consensual restrictions was entered into in connection with, or in contemplation
of, such entity becoming a Subsidiary); (C) customary provisions restricting
subletting or assignment of any lease governing a leasehold interest of any
Subsidiary; (D) customary restrictions in security agreements or mortgages
securing Indebtedness of a Subsidiary to the extent such restrictions restrict
the transfer of the property subject to such security agreements and mortgages;
(E) customary restrictions in purchase money obligations for property acquired
in the ordinary course of business restricting the transfer of the property
acquired thereby; (F) consensual encumbrances or restrictions under any
agreement that refinances or replaces any agreement described in clauses (A),
(B), (C), (D) or (E) above, provided that the terms and conditions of any such
restrictions are no less favorable to the holders of the Notes than those under
the agreement so refinanced or replaced; and (G) customary non-assignment
provisions in leases, purchase money financings and any encumbrance or
restriction due to applicable law.
SECTION 10.14. LIMITATION ON TRANSACTIONS WITH AFFILIATES.
The Company and the Guarantor will not, and will not permit any of their
respective Subsidiaries to, directly or indirectly, (i) sell, lease, transfer or
otherwise dispose of any of its property, assets or securities to, (ii) purchase
or lease any property, assets or securities from, (iii) make any Investment in,
or (iv) enter into or amend any contract or agreement with or for the benefit
of, either (A) an Affiliate of any of them, (B) any Person or Persons who is a
member of a group (as such term is used for purposes of Sections 13(d) and 14(d)
of the Exchange Act, whether or not applicable) that, directly or indirectly, is
the beneficial holder or the Guarantor of 5% or more of any class of equity
securities of the Company, (C) any Person who is an Affiliate of any such
holder, or (D) any officers, directors, or employees of any of the above (each
case under (A), (B), (C) and (D), an "Affiliate Transaction"), unless such
Affiliate Transaction is pursuant to an employee incentive program customary in
the industry, is a transaction involving the sale or transfer of a completed
housing unit between the Company, the Guarantor and any of their respective
Subsidiaries or a joint venture partnership in which the Company, the Guarantor
or their respective Subsidiaries are a joint venture partner in a manner
consistent with customary business practice of homebuilders located in Arizona,
is "arm's length" or as a whole is on terms that are not less favorable to the
Company or the Guarantor, as the case may be, than those that could have been
obtained in a comparable transaction with a person that is not an Affiliate and
is approved by a majority of the Directors, and with respect to Affiliate
Transactions in one or a series of
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related transactions (to either party) in excess of $250,000 per Affiliate
Transaction, the Company will provide the Trustee with an Officers' Certificate
addressed and delivered to the Trustee stating that such Affiliate Transaction
has been approved by a majority of the Disinterested Directors and has been
approved by a majority of the Disinterested Directors and is made in good faith,
the terms of which are fair and reasonable to the Company or the Guarantor or
such Subsidiary, as the case may be, or, with respect to Affiliate Transactions
between the Company or the Guarantor and their respective Subsidiaries, to the
Company or the Guarantor and are at least as favorable as the terms which could
be obtained by the Company or such Subsidiary, as the case may be, or with
respect to Affiliate Transactions between the Company or the Guarantor and their
respective Subsidiaries by the Company or the Guarantor in a comparable
transaction made on an arm's length basis with Persons who are not affiliated
with the Company or the Guarantor or such Subsidiary and otherwise in compliance
with this Indenture; provided, that with respect to any Affiliate Transaction
with an aggregate value (to either party) in excess of $1,000,000, the Company
or the Guarantor, as the case may be, must, prior to the consummation thereof,
obtain a written favorable opinion as to the fairness of such transaction to
itself from a financial point of view from an independent investment banking
firm; provided, further, that the Company will not purchase or sell land from or
to an Affiliate except (a) as provided above, or (b) if the purchase or sale is
between MI and MHC at the same price originally paid by the selling party, or
(c) the sales price is based on fair market value supported by an independent
MAI appraisal.
SECTION 10.15. LIMITATION ON FUTURE SENIOR SUBORDINATED INDEBTEDNESS.
The Company and the Guarantor and their respective Subsidiaries shall not
incur any Indebtedness other than the Notes that is pari passu or subordinated
in right of payment to any other Indebtedness of the Company unless such
Indebtedness, by its terms, is subordinated to the Notes; provided, that if the
Indebtedness is for the purpose of refinancing the Notes, the Company and the
Guarantor and their respective Subsidiaries shall be permitted to incur
Indebtedness that is pari passu in right of payment to the Notes. The Guarantor
shall not incur any Indebtedness other than the Guarantee that is subordinated
in right of payment to any other Indebtedness of the Guarantor unless such
Indebtedness, by its terms, is pari passu or subordinated to the Guarantee.
Provided, however, that the Company and the Guarantor and their respective
Subsidiaries may issue up to $20,000,000 additional Indebtedness that ranks pari
passu with the Notes (provided that the Company and the Guarantor continues to
be in compliance with all covenants hereof and all applicable ratios referenced
herein upon such issuance applicable thereto) upon the occurrence of either of
the following events: (a) after completion of an initial public offering of the
Company of at least $5,000,000; or (b) on or after October 15, 1998, whichever
first occurs.
SECTION 10.16. CHANGE OF CONTROL.
(a) Within thirty (30) days following the occurrence of any Change of
Control, the Company shall offer (a "Change of Control Offer") to purchase all
outstanding Notes at a purchase price equal to 101% of the aggregate principal
amount of the Notes, plus accrued and unpaid interest to the date of purchase.
The Change of Control Offer shall be deemed to have commenced upon mailing of
the notice described in the next succeeding paragraph and shall terminate twenty
(20) Business Days after its commencement, unless a longer offering period is
then required by law. Promptly after the termination of the Change of Control
Offer (the "Change of Control Payment Date"), the Company shall purchase and
mail or deliver payment for all Notes tendered in response to the Change of
Control Offer. If the Change of Control Payment Date is on or after an interest
payment record date and on or before the related interest payment date, any
accrued interest will be paid to the Person in whose name a Note is registered
at the close of business on such record date, and no additional interest will be
payable to Holders who tender Notes pursuant to the Change of Control Offer.
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(b) Within thirty (30) days after any Change of Control, the Company (with
notice to the Trustee), or the Trustee at the Company's request, will mail or
cause to be mailed to all Holders on the date of the Change of Control a notice
(the "Change of Control Notice") of the occurrence of such Change of Control and
of the Holders' rights arising as a result thereof. The Change of Control Notice
will contain all instructions and materials necessary to enable Holders to
tender their Notes to the Company. The Change of Control Notice, which shall
govern the terms of the Change of Control Offer, shall state: (1) that the
Change of Control Offer is being made pursuant to this Section ; (2) the
purchase price and the Change of Control Payment Date; (3) that any Note not
tendered will continue to accrue interest; (4) that any Note accepted for
payment pursuant to the Change of Control Offer shall cease to accrue interest
on the Change of Control Payment Date; (5) that Holders electing to have a Note
purchased pursuant to any Change of Control Offer will be required to surrender
the Note, with the form entitled "Option of Holder to Elect Purchase" on the
reverse of the Note completed, to the Company, a depositary, if appointed by the
Company, or a Paying Agent at the address specified in the notice prior to
termination of the Change of Control Offer; (6) that Holders will be entitled to
withdraw their election if the Company, depositary or Paying Agent, as the case
may be, receives, not later than the expiration of the Change of Control Offer,
or such longer period as may be required by law, a telegram, telex, facsimile
transmission or letter setting forth the name of the Holder, the principal
amount of the Note the Holder delivered for purchase and a statement that such
Holder is withdrawing his election to have the Note purchased; and (7) that
Holders whose Notes are purchased only in part will be issued Notes equal in
principal amount to the unpurchased portion of the Notes surrendered.
(c) On the Change of Control Payment Date, the Company shall, and with
respect to clause (ii) below, the Company and/or the Guarantor shall, (i) accept
for payment Notes or portions thereof tendered pursuant to the Change of Control
Notice, (ii) if the Company appoints a depository or Paying Agent, deposit with
such depository or Paying Agent money sufficient to pay the purchase price of
all Notes or portions thereof so tendered and (iii) deliver to the Trustee the
Notes so accepted together with an Officers' Certificate identifying the Notes
or portions thereof tendered to and accepted by the Company. The depository, the
Company or the Paying Agent, as the case may be, shall promptly mail to the
Holder of Notes so accepted payment in an amount equal to the purchase price,
and the Trustee shall promptly authenticate and mail to such Holders a new Note
equal in principal amount to any unpurchased portion of the Note surrendered.
For purposes of this Section, the Trustee shall act as the Paying Agent.
(d) The Company, to the extent applicable and if required by law, will
comply with Section 14 of the Exchange Act and the provisions of Regulation 14E
and any other tender offer rules under the Exchange Act and any other federal
and state securities laws, rules and regulations which may then be applicable to
any offer by the Company to purchase the Notes at the option of the Holders upon
a Change of Control.
SECTION 10.17. MAINTENANCE OF CONSOLIDATED TANGIBLE NET WORTH
If the Company's and the Guarantor's Consolidated Tangible Net Worth at
the end of each of any two consecutive fiscal quarters (the last day of the
second such fiscal quarter being referred to as a "Deficiency Date") is less
than $1,500,000 (the "Minimum Consolidated Net Worth"), then the Company shall,
no later than sixty (60) days after a Deficiency Date (or one hundred twenty
(120) days if a Deficiency Date is also the end of the Company's fiscal year),
offer to purchase (a "Net Worth Offer") Notes in a principal amount equal to 10%
of the principal amount of Notes originally issued under this Indenture (or such
lesser amount as may be outstanding at the time the Net Worth Offer is made)
(the "Net Worth Offer Amount") at a purchase price equal to 100% of the
aggregate principal amount of such
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Notes, plus accrued and unpaid interest to the purchase date (the "Net Worth
Purchase Price"). The Net Worth Offer shall remain open for a period of twenty
(20) Business Days following its commencement and no longer, unless a longer
period is required by law (the "Net Worth Offer Period"). Three (3) business
days after the termination of the Net Worth Offer Period (the "Net Worth Payment
Date"), the Company shall purchase and the Paying Agent shall mail or deliver
payment for the Net Worth Offer Amount of Notes tendered, pro rated over such
tendered Notes to the nearest $1,000 principal amount, or, if less than the Net
Worth Offer Amount has been tendered, all Notes tendered in response to the Net
Worth Offer. In no event shall the Company's failure to meet the Minimum
Consolidated Tangible Net Worth at the end of any fiscal quarter require the
making of more than one Net Worth Offer. The principal amount of Notes to be
purchased pursuant to a Net Worth Offer may be reduced by the principal amount
of Notes acquired by the Company subsequent to the Deficiency Date and
surrendered to the Trustee for cancellation through purchase or redemption
(other than pursuant to a Change of Control Offer).
Notice of a Net Worth Offer shall be mailed by the Company to all Holders
at their last registered address upon the commencement of the Net Worth Offer.
The Net Worth Offer shall remain open from the time of mailing until three
Business Days before the Net Worth Payment Date. The notice shall contain all
instructions and material necessary to enable such Holders to tender Notes
pursuant to a Net Worth Offer. The notice, which (to the extent consistent with
this Indenture) shall govern the terms of a Net Worth Offer, shall state: (1)
that the Net Worth is being made pursuant to this Section 10.17; (2) the Net
Worth Offer Amount, the Net Worth Purchase Price (including the amount of
accrued and unpaid interest) and the Net Worth Payment Date; (3) that any Note
not tendered or accepted for payment and for which payment is made pursuant to
the Net Worth Purchase Offer shall cease to accrue interest on and after the Net
Worth Payment Date; (5) that Holders electing to have a Note purchased pursuant
to a Net Worth Purchase Offer will be required to surrender the Security, with
the form entitled "Option of Holder to Elect Purchase" on the reverse of the
Security completed, to the Paying Agent (which may not for purposes of this
Section 10.17, notwithstanding anything in this Indenture to the contrary, be
the Company or any Affiliate of the Company) at the address specified in the
notice on or before the Net Worth Purchase Date; (6) that Holders will be
entitled to withdraw their election if the Paying Agent receives, not later than
three Business Days prior to the Net Worth Purchase Date, a telegram, telex,
facsimile transmission or letter setting forth the name of the Holder, the
principal amount of the Notes the Holder delivered for purchase and a statement
that such Holder is withdrawing his election to have the Note purchased; (7)
that if Notes in a principal amount in excess of the Net Worth Offer Amount are
tendered pursuant to the Net Worth Purchase Offer, the Company shall purchase
Notes on a pro rata basis (with such adjustments as may be deemed appropriate by
the Company so that only Notes in denominations of $1,000 or integral multiples
of $1,000 shall be acquired); and (8) that Holders whose Notes were purchased
only in part will be issued new Notes of the same series equal in principal
amount to the unpurchased portion of the Notes surrendered.
Any such Net Worth Purchase Offer shall comply with all applicable
provisions of federal and state laws regulating such offers, including but not
limited to Section 14(e) of the Exchange Act and Rule 14e-1 thereunder, and any
provisions of this Indenture which conflict with such laws shall be deemed to be
superseded by the provisions of such laws.
No later than the Net Worth Payment Date, the Company (and/or the
Guarantor with respect to (ii)) shall (i) accept for payment Notes or portions
thereof tendered pursuant to the Net Worth Purchase Offer (on a pro rata basis
if required pursuant to clause (7) above), (ii) deposit with the Paying Agent
U.S. legal tender sufficient to pay the purchase price of all Notes or portions
thereof so accepted together with the Officers' Certificate stating the Notes or
portions thereof accepted for payment by the Company.
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The Company shall execute and Trustee shall promptly authenticate and mail or
deliver to such Holders a new Note equal in principal amount to any unpurchased
portion of the Note surrendered. Any Notes not so accepted shall be mailed
promptly or delivered by the Paying Agent to the Holder thereof. The Company
will notify the Holders of the results of the Net Worth Purchase Offer
promptly after the Net Worth Payment Date.
In addition to the foregoing provisions, in the event that the Company's
and the Guarantor's Consolidated Tangible Net Worth at the end of each of two
consecutive fiscal quarters is less than $2,000,000, the annual rate of interest
on the Notes shall be increased by one percent (1%) from the annual rate of
interest the Notes then bear, which adjusted rate of interest shall remain in
effect from the Deficiency Date until the end of the fiscal year in which the
Company's and the Guarantor's Consolidated Tangible Net Worth is equal to or
exceeds $2,000,000. In the event that the Company's and the Guarantor's
Consolidated Tangible Net Worth at the end of each of two consecutive fiscal
quarters is less than the Minimum Consolidated Net Worth, the annual rate of
interest on the Notes shall be increased by four percent (4%) from the annual
rate of interest the Notes then bear unless the annual interest rate has already
been and remains increased by one percent (1%) in accordance with the
immediately preceding sentence, in which case the annual rate of interest shall
be increased by three percent (3%) from the annual rate of interest the Notes
then bear, such adjusted rate of interest in either situation remaining in
effect from the Deficiency Date until the end of the fiscal year in which the
Company's and the Guarantor's Consolidated Tangible Net Worth exceeds the
Minimum Consolidated Net Worth.
SECTION 10.18 ELECTION OF OUTSIDE DIRECTORS.
No later than one hundred and eighty (180) days subsequent to the Issue
Date ("Election Period"), the Company and the Guarantor shall use their best
efforts to elect to each of their respective Boards of Directors two (2)
additional Persons who are not employees of the Company or the Guarantor, any
Subsidiaries of either the Company or the Guarantor or any Affiliate of the
Company, the Guarantor or any Subsidiary thereof ("Outside Directors"). Such
Outside Directors shall serve until the next annual meetings of the stockholders
of the Company and the Guarantor held subsequent to their election or until
their successors have been duly elected and qualified. In the event that the
Company and the Guarantor have not elected two Outside Directors at the
expiration of the Election Period set forth above, the annual interest rate on
the Notes shall be increased by one and one-half percent (1.5%) from the annual
rate of interest the Notes then bear, which adjusted rate of interest shall
remain in effect from the first day subsequent to the Election Period until the
date that both the Company and the Guarantor have elected two (2) Outside
Directors to their respective Boards of Directors; provided, however, in the
event that both the Company and the Guarantor have not elected two (2) Outside
Directors upon the expiration of thirty (30) days after the expiration of the
Election Period, the adjusted annual rate of interest on the Notes shall be
increased an additional one tenth of one percent (.1%), which adjusted annual
interest rate shall be further increased an additional one tenth of one percent
(.1%) for each additional thirty (30) days that both the Company and the
Guarantor have not elected two (2) Outside Directors to their respective Boards
of Directors.
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ARTICLE 11
Subordination of Notes
SECTION 11.1. NOTES SUBORDINATED TO SENIOR INDEBTEDNESS.
The Company, for itself and its successors, and each Holder, by its
acceptance of Notes, agrees that the payment of the principal of and interest on
the Notes is subordinated, to the extent and in the manner provided in this
Article, to the prior payment in full of all Senior Indebtedness of the Company
(hereinafter in this Article referred to as "Senior Indebtedness").
This Article shall constitute a continuing offer of all Persons who, in
reliance upon such provisions, become holders of, or continue to hold, Senior
Indebtedness, and such provisions are made for the benefit of the holders of
Senior Indebtedness, and such holders are made obligees hereunder and any one or
more of them may enforce such provisions.
SECTION 11.2. NO PAYMENT ON NOTES IN CERTAIN CIRCUMSTANCES.
Upon the Maturity of any Senior Indebtedness by lapse of time,
acceleration or otherwise, unless and until all principal thereof, premium, if
any, interest thereon and other amounts due thereon shall first be paid in full,
no payment shall be made by or on behalf of the Company with respect to the
principal of, premium, if any, or interest on the Notes.
Upon the maturity of any Senior Indebtedness of the Company by lapse of
time, acceleration or otherwise, unless and until all principal thereof,
premium, if any, and interest thereon and other amounts due thereon shall first
be paid in full, no payment shall be made by or on behalf of the Company with
respect to the principal of, premium, if any, or interest on the Notes. Upon the
happening of any default in the payment of any principal of or interest on or
other amounts due on any Senior Indebtedness of the Company ("Payment Default"),
then, unless and until such default shall have been cured or waived or have
ceased to exist, no payment shall be made by or on behalf of the Company with
respect to the principal of premium, if any, or interest on the Notes. Upon the
happening of any default or event of default (other than a Payment Default)
(including any event which with the giving of notice or the lapse of time or
both would become an event of default and including any default or event of
default which would result upon any payment with respect to the Notes) with
respect to any Senior Indebtedness of the Company, as such default or event of
default is defined therein or in the instrument or agreement or other document
under which it is outstanding, then upon written notice thereof given to the
Company and the Trustee which specifies the particular provision of the
Indenture by a holder or holders of any Senior Indebtedness of the Company or
their Representative ("Payment Notice") and for the period of 179 days following
the delivery of such Payment Notice ("Payment Blockage Period") unless and until
such event of default has been cured or waived or has ceased to exist or the
Trustee receives notice from the holder or holders of the relevant Senior
Indebtedness (or a representative) terminating the payment blockage period
during the Payment Blockage Period, then (i) no payment of or with respect to
the principal of or interest on the Notes (including any payment or distribution
that may be payable or deliverable to holders of the Notes by reason of the
payment of any other debt of the Company subordinated to the payment of the
Notes) shall be made directly or indirectly by or on behalf of the Company and
(ii) no direct or indirect payment shall be made by or on behalf of the Company
with respect to any repurchase, redemption or other retirement of any of the
Notes for cash or property or otherwise. At the expiration of such Payment
Blockage Period, the Company shall, subject to the existence of certain
conditions,
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promptly pay to the Trustee all sums due and not paid during such Payment
Blockage Period as a result thereof. Only one such Blockage Period may be
commenced within any 360 consecutive days. For purposes of such provision, no
event of default which existed or was continuing, on the date such Payment
Blockage Period commenced shall be or be made the basis for the commencement of
any subsequent Payment Blockage Period by the holder or holders of such Senior
Indebtedness (or a representative of such holder or holders) unless such event
of default is cured or waived or has ceased to exist for a period of not less
than 90 consecutive days.
In furtherance of the provisions of the first Section of this Article, in
the event that, notwithstanding the foregoing provisions of this Section, any
payment with respect to the principal of or interest on the Notes shall be made
by or on behalf of the Company, and received by the Trustee, by any Holder or by
any Paying Agent (or, if the Company is acting as its own Paying Agent, money
for any such payment shall be segregated and held in trust), at a time when such
payment was prohibited by the provisions of this Section, then, unless and
until such payment is no longer prohibited by this Section, such payment
(subject to the provisions of Sections 11.6 and 11.7) shall be received and held
in trust by the Trustee or such Holder or Paying Agent for the benefit of and
shall be immediately paid over to the holders of Senior Indebtedness or their
Representative, ratably according to the aggregate amounts remaining unpaid on
account of the principal of and interest on the Senior Indebtedness held or
represented by each, for application to the payment of all Senior Indebtedness
in accordance with its terms, after giving effect to any concurrent payment or
distribution to or for the benefit of the holders of Senior Indebtedness.
The provisions of this Section shall not modify or limit in any way the
application of the following Section.
The Company shall give prompt written notice to the Trustee of any default
in the payment of any Senior Indebtedness or any acceleration under any Senior
Indebtedness or under any agreement pursuant to which Senior Indebtedness may
have been issued. Without limiting the effect of Section 11.6 hereof, failure to
give such notice shall not affect the subordination of the Notes to the Senior
Indebtedness or the application of the other provisions provided in this
Article.
SECTION 11.3. NOTES SUBORDINATED TO PRIOR PAYMENT OF ALL SENIOR
INDEBTEDNESS ON DISSOLUTION, LIQUIDATION OR REORGANIZATION
OF THE COMPANY.
In the event of any Insolvency or Liquidation Proceeding with respect to
the Company, all amounts payable in respect of any Senior Indebtedness shall
first be paid in full before the Holders are entitled to receive any direct or
indirect payment or distribution of any cash, property or securities on account
of principal of or interest on the Notes or any other payment with respect to
the Notes.
The holders of Senior Indebtedness shall be entitled to receive directly,
for application to the payment of Senior Indebtedness (to the extent necessary
to pay in full all Senior Indebtedness, whether or not due, including
specifically, without limitation, all Post-Commencement Interest, whether or not
allowed as a claim in such Insolvency or Liquidation Proceeding, after giving
effect to any substantially concurrent payment or distribution to the holders of
Senior Indebtedness on account of Senior Indebtedness), any payment or
distribution of any kind or character, whether in cash, property or securities,
including any payment or distribution which may be payable or deliverable by
reason of the payment of any other Indebtedness of the Company being
subordinated to the payment of the Notes which may be payable or deliverable in
respect of the Notes in any such Insolvency or Liquidation Proceeding.
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In the event that, notwithstanding the foregoing provisions of this
Section, the Trustee or any Paying Agent or the Holder of any Note shall have
received any payment from or distribution of assets of the Company or the estate
created by the commencement of any such Insolvency or Liquidation Proceeding, of
any kind or character in respect of the Notes, whether in cash, property or
securities, including any payment or distribution which may be payable or
deliverable by reasons of the payment of any other Indebtedness of the Company
being subordinated to the payment of the Notes, before all Senior Indebtedness
(whether or not due including specifically, without limitation, all
Post-Commencement Interest, whether or not allowed as a claim in such Insolvency
or Liquidation Proceeding) is paid in full, then and in such event such payment
or distribution shall be received and held in trust by the Trustee, any such
Paying Agent or Holder for and shall be paid over to the holders of Senior
Indebtedness (to the extent necessary to pay in full all such Senior
Indebtedness, whether or not due, including specifically, without limitation,
all Post-Commencement Interest thereon, whether or not allowed as a claim in
such Insolvency or Liquidation Proceeding), after giving effect to any
substantially concurrent payment or distribution to the holders of Senior
Indebtedness on account of Senior Indebtedness, for application to the payment
in full of such Senior Indebtedness.
The Company shall give prompt written notice to the Trustee of any
Insolvency or Liquidation Proceeding with respect to it.
SECTION 11.4. HOLDERS TO BE SUBROGATED TO RIGHTS OF HOLDERS OF SENIOR
INDEBTEDNESS.
After all amounts payable under or in respect of Senior Indebtedness
(whether or not due) are paid in full, the Holders shall be subrogated (without
any duty on the part of the holders of Senior Indebtedness to warrant, create,
effectuate, preserve or protect such subrogation), to the extent of the payments
or distributions made to the holders of Senior Indebtedness pursuant to the
provisions of this Article (equally and ratably with the holders of all other
Indebtedness of the Company which by its express terms is subordinate and
subject in right of payment to Senior Indebtedness to substantially the same
extent as the Notes are so subordinate and subject in right of payment and which
is entitled to like rights and subrogation), to the rights of the holders of
Senior Indebtedness to receive payments and distributions of cash, property and
securities applicable to the Senior Indebtedness, until the principal of and
interest on the Notes shall be paid in full. For the purpose of such subrogation
no such payments or distributions to the holders of Senior Indebtedness by or on
behalf of the Company, or by or on behalf of the Holders by virtue of this
Article, which otherwise would have been made to the Holders shall, as between
the Company and the Holders, be deemed to be payment by the Company to or on
account of the Senior Indebtedness, it being understood that the provisions of
this Article are and are intended solely for the purpose of defining the
relative rights of the Holders, on the one hand, and the holders of Senior
Indebtedness, on the other hand.
SECTION 11.5. OBLIGATIONS OF THE COMPANY UNCONDITIONAL.
Nothing contained in this Article or elsewhere in this Indenture or in any
Note is intended to or shall impair, by and among the Company, the Guarantor and
any Subsidiary Guarantor and the Holders, the obligations of the Company and the
Guarantor and any Subsidiary Guarantor, which are absolute and unconditional, to
pay to the Holders the principal of and interest on the Notes as and when the
same shall become due and payable in accordance with their terms, or is intended
to or shall affect the relative rights of the Holders and creditors of the
Company, other than the holders of the Senior Indebtedness, nor shall anything
herein or therein prevent the Trustee or any Holder from exercising all remedies
otherwise permitted by applicable law upon default under this Indenture, subject
to the rights, if any, under this Article, of the holders of Senior Indebtedness
in respect of cash, property or securities of the Company
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received upon the exercise of any such remedy. Upon any distribution of assets
of the Company referred to in this Article, the Trustee, subject to the
provisions of Section 6.1, and the Holders shall be entitled to rely upon any
order or decree made by any court of competent jurisdiction in which such
Insolvency or Liquidation Proceeding is pending, or a certificate of the
liquidating trustee or agent or other Person making any distribution to the
Trustee or to the Holders for the purpose of ascertaining the Persons entitled
to participate in such distribution, the holders of the Senior Indebtedness and
other indebtedness of the Company, the amount thereof or payable thereon, the
amount or amounts paid or distributed thereon and all other facts pertinent
thereto or to this Article.
SECTION 11.6. TRUSTEE ENTITLED TO ASSUME PAYMENTS NOT PROHIBITED IN
ABSENCE OF NOTICE.
The Trustee or any Paying Agent (other than the Company) shall not at any
time be charged with knowledge of the existence of any facts which would
prohibit the making of any payment to or by the Trustee or such Paying Agent
unless and until the Trustee or any Paying Agent shall have received written
notice thereof from the Company or from one or more holders of Senior
Indebtedness or from any Representative therefor and, prior to the receipt of
any such written notice, the Trustee, subject to the provisions of Section 6.1,
shall be entitled in all respects conclusively to assume that no such fact
exists. Nothing in this Section is intended to or shall relieve any Holder from
the obligations imposed under Sections 11.2 and 11.3 with respect to money or
other distributions received in violation of the provisions thereof.
SECTION 11.7. APPLICATION BY TRUSTEE OF ASSETS DEPOSITED WITH IT.
All money and U.S. Government Obligations deposited in trust with the
Trustee pursuant to and in accordance with Section 4.1 shall be for the sole
benefit of the Holders and shall not be subject to this Article. Otherwise, any
deposit of assets by the Company with the Trustee or any Paying Agent (whether
or not in trust) for the payment of principal of or interest on any Notes shall
be subject to the provisions of this Article provided that, if prior to the
second Business Day preceding the date on which by the terms of this Indenture
any such assets may become distributable for any purpose (including without
limitation, the payment of either principal of or interest on any Note) the
Trustee or such Paying Agent shall not have received with respect to such assets
the written notice provided for in Section 11.6, then the Trustee or such Paying
Agent shall have full power and authority to receive such assets and to apply
the same to the purpose for which they were received, and shall not be affected
by any notice to the contrary which may be received by it on or after such date.
The preceding sentence shall be construed solely for the benefit of the Trustee
and each Paying Agent and shall not otherwise affect the rights of holders of
Senior Indebtedness.
SECTION 11.8. SUBORDINATION RIGHTS NOT IMPAIRED BY ACTS OR OMISSIONS OF
THE COMPANY OR HOLDERS OF SENIOR INDEBTEDNESS.
No right of any present or future holder of any Senior Indebtedness to
enforce the subordination provisions in this Article shall at any time in any
way be prejudiced or impaired by any act or failure to act on the part of the
Company or by any act or failure to act by any such holder, or by any
noncompliance by the Company with the terms of this Indenture, regardless of any
knowledge thereof which any such holder may have or be otherwise charged with.
The holders of Senior Indebtedness may extend, renew, modify or amend the terms
of the Senior Indebtedness or any security therefor and release, sell or
exchange such security and otherwise deal freely with the Company, all without
affecting the liabilities and obligations of the parties to this Indenture or
the Holders.
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SECTION 11.9. HOLDERS AUTHORIZE TRUSTEE TO EFFECTUATE SUBORDINATION OF
NOTES.
Each Holder of Notes by his acceptance thereof (i) authorizes and
expressly directs the Trustee on his behalf to take such action as may be
necessary or appropriate to effectuate the subordination provided in this
Article and to protect the rights of the Holders pursuant to this Indenture, and
(ii) appoints the Trustee his attorney-in-fact for such purpose, including in
the event of any Insolvency or Liquidation Proceeding with respect to the
Company, the timely filing of a claim for the unpaid balance of his Notes in the
form required in said proceeding and the causing of such claim to be approved.
If the Trustee shall not file a proper claim or proof of debt in the form
required in such proceeding prior to 30 days before the expiration of the time
to file such claim or claims, then the holders of the Senior Indebtedness or
their Representative shall have the right to file an appropriate claim for and
on behalf of the Holders. Nothing herein contained shall be deemed to authorize
the Trustee or any holder of Senior Indebtedness or their Representative to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Notes or
the rights of any Holder, or to authorize the Trustee or any holder of Senior
Indebtedness or their Representative to vote in respect of the claim of any
Holder in any such proceeding.
SECTION 11.10. RIGHT OF TRUSTEE TO HOLD SENIOR INDEBTEDNESS.
The Trustee shall be entitled to all of the rights set forth in this
Article in respect of any Senior Indebtedness at any time held by it to the same
extent as any other holder of Senior Indebtedness, and nothing in this Indenture
shall be construed to deprive the Trustee of any of its rights as such holder.
SECTION 11.11. ARTICLE 11 NOT TO PREVENT EVENTS OF DEFAULT.
The failure to make a payment of principal of or interest on the Notes by
reason of any provision of this Article shall not be construed as preventing the
occurrence of a Default or an Event of Default.
SECTION 11.12. PAYMENT.
A payment with respect to a Note or with respect to principal of or
interest on a Note shall include, without limitation, payment of principal of
(and premium, if any) and interest on any Note, any depositing of funds under
Article 4, any payment on account of any mandatory or optional repurchase or
redemption of any Note (including payments pursuant to Section 10.11, Section
10.16 or Section 10.17) and any payment or recovery on any claim (whether for
rescission or damages and whether based on contract, tort, duty imposed by law,
or any other theory of liability) relating to or arising out of the offer, sale
or purchase of any Note, provided that any such payment, deposit, other payment
or recovery (i) not prohibited pursuant to this Article at the time actually
made shall not be subject to any recovery by any holder of Senior Indebtedness
or Representative therefor or other Person pursuant to this Article at any time
thereafter and (ii) made by or from any person other than the Company shall not
be subject to any recovery by any holder of Senior Indebtedness or
Representative therefor or other Person pursuant to this Article at any time
thereafter except to the extent such Person recovers any such amount paid from
the Company, whether pursuant to rights of indemnity, rescission or otherwise.
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ARTICLE 12
Redemption of Notes
SECTION 12.1. RIGHT OF REDEMPTION AND REDEMPTION PRICES.
(a) The Notes may be redeemed in the manner, on the dates and at the
redemption prices specified in this Section .
(b) The Notes may be redeemed at the option of the Company, in whole
or in part (in any integral multiple of $1,000), at any time on or after October
15, 1998, upon notice as set forth in Section 12.2, at the following redemption
prices (expressed as percentages of the principal amount), together with accrued
and unpaid interest to and including the date fixed for redemption, if redeemed
during the 12-month period beginning October 15 of the following years:
Years Redemption Price
----- ----------------
1998 106.500%
1999 103.250%
2000 and thereafter 100.0%
(c) In addition, the Notes may be redeemed at the option of the
Company upon completion by the Company of an initial public offering in excess
of $10.0 million at a purchase price equal to 100% of the principal amount to be
redeemed, plus the interest rate the Notes then bear, together with accrued and
unpaid interest to and including the dated fixed for redemption upon notice as
set forth in Section 12.2; provided, however, the Company cannot redeem Notes
aggregating more than 25% of the outstanding principal balance of the Notes
pursuant to the provisions hereof.
SECTION 12.2. NOTICE OF REDEMPTION; PARTIAL REDEMPTION.
In case the Company shall desire to exercise such right to redeem all, or,
as the case may be, any part of the Notes in accordance with the foregoing
rights, it shall fix a date for redemption and shall mail or cause to be mailed
a notice of such redemption at least thirty (30) and not more than sixty (60)
days prior to the date fixed for redemption to the Holders of Notes to be
redeemed as a whole or in part at their last addresses as the same appear on the
books of transfer agent. Such mailing shall be by first class mail. Notice, if
mailed in the manner herein provided, shall be conclusively presumed to have
been duly given, whether or not the Holder receives such notice. In any case,
failure to give such notice by mail or any defect in the notice to the Holder of
any Note selected for redemption in whole or in part shall not affect the
validity of the proceeding for the redemption of any other Note or portion
thereof.
Each such notice of redemption shall specify the date fixed for redemption
and the redemption price at which Notes are to be redeemed, and shall state that
payment of the redemption price of the Notes to be redeemed, together with
accrued interest to the date fixed for redemption, will be made at the office or
agency to be maintained by the Company in accordance with this Indenture (or, if
desired by the Company, at the Corporate Trust Office of the Trustee), upon
presentation and surrender of such Notes and that from and after such date
interest thereon will cease to accrue. If less than all the Notes are to be
redeemed, the notice shall specify the particular Notes to be redeemed in whole
or in part. In case any Note is to be redeemed in part only, the notice shall
state the portion of the principal amount
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thereof to be redeemed, and that on and after the redemption date, upon
surrender of any such Note, a new Note or Notes in principal amount equal to the
unredeemed portion of such Note will be issued.
The Trustee, upon the written request of the Company delivered to the
Trustee at least 15 days prior to the last permissible date on which notice of
redemption must be given (or such shorter period as shall be acceptable to the
Trustee) shall, for and on behalf of and in the name of the Company, give notice
of the redemption of Notes as hereinabove provided (whether or not the Trustee
shall hold at the time of the giving of such notice sufficient cash to effect
such redemption).
If less than all the Notes are to be redeemed, the Company shall give to
the Trustee at least 60 days' notice (or such shorter notice as may be
acceptable to the Trustee) in advance of the redemption date as to the aggregate
principal amount of Notes to be redeemed, and the Trustee shall select by lot,
or in such other manner as, in its discretion, it shall deem appropriate and
fair, the Notes or portions thereof to be redeemed. In making such selection,
the Trustee may provide for selection of Notes of denominations of less than
$1,000 only as a whole.
SECTION 12.3. PAYMENT OF NOTES CALLED FOR REDEMPTION.
If the giving of notice of redemption shall have been completed as above
provided, the Notes or portions of Notes specified in such notice shall become
due and payable on the date and at the place stated in such notice at the
applicable redemption price, together with interest accrued to the date fixed
for redemption, and on and after such date of redemption (unless the Company
shall make default in the payment of such Notes at the redemption price,
together with interest accrued thereon to the date fixed for redemption)
interest on the Notes or portions of Notes so called for redemption shall cease
to accrue, and such Notes and portions of Notes shall be deemed not to be
outstanding hereunder and shall not be entitled to any benefit under this
Indenture except to receive payment of the redemption price, together with
accrued interest to the date fixed for redemption. On presentation and surrender
of such Notes at said place of payment in said notice specified, such Notes or
specified portions thereof shall be paid and redeemed by the Company at the
applicable redemption price, together with interest accrued thereon to the date
fixed for redemption.
Upon presentation of any Note which is redeemed in part only, the Company
shall execute and the Trustee shall authenticate and deliver to the holder
thereof, at the expense of the Company, a new Note or Notes of authorized
denominations in principal amount equal to the unredeemed portion of the Note so
presented.
SECTION 12.4. REDEMPTION MONEYS TO BE DEPOSITED WITH TRUSTEE OR PAYING
AGENTS.
At least one Business Day prior to the date fixed for the redemption of
any Notes as hereinbefore provided in this Article, the Company and/or the
Guarantor or any Subsidiary Guarantor shall deposit in trust with the Trustee,
or at its option with any Paying Agent, cash sufficient to redeem the Notes to
be redeemed on such date, at the redemption price, together with interest
accrued to the date fixed for redemption.
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ARTICLE 13
Guarantee
SECTION 13.1. UNCONDITIONAL GUARANTEE.
Each Subsidiary Guarantor and the Guarantor hereby, jointly and severally,
unconditionally guarantees (such guarantee to be referred as the "Guarantee") to
each Holder and to the Trustee, irrespective of the validity and enforceability
of this Indenture, the Notes or the obligations of the Company, the Guarantor
or Subsidiary Guarantor, if any, under this Indenture, the due and punctual
payment of the principal of, premium, if any, and interest on the Notes and
all other amounts due and payable under this Indenture and the Notes by the
Company whether at maturity, by acceleration, redemption, repurchase or
otherwise, including, without limitation, interest on the overdue principal of,
premium, if any, and interest on the Notes, to the extent lawful, all in
accordance with the terms hereof and thereof; subject, however, to the
limitations set forth in Section 13.4.
Failing payment when due of any amount so guaranteed for whatever reason,
the Guarantor will be obligated to pay the same immediately. Each Subsidiary
Guarantor and the Guarantor hereby agrees that its obligations hereunder shall
be unconditional, irrespective of the validity, regularity or enforceability of
the Notes or this Indenture, the absence of any action to enforce the same, any
waiver or consent by any Holder of the Notes with respect to any provisions
hereof or thereof, the recovery of any judgment against the Company, any action
to enforce the same or any other circumstance which might otherwise constitute a
legal or equitable discharge or defense of a guarantor. Each Subsidiary
Guarantor and the Guarantor hereby waives diligence, presentment, demand of
payment, filing of claims with a court in the event of insolvency or bankruptcy
of the Company, any right to require a proceeding first against the Company,
protest, notice and all demands whatsoever and covenants that this Guarantee
will not be discharged except by complete performance of the obligations
contained in the Notes, this Indenture and in this Guarantee. If any Holder or
the Trustee is required by any court or otherwise to return to the Company, any
Subsidiary Guarantor and the Guarantor, or any custodian, trustee, liquidator or
other similar official acting in relation to the Company or any Subsidiary
Guarantor and the Guarantor, any amount paid by the Company or any Subsidiary
Guarantor and the Guarantor to the Trustee or such Holder, this Guarantee, to
the extent theretofore discharged, shall be reinstated in full force and effect.
Each Subsidiary Guarantor and the Guarantor agrees it shall not be entitled to
any right of subrogation in relation to the Holders in respect of any
obligations guaranteed hereby until payment in full of all obligations
guaranteed hereby. Each Subsidiary Guarantor and the Guarantor further agrees
that, as between each Subsidiary Guarantor and the Guarantor, on the one hand,
and the Holders and the Trustee, on the other hand, (x) the maturity of the
obligations guaranteed hereby may be accelerated as provided in Article 5 for
the purposes of this Guarantee, notwithstanding any stay, injunction or other
prohibition preventing such acceleration in respect of the obligations
guaranteed hereby, and (y) in the event of any acceleration of such obligations
as provided in Article 5, such obligations (whether or not due and payable)
shall forthwith become due and payable by each Subsidiary Guarantor and the
Guarantor for the purpose of this Guarantee.
Failing payment of the Guarantee, for whatever reason, the Company will be
obligated to pay, or to perform, or cause the performance of, the same
immediately. The Company hereby agrees that its obligation on the Notes shall be
full, unconditional and absolute, irrespective of the validity, regularity or
enforceability of the Notes, the Guarantee or this Indenture, the absence of any
action to enforce the same, any waiver or consent by any Holder of the Notes
with respect to any provisions hereof or thereof,
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the recovery or any judgment against the Company or any Subsidiary Guarantor and
the Guarantor, any action to enforce the same or any other circumstance which
might otherwise constitute a legal or equitable discharge or defense of the
Company.
The Guarantee of each Subsidiary Guarantor and the Guarantor and the
obligations of the Company herein shall be, in the manner and to the extent set
forth in Article 14, subordinated in right of payment to the prior payment when
due of the principal of, premium, if any, and accrued and unpaid interest on all
existing and future Senior Indebtedness of any Subsidiary Guarantor and the
Guarantor and of the Company, as the case may be, and senior to the right of
payment of principal of, premium, if any, and accrued and unpaid interest on all
existing and future Subordinated Indebtedness of any Subsidiary Guarantor and
the Guarantor and of the Company, as the case may be.
SECTION 13.2. GUARANTOR MAY CONSOLIDATE, ETC., ON CERTAIN TERMS.
(a) Except as set forth in Articles 4 and 5, nothing contained in this
Indenture or in any of the Notes shall prevent any consolidation or merger of
any Guarantor with or into the Company or any other Guarantor or shall prevent
any sale or conveyance of all or substantially all of its assets, to the Company
or any other Guarantor.
(b) The Company may not sell the Capital Stock of a Subsidiary Guarantor,
or the Guarantor and a Subsidiary Guarantor or the Guarantor may not consolidate
with or merge into or sell all or substantially all of its assets (in a single
transaction or series of related transactions) to any Person other than the
Company or a Subsidiary Guarantor (whether or not affiliated with the Company or
the Guarantor), unless (i) with respect to a consolidation or merger of such
Subsidiary Guarantor or the Guarantor, either (A)(1) the surviving corporation
is a Subsidiary of the Company or, as a result of the transaction, becomes a
Subsidiary of the Company, (2) immediately after giving effect to such
transaction on a pro forma basis, the Consolidated Tangible Net Worth of the
surviving entity is equal to or greater than the Consolidated Tangible Net Worth
of the Guarantor or the Subsidiary Guarantor, as the case may be, immediately
before such transaction, (3) immediately after giving effect to such transaction
on a pro forma basis, the Company would be able to incur at least $1.00 of
additional Indebtedness under the test described in Section 10.9(a), (4) if the
surviving corporation is not the Guarantor or the Subsidiary Guarantor, the
surviving corporation agrees to assume such Guarantor's or Subsidiary
Guarantor's Guarantee and all its obligations pursuant to this Indenture, and
(5) such transaction does not (x) violate any covenant in Sections 10.1 to
10.17 or (y) result in a Default or an Event of Default immediately thereafter
that is continuing or (B)(1) such transaction is made in accordance with the
covenant in Section 10.11 and (2) such transaction does not (x) violate any
provision of Sections 8.1 to 8.3 or any other covenant in Sections 10.1 to
10.17 or (y) result in a Default or Event of Default immediately thereafter
that is continuing and (ii) with respect to the sale of the Capital Stock or
all or substantially all of the assets of such Guarantor or Subsidiary
Guarantor, (A) such transaction is made in accordance with the covenant in
Section 10.11 and (B) such transaction does not (x) violate any provision of
Sections 8.1 to 8.3 or any covenants under the Indenture or (y) result in a
Default or Event of Default immediately thereafter that is continuing. In the
case of any such consolidation, merger, sale or conveyance involving the
assumption by the successor corporation of a Guarantor's or Subsidiary
Guarantor's obligations under the Indenture, such successor shall assume such
obligations by supplemental indenture executed and delivered to the Trustee
and satisfactory in form to the Trustee and shall assume the due and punctual
performance of all the covenants and conditions of this Indenture to be
performed by the Guarantor or the Subsidiary Guarantor. Upon execution and
delivery of such supplemental indenture, such successor corporation shall
succeed to and be substituted for the Guarantor or the Subsidiary Guarantor
with the same effect as if it had been named herein as a Guarantor or a
Subsidiary Guarantor. The Guarantor or
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Subsidiary Guarantor shall deliver to the Trustee an Officer's Certificate and
an Opinion of Counsel, each stating that such merger, consolidation, sale or
transfer and such supplemental indenture comply with this Section 13.2 and all
conditions precedent herein provided relative to such transaction have been
complied with.
SECTION 13.3. RELEASE OF THE GUARANTOR OR A SUBSIDIARY GUARANTOR.
By undertaking all of the actions required in compliance with the terms of
this Indenture, including but not limited to the provisions of Section 13.2(b),
the Guarantor or a Subsidiary Guarantor, if any, shall be deemed released from
all of its Guarantee and related obligations in this Indenture. The Trustee
shall deliver an appropriate instrument evidencing such release upon receipt of
a request by the Company accompanied by an Officers' Certificate and an Opinion
of Counsel certifying that all conditions specified in this Indenture for such
release have been satisfied in accordance with the provisions of this Indenture.
Any Guarantor or Subsidiary Guarantor not so released remains liable for the
full amount of principal of and interest on the Notes as provided in this
Article.
SECTION 13.4. LIMITATION GUARANTOR'S LIABILITY.
The Guarantor and each Subsidiary Guarantor and by its acceptance hereof
each Holder hereby confirms that it is the intention of all such parties that
the Guarantee by Guarantor pursuant to its Guarantee not constitute a fraudulent
transfer or conveyance for purposes of any federal or state law. To effectuate
the foregoing intention, the Holders and each Guarantor hereby irrevocably
agrees that the obligations of each Guarantor under the Guarantee shall be
limited to the maximum amount as will, after giving effect to all other
contingent and fixed liabilities of such Guarantor and after giving effect to
any collections from or payments made by or on behalf of any other Guarantor in
respect of the obligations of such other Guarantor under its Guarantee or
pursuant to Section 13.5, result in the obligations of such Guarantor under the
Guarantee not constituting a fraudulent conveyance or fraudulent transfer under
federal, state or foreign law.
SECTION 13.5. CONTRIBUTION.
In order to provide for just and equitable contribution by the Guarantor
and each Subsidiary Guarantor, each Guarantor agrees, inter se, that in the
event any payment or distribution is made by a Guarantor (a "Funding Guarantor")
under the Guarantee, such Funding Guarantor shall be entitled to a contribution
from each other Guarantor in a pro rata amount based on the adjusted Net Assets
of each Guarantor (including the Funding Guarantor) for all payments, damages
and expenses incurred by the Funding Guarantor in discharging the Company's
obligations with respect to the Notes or any other Guarantor's obligations with
respect to the Guarantee; provided, however, that the liability of each
Guarantor under the Guarantee shall not be limited in any manner by the
foregoing.
SECTION 13.6. EXECUTION AND DELIVERY.
To further evidence the Guarantee set forth in Section 13.1, each
Guarantor hereby agrees that a notation relating to such Guarantee, in
substantially the form of Exhibit A-1, shall be endorsed on each Note
authenticated and delivered by the Trustee and executed by either manual or
facsimile signature of two Officers of each Guarantor.
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Each Subsidiary Guarantor and the Guarantor hereby agrees that its
Guarantee set forth in Section 13.1 shall remain in full force and effect
notwithstanding any failure to endorse on each Note a notation relating to such
Guarantee.
If an Officer of a Guarantor whose signature is on this Indenture or a
Note no longer holds that office at the time the Trustee authenticates such Note
or at any time thereafter, such Guarantor's Guarantee of such Note shall be
valid nevertheless.
The delivery of any Note by the Trustee, after the authentication thereof
hereunder, shall constitute due delivery of any Guarantee set forth in this
Indenture on behalf of a Guarantor.
SECTION 13.7. SEVERABILITY.
In case any provision of this Guarantee shall be invalid, illegal or
unenforceable, that portion of such provision that is not invalid. illegal or
unenforceable shall remain in effect, and the validity, legality, and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
ARTICLE 14
Subordination of Guarantee
SECTION 14.1. GUARANTEE SUBORDINATED TO SENIOR INDEBTEDNESS.
Each Guarantor or Subsidiary Guarantor, for itself and its successors, and
each Holder, by his acceptance of Notes, agrees that the Guarantee of each such
Guarantor is subordinated, to the extent and in the manner provided in this
Article, to the prior payment in full of all Senior Indebtedness of that
Guarantor (hereinafter in this Article referred to as "Senior Indebtedness").
This Article shall constitute a continuing offer of all Persons who, in
reliance upon such provisions, become holders of, or continue to hold, Senior
Indebtedness, and such provisions are made for the benefit of the holders of
Senior Indebtedness, and such holders are made obligees hereunder and any one or
more of them may enforce such provisions.
SECTION 14.2. NO PAYMENT ON GUARANTEE IN CERTAIN CIRCUMSTANCES.
Upon the Maturity of any Senior Indebtedness by lapse of time,
acceleration or otherwise, unless and until all principal thereof, interest
thereon and other amounts due thereon shall first be paid in full, no payment
shall be made by or on behalf of any Guarantor pursuant to the Guarantee with
respect to the principal of or interest on the Notes.
Upon the happening of any default in the payment of any principal of or
interest on or other amounts due on any Senior Indebtedness (a "Payment
Default"), then, unless and until such default shall have been cured or waived
or shall have ceased to exist, no payment shall be made by or on behalf of any
Guarantor pursuant to the Guarantee with respect to the principal of or interest
on the Notes.
Upon the happening of any default or event of default (other than a
Payment Default) (including any event which with the giving of notice or the
lapse of time or both would become an event of default
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and including any default or event of default which would result upon any
payment pursuant to the Guarantee with respect to the Notes) with respect to any
Senior Indebtedness of such Guarantor, as such default or event of default is
defined therein or in the instrument or agreement or other document under which
it is outstanding, then upon written notice thereof given to any Guarantor and
the Trustee by a holder or holders of any Senior Indebtedness or their
Representative ("Payment Notice"), no payment shall be made by or on behalf of a
Guarantor pursuant to the Guarantee with respect to the principal of, premium,
if any, or interest on the Notes, during the period (the "Payment Blockage
Period") commencing on the date of such receipt of such Payment Notice and
ending on the earlier of (i) the date, if any, on which such default is cured or
waived or ceases to exist or (ii) the date, if any, on which the Senior
Indebtedness to which such default relates is discharged; provided, however,
that no default or event of default (other than a Payment Default) shall prevent
the making of any payment for more than 179 days after the Payment Notice shall
have been given. Notwithstanding the foregoing, (i) not more than one Payment
Notice shall be given within a period of 360 consecutive days, and (ii) no event
of default which existed or was continuing on the date of any Payment Notice
shall be made the basis for the giving of a subsequent Payment Notice unless all
such events of default shall have been cured or waived for a period of at least
180 consecutive days after such date, and (iii) if any Guarantor or the Trustee
receives any Payment Notice, a similar notice relating to or arising out of the
same default or facts giving rise to such default (whether or not such default
is on the same issue of Senior Indebtedness) shall not be effective for purposes
of this.paragraph.
In furtherance of the provisions of Section 14.1, in the event that,
notwithstanding the foregoing provisions of this Section, any payment with
respect to the principal of or interest on the Notes shall be made by or on
behalf of any Guarantor, and received by the Trustee, by any Holder or by any
Paying Agent (or, if the Company is acting as its own Paying Agent, money for
any such payment shall be segregated and held in trust), at a time when such
payment was prohibited by the provisions of this Section, then, unless and
until such payment is no longer prohibited by this Section, such payment
(subject to the provisions of Sections 14.6 and 14.7) shall be received and held
in trust by the Trustee or such Holder or Paying Agent for the benefit of and
shall be immediately paid over to the holders of Senior Indebtedness or their
Representative, ratably according to the aggregate amounts remaining unpaid on
account of the principal of and interest on the Senior Indebtedness held or
represented by each, for application to the payment of all Senior Indebtedness
in accordance with its terms, after giving effect to any concurrent payment or
distribution to or for the benefit of the holders of Senior Indebtedness.
The provisions of this Section shall not modify or limit in any way the
application of Section 14.3.
Each Guarantor shall give prompt written notice to the Trustee of any
default in the payment of any Senior Indebtedness of such Guarantor or any
acceleration under any such Senior Indebtedness or under any agreement pursuant
to which such Senior Indebtedness may have been issued. Without limiting the
effect of Section 14.6 hereof, failure to give such notice shall not affect the
subordination of the Guarantee to the Senior Indebtedness or the application of
the other provisions provided in this Article.
SECTION 14.3. GUARANTEE SUBORDINATED TO PRIOR PAYMENT OF ALL SENIOR
INDEBTEDNESS ON DISSOLUTION, LIQUIDATION OR REORGANIZATION
OF A GUARANTOR.
In the event of any Insolvency or Liquidation Proceeding with respect to
any Guarantor, all amounts payable in respect of any Senior Indebtedness of such
Guarantor shall first be paid in full before the Holders are entitled to receive
any direct or indirect payment or distribution of any cash, property
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or securities pursuant to the Guarantee on account of principal of or interest
on the Notes or any other payment with respect to the Notes.
The holders of Senior Indebtedness shall be entitled to receive directly,
for application to the payment of Senior Indebtedness (to the extent necessary
to pay in full all Senior Indebtedness, whether or not due) any payment or
distribution of any kind or character, (whether in cash, property or securities,
including any payment or distribution which may be payable or deliverable by
reason of the payment of any other indebtedness of such Guarantor being
subordinated to the payment of the Guarantee) which may be payable or
deliverable in respect of the Guarantee in any such Insolvency or Liquidation
Proceeding.
In the event that, notwithstanding the foregoing provisions of this
Section, the Trustee or any Paying Agent or the Holder of any Note shall have
received any payment from or distribution of assets of a Guarantor or the estate
created by the commencement of any such Insolvency or Liquidation Proceeding, of
any kind or character in respect of the Guarantee, whether in cash, property or
securities, including any payment or distribution which may be payable or
deliverable by reason of the payment of any other indebtedness of such Guarantor
being subordinated to the payment of the Guarantee, before all Senior
Indebtedness (whether or not due) is paid in full, then and in such event such
payment or distribution shall be received and held in trust by the Trustee, any
such Paying Agent or Holder for and shall be paid over to the holders of Senior
Indebtedness (to the extent necessary to pay in full all such Senior
Indebtedness, whether or not due) after giving effect to any substantially
concurrent payment or distribution to the holders of Senior Indebtedness on
account of Senior Indebtedness, for application to the payment in full of such
Senior Indebtedness.
The Company and each Subsidiary Guarantor and the Guarantor shall give
prompt written notice to the Trustee of any Insolvency or Liquidation Proceeding
with respect to any such Guarantor.
SECTION 14.4. HOLDERS TO BE SUBROGATED TO RIGHTS OF HOLDERS OF SENIOR
INDEBTEDNESS.
After all amounts payable under or in respect of Senior Indebtedness
(whether or not due) are paid in full, the Holders shall be subrogated (without
any duty on the part of the holders of Senior Indebtedness to warrant, create,
effectuate, preserve or protect such subrogation), to the extent of the payment
or distributions made to the holders of Senior Indebtedness pursuant to the
provisions of this Article (equally and ratably with the holders of all other
indebtedness of any Guarantor which by its express terms is subordinate and
subject in right of payment to Senior Indebtedness to substantially the same
extent as the Guarantee are so subordinated and subject in right of payment and
which is entitled to like rights and subrogation), to the rights of the holders
of Senior Indebtedness to receive payments and distributions of cash, property
and securities applicable to the Senior Indebtedness, until the principal of and
interest on the Notes shall be paid in full. For the purpose of such subrogation
no such payments or distributions to the holders of Senior Indebtedness by or on
behalf of the Company, or by or on behalf of the Holders by virtue of this
Article, which otherwise would have been made to the Holders shall, as between
any Guarantor and the Holders, be deemed to be payment by any Guarantor to or on
account of the Senior Indebtedness, it being understood that the provisions of
this Article are and are intended solely for the purpose of defining the
relative rights of the Holders, on the one hand, and the holders of Senior
Indebtedness, on the other hand.
SECTION 14.5. GUARANTEE UNCONDITIONAL.
Nothing contained in this Article or elsewhere in this Indenture or in any
Guarantee is intended to or shall impair, as between any Guarantor and the
Holders, the Guarantee, which is absolute and
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unconditional, as and when the same shall become due and payable in accordance
with their terms, or is intended to or shall affect the relative rights of the
Holders and creditors of a Guarantor, other than the holders of the Senior
Indebtedness, nor shall anything herein or therein prevent the Trustee or any
Holder from exercising all remedies otherwise permitted by applicable law upon
default under this Indenture, subject to the rights, if any, under this Article,
of the holders of Senior Indebtedness in respect of cash, property or securities
of any Guarantor received upon the exercise of any such remedy. Upon any
distribution of assets of any Guarantor referred to in this Article, the
Trustee, subject to the provisions of Section 6.1, and the Holders shall be
entitled to rely upon any order or decree made by any court of competent
jurisdiction in which such Insolvency or Liquidation Proceedings is pending, or
a certificate of the liquidating trustee or agent or other Person making any
distribution to the Trustee or to the Holders for the purpose of ascertaining
the Persons entitled to participate in such distribution, the holders of the
Senior Indebtedness and other indebtedness of such Guarantor, the amount thereof
or payable thereon, the amount or amounts paid or distributed thereon and all
other facts pertinent thereto or to this Article.
SECTION 14.6. TRUSTEE ENTITLED TO ASSUME PAYMENTS NOT PROHIBITED IN
ABSENCE OF NOTICE.
The Trustee or any Paying Agent (other than the Company) shall not at any
time be charged with knowledge of the existence of any facts which would
prohibit the making of any payment to or by the Trustee or such Paying Agent
unless and until the Trustee or any Paying Agent shall have received written
notice thereof from the Company or a Guarantor or from one or more holders of
Senior Indebtedness or from any Representative therefor and, prior to the
receipt of any such written notice, the Trustee, subject to the provisions of
Section 6.1, shall be entitled in all respects conclusively to assume that no
such fact exists. Nothing in this Section is intended to or shall relieve any
Holder from the obligations imposed under Sections 14.2 and 14.3 with respect to
money or other distributions received in violation of the provisions thereof.
SECTION 14.7. APPLICATION BY TRUSTEE OF ASSETS DEPOSITED WITH IT.
All money and U.S. Government Obligations deposited in trust with the
Trustee pursuant to and in accordance with Section 4.1 shall be for the sole
benefit of the Holders and shall not be subject to this Article. Otherwise, any
deposit of assets by any Guarantor pursuant to the Guarantee with the Trustee or
any Paying Agent (whether or not in trust) for the payment of principal of or
interest on any Notes shall be subject to the provisions of this Article;
provided that, if prior to the second Business Day preceding the date on which
by the terms of this Indenture any such assets may become distributable for any
purpose (including without limitation, the payment of either principal of or
interest on any Note) the Trustee or such Paying Agent shall not have received
with respect to such assets the written notice provided for in Section 14.6,
then the Trustee or such Paying Agent shall have full power and authority to
receive such assets and to apply the same to the purpose for which they were
received, and shall not be affected by any notice to the contrary which may be
received by it on or after such date. The preceding sentence shall be construed
solely for the benefit of the Trustee and each Paying Agent and shall not
otherwise affect the rights of holders of Senior Indebtedness.
SECTION 14.8. SUBORDINATION RIGHTS NOT IMPAIRED BY ACTS OR OMISSIONS OF
GUARANTORS OR HOLDERS OF SENIOR INDEBTEDNESS.
No right of any present or future holder of any Senior Indebtedness to
enforce the subordination provisions in this Article shall at any time in any
way be prejudiced or impaired by any act or failure to act on the part of any
Guarantor or by any act or failure to act by any such holder, or by any
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<PAGE> 81
noncompliance by the Company with the terms of this Indenture, regardless of any
knowledge thereof which any such holder may have or be otherwise charged with.
The holders of Senior Indebtedness may extend, renew, modify or amend the terms
of the Senior Indebtedness or any security therefor and release, sell or
exchange such security and otherwise deal freely with any Guarantor, all without
affecting the liabilities and obligations of the parties to this Indenture or
the Holders.
SECTION 14.9. HOLDERS AUTHORIZE TRUSTEE TO EFFECTUATE SUBORDINATION OF
NOTES.
Each Holder of Notes by his acceptance thereof (i) authorizes and
expressly directs the Trustee on his behalf to take such action as may be
necessary or appropriate to effectuate the subordination provided in this
Article and to protect the rights of the Holders pursuant to this Indenture, and
(ii) appoints the Trustee his attorney-in-fact for such purpose, including in
the event of any Insolvency or Liquidation Proceeding with respect to any
Guarantor, the timely filing of a claim of the unpaid balance of his Notes
pursuant to Guarantee in the form required in said proceeding and the causing of
such claim to be approved. If the Trustee shall not file a proper claim or proof
of debt in the form required in such proceeding prior to thirty (30) days before
the expiration of the time to file such claim or claims, then the holders of the
Senior Indebtedness or their Representative shall have the right to file an
appropriate claim for and on behalf of the Holders. Nothing herein contained
shall be deemed to authorize the Trustee or any Holder of Senior Indebtedness or
their Representative to authorize or consent to or accept or adopt on behalf of
any Holder any plan of reorganization, arrangement, adjustment or composition
affecting the Notes, the Guarantee or the rights of any Holder, or to authorize
the Trustee or any holder of Senior Indebtedness or their Representative to vote
in respect of the claim of any Holder in any such proceeding.
SECTION 14.10. RIGHT OF TRUSTEE TO HOLD SENIOR INDEBTEDNESS.
The Trustee shall be entitled to all of the rights set forth in this
Article in respect of any Senior Indebtedness at any time held by it to the same
extent as any other holder of Senior Indebtedness, and nothing in this Indenture
shall be construed to deprive the Trustee of any of its rights as such holder.
SECTION 14.11. PAYMENT.
A payment pursuant to the Guarantee with respect to a Note or with respect
to principal of or interest on a Note shall include, without limitation, payment
of principal of (and premium, if any) and interest on any Note, any depositing
of funds under Article 10, any payment on account of any mandatory or optional
repurchase or redemption of any Note (including payments pursuant to Section
10.11, Section 10.16 or 10.17) and any payment or recovery on any claim (whether
for rescission or damages and whether based on contract, tort, duty imposed by
law, or any other theory of liability) relating to or arising out of the offer,
sale or purchase of any Note, provided that any such payment, deposit, other
payment or recovery (i) not prohibited pursuant to this Article at the time
actually made shall not be subject to any recovery by any holder of Senior
Indebtedness or Representative therefor or other Person pursuant to this Article
at any time thereafter and (ii) made by or from any Persons other than any
Guarantor shall not be subject to any recovery by any holder of Senior
Indebtedness or Representative therefor or other Person pursuant to this Article
at any time thereafter except to the extent such Person recovers any such amount
paid from any such Guarantor whether pursuant to rights of indemnity, rescission
or otherwise.
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<PAGE> 82
SECTION 14.12. ARTICLE 14 NOT TO PREVENT EVENTS OF DEFAULT.
The failure of any Guarantor to make a payment by reason of any provision
of this Article 14 shall not be construed as preventing the occurrence of a
Default or Event of Default under Section 5.1 or in any way preventing the
Holders from exercising any rights hereunder, other than the right to receive
payment in respect of the Guarantee
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed, and their respective corporate seals to be hereunto affixed and
attested, all as of the day and year first above written.
MONTEREY MANAGEMENT, INC., an Arizona
corporation
By /s/ William W. Cleverly
-------------------------------
William W. Cleverly, President
BANK ONE, ARIZONA, NA,
as Trustee
By /s/ D D Melendez
--------------------------------
Vice President
GUARANTOR:
MONTEREY HOMES CORPORATION, an Arizona
corporation
By /s/ William W. Cleverly
-------------------------------
William W. Cleverly, President
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<PAGE> 83
STATE OF ARIZONA )
)ss.
County of Maricopa )
On this 14th day of October, 1994, before me, a Notary Public in and for
said county and state, personally appeared WILLIAM W. CLEVERLY to me personally
known and known to me to be the same person who executed the within and
foregoing instrument, who, being by me duly sworn, did depose, acknowledge and
say that he is the President of MONTEREY MANAGEMENT, INC., one of the
corporations described in and which executed the foregoing instrument; that said
instrument was signed on behalf of said corporation by authority of its Board of
Directors; and he acknowledged the execution of said instrument to be the
voluntary act and deed of said corporation by it voluntarily executed.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal this
14th day of October,1994.
/s/ Michele L. Fairbank
--------------------------------
Notary Public exp 5-2-98
(Seal)
STATE OF ARIZONA )
)ss.
County of MARICOPA )
On this 17th day of October, 1994, before me, a Notary Public in and for
said county and state, personally appeared D D Melendez to me personally known
and known to me to be the same person who executed the within and foregoing
instrument, who, being by me duly sworn, did depose, acknowledge and say: That
he/she is a Trust Officer of BANK ONE, ARIZONA, NA, one of the corporations
described in and which executed the foregoing instrument; that said instrument
was signed and sealed on behalf of said corporation by authority of its Board of
Directors; and he/she acknowledged the execution of said instrument to be the
voluntary act and deed of said corporation by it voluntarily executed.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal this
17th day of October, 1994.
/s/ Teresa Stombaugh
----------------------------------------------------
Notary Public My Commission Expires May 31, 1998
(Seal)
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<PAGE> 84
STATE OF ARIZONA )
)ss.
County of Maricopa )
On this 14th day of October, 1994, before me, a Notary Public in and for
said county and state, personally appeared WILLIAM W. CLEVERLY to me personally
known and known to me to be the same person who executed the within and
foregoing instrument, who, being by me duly sworn, did depose, acknowledge and
say that he is the President of MONTEREY HOMES CORPORATION, one of the
corporations described in and which executed the foregoing instrument; that said
instrument was signed on behalf of said corporation by authority of its Board of
Directors; and he acknowledged the execution of said instrument to be the
voluntary act and deed of said corporation by it voluntarily executed.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal this
14th day of October, 1994.
/s/ Michele L. Fairbank
--------------------------------
Notary Public
(Seal)
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<PAGE> 85
FIRST SUPPLEMENTAL INDENTURE, dated as of September 9, 1996, among
MONTEREY MANAGEMENT, INC., an Arizona corporation (the "Company"), having its
principal office at 6613 North Scottsdale Road, Suite 200, Scottsdale, Arizona
85250, MONTEREY HOMES CORPORATION, an Arizona corporation (the "Guarantor")
having its principal office at 6613 North Scottsdale Road, Suite 200,
Scottsdale, Arizona 85250, Monterey Management-Tucson, Inc., an Arizona
corporation, having its principal office at 6613 North Scottsdale Road, Suite
200, Scottsdale, Arizona 85250, Monterey Homes-Tucson Corporation, an Arizona
corporation, having its principal office of 6613 North Scottsdale Road, Suite
200 Scottsdale, Arizona 85250, and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION,
as Trustee (the "Trustee"), having its principal Corporate Trust Office at
Norwest Center, Sixth and Marquette, Minneapolis, Minnesota 55479-0069,
supplementing that certain Indenture, dated as of October 17, 1994 (as amended
and supplemented from time to time, the "Indenture") between the Company, the
Guarantor, and the Trustee.
RECITALS OF THE COMPANY
The Company has heretofore executed and delivered to the Trustee the
Indenture providing for the issuance of up to $8,000,000 in aggregate principal
amount of its 13% Senior Subordinated Notes due 2001 (the "Notes").
Section 9.2 of the Indenture permits a supplemental indenture to the
Indenture to be entered into with the consent of the Holders of not less than a
majority in principal amount of the Outstanding Notes for the purpose of adding
any provisions to or changing in any manner or eliminating any of the provisions
of the Indenture or of modifying in any manner the rights of the Holders under
the Indenture, and the requisite consent of Holders of the Notes has been
obtained for this First Supplemental Indenture.
The Company, pursuant to the foregoing authority, proposes in and by
this First Supplemental Indenture to modify the terms of the Indenture as
provided herein.
All things necessary to make this First Supplemental Indenture a
valid agreement of the Company, the Guarantor, and the Trustee, and a valid
supplement to the Indenture, in accordance with its terms, have been done.
NOW, THEREFORE, THIS FIRST SUPPLEMENTAL INDENTURE WITNESSETH:
For and in consideration of the premises and the agreements set
forth in this First Supplemental Indenture and intending to be legally bound
hereby, it is mutually agreed, for the equal and proportionate benefit of all
Holders of the Notes as follows:
ARTICLE ONE
Definitions and Other Provisions
of General Application
Section 101. Definitions.
(a) For all purposes of this First Supplemental Indenture, except as
otherwise expressly provided or unless the context otherwise requires:
(1) the terms defined in this Article have the meanings
assigned to them in this Article and include the plural as well as
the singular;
<PAGE> 86
(2) capitalized terms used herein without definition shall
have the meanings specified in the Indenture;
(3) unless the context otherwise requires, any reference to an
"Article" or a "Section " refers to an Article or a Section , as the
case may be, of the Indenture; and
(4) the words "herein," "hereof" and "hereunder" and other
words or similar import refer to this First Supplemental Indenture
as a whole and not to any particular Article, Section , or
subdivision.
(b) For all purposes of the Indenture and this First Supplemental
Indenture, except as otherwise expressly provided or unless the context
otherwise requires:
"Homeplex" means Homeplex Mortgage Investments Corporation, a
Maryland corporation.
"Homeplex Merger" means any transaction by which either (i)
the Company and the Guarantor merge with and into Homeplex or (ii)
the Company and the Guarantor become wholly-owned subsidiaries of
Homeplex. The Homeplex Merger shall be deemed to constitute an
initial public offering of the Company for all purposes of this
Indenture, except that the Homeplex Merger shall not be deemed to
constitute an initial public offering under Section 12.1 of the
Indenture or the form of the Note in Section 2.4 of the Indenture to
the extent relating to redemption of the Notes. For purposes of
Section 10.15, the Homeplex Merger will be deemed to constitute an
initial public offering of the Company of at least $5,000,000.
"Intercompany Mergers" means the merger of MMI into MM-TI,
with MM-TI surviving, and the merger of MHC into MH-TC, with MH-TC
surviving.
"MHC" means Monterey Homes Corporation, as Arizona
corporation.
"MH-TC" means Monterey Homes-Tucson Corporation, an Arizona
corporation.
"MMI" means Monterey Management, Inc., an Arizona corporation.
"MM-TI" means Monterey Management-Tucson, Inc., an Arizona
corporation.
"Monterey Stockholders" means William W. Cleverly and Steven
J. Hilton.
"Newco 1" means the corporation to which MM-TI will transfer
or contribute all of its assets and its liabilities and obligations,
including its liabilities and obligations under the Notes and the
Indenture, pursuant to the Subsidiary Drop Downs.
"Newco 2" means the corporation to which MH-TC will transfer
or contribute all of its assets and its liabilities and obligations,
including its liabilities and obligations under the Notes and the
Indenture, pursuant to the Subsidiary Drop Downs.
"Subsidiary Drop Downs" means (i) the transfer or contribution
by MM-TI of all of its assets and its liabilities and obligations,
including its liabilities and obligations under the Notes and the
Indenture, to a newly formed, wholly-owned subsidiary (Newco 1) and
(ii)
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<PAGE> 87
the transfer or contribution by MH-TC of all of its assets and its
liabilities and obligations, including its liabilities and
obligations under the Notes and the Indenture, to a newly formed,
wholly-owned subsidiary (Newco 2).
ARTICLE TWO
Amendments
Section 201. Amendments to Indenture.
(a) Section 1.1 of the Indenture is hereby amended as follows:
(i) The definition of the term "Company" is hereby amended by
adding the following at the end of such definition:
MM-TI will be deemed to be the Company for all purposes of the
Indenture following the Intercompany Mergers and Newco 1 will
be deemed to be the Company for all purposes of the Indenture
following the Subsidiary Drop Downs.
(ii) The definition of the term "Guarantor" is hereby amended
to read in its entirety as follows:
"Guarantor" means each of (i) MHC; (ii) MH-TC; (iii) Homeplex,
but only at such time as (a) the Homeplex Merger has taken
place and (b) Homeplex has executed and delivered to the
Trustee an Acceptance substantially in the form attached
hereto as Supplement A; (iv) Newco 2, following the Subsidiary
Drop Downs; and (v) any entity that shall have become a
successor corporation pursuant to the applicable provisions of
this Indenture or that becomes a guarantor of the Notes in
compliance with the provisions of Article 13 hereof,
including, but not limited to, any Subsidiary Guarantor. Each
reference herein to the Guarantor shall mean each and all of
such Guarantors. If Homeplex shall become a Guarantor under
the Indenture, all covenants and tests in the Indenture will
thereupon apply to Homeplex but no retroactive application of
such covenants and tests will be required from the date of
issuance of the Notes to the date that Homeplex shall become a
Guarantor.
(iii) The definition of the term "Permitted Company
Refinancing Indebtedness" is hereby amended as follows:
(A) by adding the phrase "or Guarantor" after the phrase
"Permitted Company" in the first and twelfth lines thereof;
and
(B) by adding the phrase "or the Guarantor" after the
phrase "Indebtedness of the Company" in the first and in the
second to third line thereof.
(b) Section 10.2 of the Indenture is amended by adding a new
paragraph (d) at the end of Section 10.2 to read in its entirety as
follows:
(d) Notwithstanding anything to the contrary in this Section
10.2, after the effective date of the Homeplex Merger,
if Homeplex shall have also
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<PAGE> 88
executed and delivered to the Trustee the Acceptance in
the form attached hereto as Supplement A and for so long
as Homeplex is subject to the requirements of Section 13
or 15(d) of the Exchange Act, then the Company shall be
deemed to have satisfied its obligations under this
Section 10.2 if Homeplex makes the requisite filings and
mailings hereunder of copies of annual and quarterly
reports and other reports and information that it files
with the Commission pursuant to Section 13 or 15(d) of
the Exchange Act or furnishes to its stockholders
pursuant to the Exchange Act.
(c) Section 10.9 of the Indenture is amended by:
(i) inserting the word "Tangible" after the word
"Consolidated" in the ninth line of subsection (a) thereof;
(ii) inserting the phrase "or Guarantor" after the phrase
"Permitted Company" in the second line of subsection (b) thereof;
(iii) inserting the phrase "or the Guarantor" in each of the
following places:
(A) after the phrase "(ii) the Company" in the second
line of subsection (b) thereof;
(B) after the phrase "(iv) the Company" in the third
line of subsection (b) thereof;
(C) after the phrase "solely to the Company" in the
fourth line of subsection (b) thereof;
(D) after the phrase "Owned Subsidiary of the Company"
in the fifth line of subsection (b) thereof;
(E) after the word "Company" in the ninth line of
subsection (b) thereof; and
(F) replacing the word "received" in the ninth line of
subsection (b) thereof with the word "made."
(d) Section 10.10 of the Indenture is amended by:
(i) inserting the phrase "(other than any Restricted Payments
made pursuant to any of subparagraphs (A), (B) or (C) of clause (iv)
of subsection (b) below)" after the phrase "Issue Date" in the
second line of clause (iii) of subsection (a) thereof;
(ii) adding the phrase "and the Guarantor" after the phrase
"taxable years of the Company" in the first line of subparagraph (B)
of clause (iv) of subsection (b) thereof; and
(iii) adding the phrase "and the Guarantor's" after the phrase
"allocable to the Company's" in the third line of subparagraph (B)
of clause (iv) of subsection (b) thereof.
(e) Section 10.11 of the Indenture in hereby amended by:
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<PAGE> 89
(i) adding the phrase "or the Guarantor (or their Subsidiary),
as the case may be," after the phrase "the Company" in the first and
third lines of subsection (b) thereof; and
(ii) deleting the words "by the Company" in the second line of
subsection (c) thereof.
(f) Section 10.13 of the Indenture is amended by inserting the
phrase "(other than the Company to the extent it is a Subsidiary of a
Guarantor and other than a Guarantor to the extent it is a Subsidiary of
the Company or another Guarantor)" after the phrase "restriction on the
ability of any Subsidiary" in the third line thereof.
(g) Section 10.14 of the Indenture is amended by:
(i) inserting the phrase "(other than Permitted Business
Investments)" after the phrase "make any Investment" in the third
line thereof.
(ii) inserting the phrase "(w)" before the words "is pursuant
to an employee incentive program "in the tenth line thereof;
(iii) inserting the phrase "(x)" before the words "is a
transaction involving the sale or transfer of a completed housing
unit" in the tenth and eleventh lines thereof;
(iv) inserting the phrase "(y)" before the words "is arm's
length" in the fourteenth line thereof; and
(v) inserting the phrase "(z)" before the words "as a whole"
in the fourteenth line thereof.
(h) Section 10.15 of the Indenture is amended by deleting the words
"pari passu or" in the second line thereof.
(i) Section 10.16 of the Indenture is amended by:
(i) adding the phrase "Except as provided in subsection (e)
below," at the beginning of subsection (c) thereof; and
(ii) adding a new subsection (e) thereto to read in its
entirety as follows:
(e) Notwithstanding anything to the contrary in this
Section 10.16, in the event that the Monterey Stockholders
deliver a binding commitment to the Trustee to purchase Notes
that are tendered to the Company for payment in connection
with a Change of Control resulting from the Homeplex Merger,
the Monterey Stockholders shall purchase all of the Notes
tendered in response to a Change of Control Offer given as a
result of the Homeplex Merger in the amount that would
otherwise be payable by the Company under this Section 10.16
on the Change of Control Payment Date to pay such Notes (the
"Purchase Price"). Each Monterey Stockholder will pay his
prorated portion of the Purchase Price to the depository or
Paying Agent not later than the Business Day prior to the
Change of Control Payment Date. On the Change of Control
Purchase Date, the Company will utilize such monies to
purchase tendered Notes on behalf of the Monterey
Stockholders, and, as soon as practicable thereafter, the
Company will
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<PAGE> 90
execute and the Trustee will authenticate and deliver to the
Monterey Stockholders one or more new Notes with a principal
amount equal to the principal amount of the Notes so
purchased. Notes purchased by the Monterey Stockholders
pursuant to this Section 10.16(e) will thereafter remain
outstanding under this Indenture.
(j) A new Section 10.19 is added to the Indenture to read in its
entirety as follows:
Section 10.19. Homeplex Offer to Purchase Notes
(a) If the Homeplex Merger shall have occurred, Homeplex will
make an offer (the "Purchase Offer") to purchase all
outstanding Notes at a purchase price equal to 101% of the
aggregate principal amount of the Notes, plus accrued and
unpaid interest to the date of purchase, such purchase to
occur no later than eighteen (18) months following the
effective date of the Homeplex Merger (the "Purchase Offer
Payment Date"). The Purchase Offer shall be deemed to have
commenced upon mailing of the notice described in the next
succeeding paragraph and shall terminate twenty (20) Business
Days after its commencement, unless a longer offering period
is then required by law. On the Purchase Offer Payment Date,
Homeplex shall purchase and mail or deliver payment for all
Notes tendered in response to the Purchase Offer. If the
Purchase Offer Payment Date is on or after an interest payment
record date and on or before the related interest payment
date, any accrued interest will be paid to the Person in whose
name a Note is registered at the close of business on such
record date, and no additional interest will be payable to
Holders who tender Notes pursuant to the Purchase Offer.
(b) Not later than thirty (30) Business Days preceding the
Purchase Offer Payment Date, Homeplex (with notice to the
Trustee), or the Trustee at Homeplex's request, will mail or
cause to be mailed to all Holders of record of the Notes on
the most recent practicable date prior to such mailing, a
notice (the "Purchase Offer Notice"), containing all
instructions and materials necessary to enable Holders to
tender their Notes to Homeplex. The Purchase Offer Notice,
which shall govern the terms of the Purchase Offer, shall
state: (1) that the Purchase Offer is being made pursuant to
this Section ; (2) the purchase price and the Purchase Offer
Payment Date; (3) that any Note not tendered will continue to
accrue interest; (4) that any Note accepted for payment
pursuant to the Purchase Offer shall cease to accrue interest
payable to the tendering Holder on the Purchase Offer Payment
Date; (5) that Holders electing to have a Note purchased
pursuant to the Purchase Offer will be required to surrender
the Note, with the form entitled "Option of Holder to Elect
Purchase" (to be attached to such Purchase Offer Notice)
completed, to the Company, a depositary, if appointed by the
Company, or a Paying Agent at the address specified in the
notice prior to termination of the Purchase Offer; (6) that
Holders will be entitled to withdraw their election if the
Company, depository or Paying Agent, as the case may be,
receives, not later than the expiration of the Purchase Offer,
or such longer period as may be required by law, a telegram,
telex, facsimile transmission or letter setting forth the name
of the Holder, the principal amount of the Note the Holder
delivered for purchase and a statement that such Holder is
withdrawing his election to have the Note purchased; and (7)
that Holders whose Notes are
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<PAGE> 91
purchased only in part will be issued Notes equal in principal
amount to the unpurchased portion of the Notes surrendered.
(c) On the Purchase Offer Payment Date, Homeplex shall (i)
accept for purchase Notes or portions thereof tendered
pursuant to the Purchase Offer, (ii) deposit with the
depository or Paying Agent, money sufficient to pay the
purchase price of all Notes or portions thereof so tendered
and (iii) deliver to the Trustee the Notes so accepted
together with an Officers' Certificate identifying the Notes
or portions thereof tendered to and accepted by Homeplex. The
depository, the Company or the Paying Agent, as the case may
be, shall promptly mail to the Holder of Notes so accepted
payment in an amount equal to the purchase price, and the
Trustee shall promptly authenticate and mail to such Holders a
new Note equal in principal amount to any unpurchased portion
of the Note surrendered. For purposes of this Section , the
Trustee shall act as the Paying Agent.
(d) Homeplex, to the extent applicable and if required by law,
will comply with Section 14 of the Exchange Act and the
provisions of Regulation 14E and any other tender offer rules
under the Exchange Act and other federal and state securities
laws, rules and regulations which may then be applicable to
any offer by Homeplex to purchase the Notes at the option of
the Holders hereunder.
(e) Notwithstanding anything to the contrary in this Section
10.19, Notes purchased by Homeplex pursuant to this Section
10.19 will thereafter remain outstanding under the Indenture.
(k) Section 13.2 of the Indenture is hereby amended as follows:
(i) by deleting the phrases "or the Guarantor," "the Guarantor
or," "Guarantor's or," and "Guarantor or" wherever such terms
appear in the first, second, fifth to sixth, ninth, twelfth,
thirteenth, twentieth, twenty-fourth, twenty-seventh, twenty-
ninth, and thirtieth lines thereof;
(ii) by deleting the phrase ", as the case may be," in the
ninth to tenth lines thereof;
(iii) by inserting the phrase ", the Guarantor," after the
phrase "than the Company" in the fourth line thereof; and
(iv) by inserting the phrase "or the Guarantor" after the
phrase "a Subsidiary of the Company" in the sixth and seventh
lines thereof.
(l) Section 13.3 of the Indenture is hereby amended by deleting the
phrase, "the Guarantor or" in the second line and the phrase "Guarantor
or" in the seventh line thereof.
- 7 -
<PAGE> 92
ARTICLE THREE
Miscellaneous
Section 301. Miscellaneous.
(a) The Trustee accepts the trusts created by the Indenture,
as supplemented by this First Supplemental Indenture, and agrees to
perform the same upon the terms and conditions of the Indenture, as
supplemented hereby.
(b) The recitals contained herein shall be taken as statements
of the Company and the Guarantor, and the Trustee assumes no
responsibility for their correctness.
(c) Each of the Company, the Guarantor and the Trustee makes
and reaffirms as of the date of execution of this First Supplemental
Indenture all of its respective representations, covenants and
agreements set forth in the Indenture as supplemented hereby.
(d) All covenants and agreements in this First Supplemental
Indenture by the Company, the Guarantor or the Trustee shall bind
its respective successors and assigns, whether so expressed or not.
(e) Except as otherwise provided herein, the Indenture shall
remain in full force and effect in accordance with its terms.
(f) This First Supplemental Indenture shall be deemed to be
incorporated in, and made a part of, the Indenture, and the
Indenture, as supplemented hereby, shall be read, taken and
construed as one and the same instrument.
(g) Nothing in this First Supplemental Indenture, express or
implied, shall give to any Person, other than the parties hereto and
their successors hereunder and the Holders, any benefit or any legal
or equitable right, remedy or claim under this First Supplemental
Indenture.
This instrument may be executed in any number of counterparts, each of
which so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this First Supplemental
Indenture to be duly executed, all as of the day and year first above written.
(SEAL) MONTEREY MANAGEMENT, INC.
By /s/ Larry W. Seay
-------------------------------
Name: Larry W. Seay
Title: CFO
- 8 -
<PAGE> 93
(SEAL) MONTEREY HOMES CORPORATION
By /s/ Larry W. Seay
------------------------------
Name: Larry W. Seay
Title: CFO
(SEAL) MONTEREY MANAGEMENT-TUCSON, INC.
By /s/ Larry W. Seay
-------------------------------
Name: Larry W. Seay
Title: CFO
(SEAL) MONTEREY HOMES-TUCSON CORPORATION
By /s/ Larry W. Seay
-------------------------------
Name: Larry W. Seay
Title: CFO
(SEAL) NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION, as Trustee
By /s/ Raymond S. Haverstock
-------------------------------
Name: Raymond S. Haverstock
Title: Vice President
- 9 -
<PAGE> 94
STATE OF ARIZONA )
)ss.
County of Maricopa )
On the 10 day of September, 1996, before me personally came
Larry W. Seay, to me known, who, being by me duly sworn, did depose and
say that he is the CFO of Monterey Management, Inc., one of the
corporations described in and which executed the foregoing instrument; that he
knows the seal of said corporation; that the seal affixed to said instrument is
such corporate seal; that it was so affixed by authority of the Board of
Directors of said corporation; and that he signed his name thereto by like
authority.
/s/ Anne M. Camuso
--------------------------------
Notary Public
My commission expires:
June 30, 1998
- ----------------------
[seal]
STATE OF ARIZONA )
)ss.
County of Maricopa )
On the 10 day of September, 1996, before me personally came
Larry W. Seay, to me known, who, being by me duly sworn, did depose and
say that he is the CFO of Monterey Homes Corporation, one of the
corporations described in and which executed the foregoing instrument; that he
knows the seal of said corporation; that the seal affixed to said instrument is
such corporate seal; that it was so affixed by authority of the Board of
Directors of said corporation; and that he signed his name thereto by like
authority.
/s/ Anne M. Camuso
---------------------------------
Notary Public
My commission expires:
June 30, 1998 [seal]
- ---------------------------
- 10 -
<PAGE> 95
STATE OF ARIZONA )
)ss.
County of Maricopa )
On the 10 day of September, 1996, before me personally came
Larry W. Seay, to me known, who, being by me duly sworn, did depose and
say that he is the CFO of Monterey Management - Tucson, Inc., one
of the corporations described in and which executed the foregoing instrument;
and that he signed his name thereto by like authority.
/s/ Anne M. Camuso
--------------------------------------
Notary Public
My commission expires:
June 30, 1998
[SEAL]
STATE OF ARIZONA )
)ss.
County of Maricopa )
On the 10 day of September, 1996, before me personally came
Larry W. Seay, to me known, who, being by me duly sworn, did depose and
say that he is the CFO of Monterey Homes - Tucson Corporation,
one of the corporations described in and which executed the foregoing
instrument; and that he signed his name thereto by like authority.
/s/ Anne M. Camuso
------------------------------
Notary Public
My commission expires:
June 30, 1998 [SEAL]
- 11 -
<PAGE> 96
STATE OF MINNESOTA )
)ss.
County of Hennepin )
On the 11th day of September, 1996, before me personally came
Raymond S. Haverstock, to me known, who, being by me duly sworn, did depose and
say that he is a Vice President of Norwest Bank Minnesota, National
Association, one of the corporations described in and which executed the
foregoing instrument; that he knows the seal of said corporation; that the seal
affixed to said instrument is such corporate seal; that it was so affixed by
authority of the Board of Directors of said corporation; and that he signed his
name thereto by like authority.
/s/ Theresa M. Stelter
--------------------------------
[SEAL] Notary Public
My commission expires 1-31-2000
- 12 -
<PAGE> 97
SUPPLEMENT A
ACCEPTANCE
Homeplex Mortgage Investments Corporation, a Maryland corporation
("Homeplex"), hereby agrees that it shall be a "Guarantor" of the $8,000,000
aggregate principal amount of the 13% Senior Subordinated Notes due 2001 issued
by Monterey Management, Inc., an Arizona corporation ("Monterey"), pursuant to
the Indenture dated as of October 17, 1994 (as amended from time to time, the
"Indenture") among Monterey, Monterey Homes Corporation, an Arizona corporation,
and Norwest Bank Minnesota, National Association, as Trustee, and further agrees
to assume all of the obligations of a Guarantor and to abide by and be subject
to all of the terms and conditions of the Indenture that are imposed upon
Guarantors.
DATED this ____ day of ___________, 1996.
HOMEPLEX MORTGAGE INVESTMENTS
CORPORATION
By __________________________
Name: _______________________
Title: ______________________
- 13 -
<PAGE> 98
SECOND SUPPLEMENTAL INDENTURE, dated as of September 11, 1996,
among MONTEREY HOMES CONSTRUCTION II, INC. (formerly Monterey Management-Tucson,
Inc.), an Arizona corporation ("Construction"), having its principal office at
6613 North Scottsdale Road, Suite 200, Scottsdale, Arizona 85250, MONTEREY HOMES
ARIZONA II, INC. (formerly Monterey Homes-Tucson Corporation), an Arizona
corporation ("Arizona"), having its principal office at 6613 North Scottsdale
Road, Suite 200, Scottsdale, Arizona 85250, and NORWEST BANK MINNESOTA, NATIONAL
ASSOCIATION, as Trustee (the "Trustee"), having its principal Corporate Trust
Office at Norwest Center, Sixth and Marquette, Minneapolis, Minnesota
55479-0069, supplementing that certain Indenture, dated as of October 17, 1994
(as heretofore amended by the First Supplemental Indenture dated as of September
9, 1996, the "Indenture").
RECITALS OF THE COMPANY
The Company has heretofore executed and delivered to the Trustee the
Indenture providing for the issuance of up to $8,000,000 in aggregate principal
amount of its 13% Senior Subordinated Notes due 2001 (the "Notes").
Monterey Management, Inc., an Arizona corporation and formerly the
Company under the Indenture, has merged pursuant to Article 8 of the Indenture
with and into Construction, with Construction surviving and becoming the
successor Company under the Indenture.
Monterey Homes Corporation, an Arizona corporation and formerly a
Guarantor under the Indenture, has merged pursuant to Article 8 of the
Indenture, with and into Arizona, with Arizona surviving and becoming a
successor Guarantor under the Indenture.
Section 8.1(1) of the Indenture requires that the corporation into
which the Company and/or the Guarantor is merged, by indenture supplemental to
the Indenture, executed and delivered to the Trustee, in form satisfactory to
the Trustee, expressly assume the due and punctual payment of the principal of
(and premium, if any) and interest on all Notes and the performance of every
covenant of the Indenture on the part of the Company and/or the Guarantor to be
performed or observed.
All things necessary to make this Second Supplemental Indenture a
valid agreement of the Company, the Guarantor, and the Trustee, and a valid
supplement to the Indenture, in accordance with its terms, have been done.
NOW, THEREFORE, THIS FIRST SUPPLEMENTAL INDENTURE WITNESSETH:
For and in consideration of the premises and the agreements set
forth in this Second Supplemental Indenture and intending to be legally bound
hereby, it is mutually agreed, for the equal and proportionate benefit of all
Holders of the Notes as follows:
<PAGE> 99
ARTICLE ONE
Assumption
Section 101. Assumption of Obligations by Construction and Arizona.
(a) Construction by this Second Supplemental Indenture does
hereby expressly assume, as required by Section 8.1(1) of the Indenture, the due
and punctual payment of the principal of (and premium, if any) and interest on
all Notes and the performance of every covenant of the Indenture on the part of
the Company to be performed or observed.
(b) Arizona by this Second Supplemental Indenture does hereby
expressly assume, as required by Section 8.1(1) of the Indenture, the due and
punctual payment of the principal of (and premium, if any) and interest on all
Notes and the performance of every covenant of the Indenture on the part of the
Guarantor to be performed or observed.
ARTICLE TWO
Miscellaneous
Section 201. Miscellaneous.
(a) The Trustee accepts the trusts created by the Indenture,
as supplemented by this Second Supplemental Indenture, and agrees to
perform the same upon the terms and conditions of the Indenture, as
supplemented hereby.
(b) The recitals contained herein shall be taken as statements
of the Company and the Guarantor, and the Trustee assumes no
responsibility for their correctness.
(c) Each of the Company, the Guarantor, and the Trustee makes
and reaffirms as of the date of execution of this Second
Supplemental Indenture all of its respective representations,
covenants, and agreements set forth in the Indenture as supplemented
hereby.
(d) All covenants and agreements in this Second Supplemental
Indenture by the Company, the Guarantor, or the Trustee shall bind
its respective successors and assigns, whether so expressed or not.
(e) Except as otherwise provided herein, the Indenture shall
remain in full force and effect in accordance with its terms.
(f) This Second Supplemental Indenture shall be deemed to be
incorporated in, and made a part of, the Indenture, and the
Indenture, as supplemented hereby, shall be read, taken, and
construed as one and the same instrument.
(g) Nothing in this Second Supplemental Indenture, express or
implied, shall give to any Person, other than the parties hereto and
their successors hereunder and the Holders, any benefit or any legal
or equitable right, remedy, or claim under this Second Supplemental
Indenture.
- 2 -
<PAGE> 100
This instrument may be executed in any number of counterparts, each of
which so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Second
Supplemental Indenture to be duly executed as of the day and year first above
written.
MONTEREY HOMES CONSTRUCTION II, INC.
By /s/ Larry W. Seay
-----------------------------------------
Name: Larry W. Seay
Title: CFO
MONTEREY HOMES ARIZONA II, INC.
By /s/ Larry W. Seay
-----------------------------------------
Name: Larry W. Seay
Title: CFO
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION, as Trustee
By /s/ Raymond S. Haverstock
-----------------------------------------
Name: Raymond S. Haverstock
Title: Vice President
- 3 -
<PAGE> 101
STATE OF ARIZONA )
)s.
County of Maricopa )
On the 11 day of September, 1996, before me personally came
Larry W. Seay, to me known, who, being by me duly sworn, did depose and
say that he is the CFO of Monterey Homes Construction II, Inc.,
one of the corporations described in and which executed the foregoing instrument
and that he signed his name thereto by authority of the Board of Directors of
said corporation.
/s/ Anne M. Camuso
--------------------------------------
Notary Public
My commission expires:
June 30, 1998
[SEAL]
STATE OF ARIZONA )
)ss.
County of Maricopa )
On the 11 day of September, 1996, before me personally came
Larry W. Seay, to me known, who, being by me duly sworn, did depose and
say that he is the CFO of Monterey Homes Arizona II, Inc., one of
the corporations described in and which executed the foregoing instrument and
that he signed his name thereto by authority of the Board of Directors of said
corporation.
/s/ Anne M. Camuso
-----------------------------------
Notary Public
My commission expires:
June 30, 1998 [SEAL]
- 4 -
<PAGE> 102
STATE OF MINNESOTA )
)ss.
County of Hennepin )
On the 12TH day of September, 1996, before me personally came
Raymond S. Haverstock, to me known, who, being by me duly sworn, did depose and
say that he is a Vice President of Norwest Bank Minnesota, National
Association, one of the corporations described in and which executed the
foregoing instrument and that he signed his name thereto by authority of the
Board of Directors of said corporation.
/s/ Theresa M. Stelter
--------------------------------
[SEAL] Notary Public
My commission expires 1-31-2000
- 5 -
<PAGE> 1
EXHIBIT 10(k)
[NORWEST BANK LOGO Norwest Bank Arizona, N.A.
Commercial Real Estate Department
3300 North Central Avenue
Mail Station 9008
Phoenix, Arizona 85012
602/263-7228
Fax: 602/248-3667
August 28, 1996
Monterey Management Tucson, Inc.
Monterey Homes Tucson Corporation
Monterey Management, Inc.
Monterey Homes Corporation
6613 North Scottsdale Road, Suite #200
Scottsdale, Arizona 85250
RE: Letter Loan Agreement
Gentlemen:
We are pleased to inform you that Norwest Bank Arizona, National Association
(the "Bank"), has approved the Credit Facility described below, according to the
terms and conditions set out in this Letter Loan Agreement (the "Agreement"), in
addition to those set out in any other documents (collectively, the "Loan
Documents") which may be signed in connection with this transaction.
BORROWERS: For purposes of this Agreement, "Borrowers" shall mean,
collectively, Monterey Management Tucson, Inc., Monterey Homes Tucson
Corporation, Monterey Management, Inc. and Monterey Homes Corporation
(the "Borrowers").
GUARANTORS: For purposes of this Agreement, "Guarantors" shall mean,
jointly and severally, Bill Cleverly, Steve Hilton and Benee Hilton
(the "Guarantors").
CREDIT FACILITY: Borrowers agree to borrow from the Bank, and, subject
to the terms and conditions of this Agreement and the other Loan
Documents, Bank agrees to loan, to or for the benefit of Borrowers, a
sum not to exceed Seven Million Five Hundred Thousand and no/100ths
Dollars ($7,500,000.00). Indebtedness arising under the Credit Facility
shall be evidenced by and bear interest as provided in Bank's form of
promissory note, dated August 28, 1996 (the "Note"), which shall be
duly signed and delivered to Bank by Borrower, and all notes taken in
renewal or modification of, additional to or substitution for it.
LOAN FEE: Borrowers shall pay to the Bank upon acceptance of this
Agreement a fee equal to three-quarters of one percent (3/4%) of the
funded amount under the Credit Facility (the "Loan Fee"), which fee
shall be deemed fully earned by the Bank and non-refundable to
Borrowers.
LOAN PURPOSE: The purpose of the Credit Facility is to partially fund
distributions of Borrowers' Previously Taxed Earnings and 1996
subchapter S tax liabilities to Bill Cleverly and Steve Hilton prior to
the merger of Borrowers with Homeplex Mortgage Investments Corporation
("Homeplex").
MATURITY DATE: The Maturity Date of the Credit Facility is August 28,
1997.
<PAGE> 2
INTEREST RATE: Interest on the Credit Facility shall be calculated at
an annual rate equal to one-half of one percent (1/2%) in excess of the
Base Rate on the basis of actual days elapsed in a year of 360 days.
"Base Rate" means the rate established by the Bank from time to time as
its "base" or " prime" rate of interest. The interest rate may vary as
often as daily with any change in the Base Rate.
REPAYMENT: The Credit Facility shall be repaid in successive monthly
installments of principal in the amount of $500,000.00 each, plus
interest, commencing on October 15, 1996, and continuing on the last
day of each succeeding month until the Maturity Date, at which time the
entire remaining balance of principal and interest shall be immediately
due and payable. In addition, Borrowers shall make an additional
principal reduction in the three month period ending May 31, 1997, in
an amount of not less than $750,000.00.
COLLATERAL: The Credit Facility shall be unsecured, however, Guarantors
shall each, jointly and severally, guarantee repayment of all
indebtedness arising under this Agreement. In addition, Bill Cleverly
and Steve Hilton shall each pledge to Bank, to secure the respective
guaranty of each, short-term U.S. Government Treasury instruments or
blue chip or investment grade marketable securities in an amount of
$3,750,000.00 or 50% of the maximum funded advances, whichever is less.
The total value of these collateral securities owned, respectively by
Bill Cleverly and Steve Hilton, shall be included as liquidity for the
purposes of calculating the personal liquidity as described in
Significant Covenants section xi.
PREPAYMENT: The Credit Facility may be prepaid in whole or in part at
any time upon written or telephonic notice to the Bank. Prepayment must
be received by the Bank before 12:00 p.m. local time in Arizona on any
business day in order for prepayment to be credited as of that business
day. Prepayment received at 12:00 p.m. or later local time in Arizona
on any business day will be credited as of the next business day.
SIGNIFICANT COVENANTS: Not in limitation of any other covenants which
may be required by the Bank pursuant to the Loan Documents, during the
term of the Credit Facility or so long as any portion of it is
outstanding, Borrowers shall:
i. provide signed copies of each Guarantor's filed state and federal
income tax returns with all schedules and attachments within 120
days after calendar year end, or when filed, if filed later;
ii. provide a resolution from each Borrower authorizing the
execution, delivery and performance of all of the Loan Documents
by such Borrower and all acts and transactions required or
contemplated by them;
iii. provide quarterly company-prepared consolidated financial
statements including each Borrower 30 days after each calendar
month end;
iv. provide annual personal financial statements for each Guarantor
within 30 days after each calendar year end;
v. provide CPA-audited annual consolidated financial statements
including each Borrower within 90 days after each fiscal year
end;
vi. not make any loans to others;
vii. not incur any obligations except for those incurred in the
ordinary course of its business;
viii. maintain a liquidity, measured quarterly, of not less than
$500,000.00;
ix. not request Advances under the Credit Facility for the purpose of
purchasing fixed assets or the making of investments;
x. maintain principal bank accounts with the Bank;
<PAGE> 3
xi. cause each of Bill Cleverly and Steve Hilton to maintain, at all
times, personal liquidity of not less than 50% of the outstanding
balance of the Credit Facility; and
xii. pay all taxes when due.
EXPENSES: Expenses, not limited to internal or external legal fees, an
appraisal fee and an environmental assessment fee plus all costs
incurred in connection with documenting, maintaining, and enforcing the
Credit Facility, including, but not limited to, court costs and
attorney fees, shall be paid by the Borrowers.
CONDITIONS TO FACILITY: The Bank's obligation to provide or to fund all
or any portion of the Credit Facility and the extension of credit, if
any, set forth in the Loan Documents will be conditioned upon the
following:
i. no material adverse change in the condition, financial or
otherwise, of Borrowers or Guarantors shall have occurred, and no
action, suit or proceeding shall be instituted or threatened
relating to the Credit Facility;
ii. execution of and delivery to the Bank of the Loan Documents, all
in form and substance satisfactory to the Bank and its counsel;
iii. Borrowers shall hold harmless and indemnify the Bank from any and
all claims of any nature arising out of Borrowers' business;
iv. Borrowers shall not be in default of any of the terms of the
Credit Facility, any of the Loan Documents or of any other
agreement with the Bank;
v Borrowers shall have received the consents and waivers of the
holders of Borrowers' 13% Senior Subordinated Notes due 2001 (the
"Senior Notes") and Warrantholders described in that certain
Consent Solicitation Statement, dated August 7, 1996 and that
certain undated Notice to Warrantholders;
vi. Borrowers shall not be in default of any of the terms of the
Senior Notes or any other loan agreement, indenture or material
contract to which Borrowers, Guarantors or any of them are parties
or by which they are bound;
REPRESENTATIONS AND WARRANTIES:
i. Borrowers jointly and severally represent and warrant to the Bank
that this Agreement, the Loan Documents and the Credit Facility
are, on the date of funding, and will be, following the Monterey
Transactions and the Merger (as such terms are defined in that
certain Agreement and Plan of Reorganization with Homeplex in the
form previously provided by the Borrowers to the Bank), valid and
binding obligations of the Borrowers, enforceable against them in
accordance with their terms.
ii. Guarantors jointly and severally represent and warrant to the Bank
that the Guarantee provided by this Agreement, the Loan Documents
and Credit Facility is, on the date of funding, and will be,
following the Monterey Transactions and the Merger (as such terms
are defined in that certain Agreement and Plan of Reorganization
with Homeplex in the form previously provided by the Borrowers to
the Bank), a valid and binding obligation of each Guarantor,
enforceable against him in accordance with the terms of such
Guarantee.
iii. Borrowers and Guarantors jointly and severally represent and
warrant to the Bank that the representations and warranties of
each of them made in that certain Amended and Restated Loan
Agreement, dated as of August 8, 1995, as amended and in effect on
the date hereof, are true and correct and are incorporated by
reference into this Agreement as if fully set forth herein.
<PAGE> 4
EVENTS OF DEFAULT: Each of the following shall constitute an Event of
Default:
i. default in any payment of interest or of principal on the Note
when due, and continuance thereof for 10 days;
ii. default in the observance or performance of any agreement of any
Borrower set forth in the Significant Covenants or Conditions to
Facility hereof or in any other agreement between the Bank and the
Borrower or evidence of indebtedness of any Borrower to the Bank;
iii. default in the observance or performance of any other agreement of
any Borrower herein set forth and continuance thereof for 30 days;
iv. default by any Borrower or any Guarantor in the payment of any
other indebtedness for borrowed money to any party or in the
observance or performance of any term, covenant or agreement of
any Borrower or any Guarantor in any agreement relating to any
indebtedness to any party, the effect of which default is to
permit the holder of such indebtedness to declare the same due
prior to the date fixed for its payments under the terms thereof,
v. any representation or warranty made by Borrowers herein or in any
statement or certificate furnished by the Borrowers hereunder, is
untrue in any material respect; or
vi. the occurrence of any litigation or governmental proceeding which
is pending or threatened against any Borrower or any Guarantor,
which could have a material adverse effect on the Borrower's or
Guarantor's financial condition or business, and which is not
remedied within a reasonable period of time (a reasonable period
of time not to exceed 10 days) after notice thereof to the
Borrowers.
REMEDIES: Immediately upon the occurrence of an Event of Default, or at
any time thereafter, unless such Event of Default is remedied, the Bank
or the holder of the Note may, by notice in writing to the Borrower,
declare the Credit Facility to be terminated or the Note to be due and
payable, or both, whereupon the Credit Facility shall immediately
terminate or the Note shall immediately become due and payable, or
both, as the case may be.
BANKRUPTCY: If any Borrower or any Guarantor becomes insolvent or
bankrupt, or makes an appointment for the benefit of creditors or
consents to the appointment of a custodian, trustee or receiver for
itself or for the greater part of its properties; or a custodian,
trustee or receiver is appointed for the Borrower or any Guarantor or
for the greater part of its properties without its consent and is not
discharged within 60 days; or bankruptcy, reorganization or liquidation
proceedings are instituted by or against the Borrower or any Guarantor
and, if instituted against it, are consented to by it or remain
undismissed for 60 days, or if any Guarantor shall die, then the Credit
Facility shall immediately terminate and the Note shall automatically
become immediately due and payable, without notice.
MISCELLANEOUS:
(i) Collateral securing the Credit Facility shall also secure any
other indebtedness of the Borrower to the Bank, and collateral
securing any other indebtedness of the Borrower to the Bank shall
also secure the Credit Facility.
ARBITRATION: Subject to the provisions of the next paragraph below, the
Bank, the Borrowers and the Guarantors agree to submit to binding
arbitration any and all claims, disputes and controversies
<PAGE> 5
between or among them, whether or in tort, contract or otherwise (and
their respective employees, officers, directors, attorneys and other
agents) arising out of or relating to in any way (i) the Credit
Facility and related loan and security documents which are the subject
of this Agreement and its negotiation, execution, collateralization,
administration, repayment, modification, extension, substitution,
formation, inducement, enforcement, default or termination; or (ii)
requests for additional credit. However, "Core Proceedings" under the
United States Bankruptcy Code shall be exempted from arbitration. Such
arbitration shall proceed in Phoenix, Arizona, shall be governed by the
Federal Arbitration Rules of the American Arbitration Association
("AAA"). The arbitrator shall give effect to statutes of limitation in
determining any claim. Any controversy concerning whether an issue is
arbitrable shall be determined by the arbitrator. Judgment upon the
award rendered by the arbitrator may be entered in any court having
jurisdiction.
Nothing in the preceding paragraph, nor the exercise of any right to
arbitrate, shall limit the right of any party hereto (i) to foreclose
against real or personal property collateral by the exercise of the
power of sale, under a deed of trust, mortgage, or other pledge,
security agreement or instrument, or applicable law; (ii) to exercise
self-help remedies relating to collateral or proceeds of collateral
such as setoff or repossession; or (iii) to obtain provisional or
ancillary remedies such as replevin, injunctive relief, attachment or
appointment of a receiver from a court having jurisdiction, before,
during or after the pendency of any arbitration proceeding. The
institution and maintenance of any action for such judicial relief, or
pursuit of provisional or ancillary remedies, or exercise of self-help
remedies shall not constitute a waiver of the right or obligation of
any party to submit any claim or dispute to arbitration, including
those claims or disputes arising from exercise of any such judicial
relief, or provisional or ancillary remedies, or exercise of self-help
remedies.
Arbitration under this Agreement shall be before a single arbitrator,
who shall be a neutral attorney who has practiced in the area of
commercial law for at least 10 years, selected in the manner
established by the Commercial Arbitration Rules of the AAA.
AGREEMENT CONTROLS: The Loan Documents shall include this Agreement and
any prior loan agreement, letter agreement or other agreement between
Bank and Borrowers or any one of them. In the event of a conflict
between any of the provisions of this Agreement and any provisions of
any other Loan Documents, the provisions of this Agreement shall
control.
ACCEPTANCE REQUIRED: It is a condition of this Agreement that Borrowers
and Guarantors accept it in writing by signing the original, or a
counterpart of the original which shall have the same effect as signing
of a single original, and by returning the accepted Agreement with the
Loan Fee to the Bank. If Borrowers and Guarantors fail to accept and
return this Agreement with the Loan Fee, the Bank shall have no
obligation under it.
NORWEST BANK ARIZONA,
NATIONAL ASSOCIATION
By: /s/ KEVIN KOSAN
_______________________________
Kevin Kosan, Vice President
<PAGE> 6
Accepted and approved this 4th day of September, 1996.
Monterey Management Tucson, Inc. Monterey Homes Tucson Corporation
By: /s/ Larry W. Seay By: /s/ Larry W. Seay
- ---------------------------------- ----------------------------------
Its: Vice President Its: Vice President
Monterey Management, Inc. Monterey Homes Corporation
By: /s/ Larry W. Seay By: /s/ Larry W. Seay
- ---------------------------------- ----------------------------------
Its: Vice President Its: Vice President
/s/ Bill Cleverly /s/ Steve Hilton
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Bill Cleverly, Guarantor Steve Hilton, Guarantor
/s/ Benee Hilton
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Benee Hilton, Guarantor
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EXHIBIT 10(l)
CONSTRUCTION LOAN AGREEMENT
DATE: December 5, 1995
PARTIES: MONTEREY MANAGEMENT, INC., an Arizona corporation ("MMI") MONTEREY
MANAGEMENT TUCSON, INC., an Arizona corporation ("MMT"), and MONTEREY
HOMES CORPORATION, an Arizona corporation, dba Monterey Homes ("MHC")
MMI, MMT and MHC are jointly and severally referred to herein as
"Borrower."
NATIONAL BANK OF ARIZONA, a national banking association ("Bank")
RECITALS:
Borrower has obtained from Bank a term loan to finance the acquisition
costs of forty-six (46) improved lots (the "Lots") within the subdivision known
as The Lakes of Castle Rock located at Tanque Verde and Woodland Drive, Tucson,
Arizona, (the "Property") described on the attached Exhibit "A."
Borrower desires to obtain from Bank a line of credit to finance the
construction of two model homes (the "Model Homes") on Lots ___ and ___, The
Lakes of Castle Rock; and (iii) a revolving line of credit to finance the
construction of pre-sold, and a maximum of two (2) not presold, i.e., "spec,"
single family homes ("Homes") thereon.
Bank is willing to establish for Borrower the two additional credit
facilities described above in conjunction with the Acquisition Loan (the
"Loans"), but only on the terms and conditions set forth herein.
Now, therefore, in consideration of the mutual covenants and agreements
herein contained, the parties agree as follows:
AGREEMENTS:
1. ACQUISITION LOAN.
1. 1. Subject to the terms and conditions contained in the
Acquisition Loan Documents (as hereinafter defined) Bank has advanced to
Borrower the sum of $1,977,500.00, for the acquisition of the Property (the
"Acquisition Loan").
1.2. The Acquisition Loan is evidenced by a Promissory Note,
(the "Acquisition Note") dated June 2, 1995 in the amount of $1,977,500.00
payable in accordance with the terms thereof. The Acquisition Loan is also
subject to the terms of the Business Loan Agreement
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between Borrower and Lender, dated as of June 2, 1995 (the "Acquisition Loan
Agreement") and secured by the Deed of Trust dated June 2, 1995, recorded June
7, 1995, at Docket No. 10059, Page 1521, official records of Pima County,
Arizona (the "Deed of Trust"). All other documents executed in connection with
or otherwise securing or relating to the Acquisition Loan are hereinafter
referred to as the "Acquisition Loan Documents."
2. REVOLVING LINE OF CREDIT.
2.1. Subject to the terms and conditions of this Agreement, Bank
will establish for Borrower a revolving line of credit (the "RLC") against which
Bank will make advances not to exceed the sum of $3,000,000.00 in the aggregate
at any one time outstanding.
2.2. The RLC shall be evidenced by a promissory note in a form
prepared and approved by Bank (the "RLC Note"). Interest on the principal amount
outstanding under the RLC shall be charged at a rate equal to one percent (1%)
in excess of the prime rate of interest as the same is published in the western
edition of the Wall Street Journal. The interest rate shall be adjusted as of
the close of business of any day during which the prime rate of interest is
changed. When a range of rates has been published, the higher of the rates will
be used. If the prime rate becomes unavailable during the term of this Loan,
Bank may designate a substitute index after notice to Borrower. Bank will advise
Borrower of the current prime rate upon Borrower's request. Borrower understands
that Bank may make loans based on other rates as well. Interest on the Note
shall be computed for the actual number of days that principal is outstanding,
on the basis of a 360 day year. Interest under the RLC shall be due and payable
monthly. All unpaid principal and interest shall be due and payable in full on
the date twenty-four (24) months following the date of the RLC Note (the "RLC
Maturity Date"). Borrower shall be entitled to postpone the Maturity Date upon
written notice to Lender prior to the Maturity Date one (1) time for an
additional six (6) months to the date thirty (30) months following the date of
the RLC Note.
2.3. Borrower agrees to pay to Bank a commitment fee for each
Home to be constructed in an amount equal to: one percent (1%) of the Estimated
Loan Value available under the RLC to construct such Home as provided in Section
4.1 hereof if such Home is a spec Home; and three-quarters of one percent (3/4%)
of the Estimated Loan Value available under the RLC to construct such Home as
provided in Section 4.1 hereof if such Home is pre-sold. Such fee shall be
payable at the same time as the initial disbursement under the RLC for such Home
and may be paid out of the RLC.
2.4. Advances under the RLC shall be used to finance the
construction of Homes on the Property. All disbursements under the RLC shall be
made in accordance with Section 4 hereof. For each Home, Bank shall record in
Borrower's revolving loan account on the books of Bank all advances made by Bank
to Borrower on the RLC, all charges, expenses, and other items properly
chargeable to Borrower, all payments made by Borrower and any other appropriate
debits and credits. The debit balance of Borrower's revolving loan account shall
reflect for each Home the amount of Borrower's indebtedness from time to time
under the RLC for such Home.
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letter with respect to the pre-sold Home; (iii) a preliminary title report or
bringdown endorsement on the affected Lot insuring Bank's first lien position
under the RLC; (iv) a breakdown of actual costs for the construction of the
pre-sold Home; (v) a copy of the plans and specifications to be used in
construction; and (vi) an appraisal for the pre-sold Home. No material changes
in the plans and specifications, estimated construction costs, permanent lender
commitment or title condition of the Lot shall be agreed to by Borrower without
Bank's prior written consent
4.3. Any requests by Borrower for an initial advance under the
RLC for any given spec Home shall be accompanied by the following, in form and
substance satisfactory to Bank and at Borrower's expense: (i) a preliminary
title report or bringdown endorsement on the affected Lot insuring Bank's first
lien position under the RLC; (ii) a breakdown of actual costs for the
construction of the Home; (iii) a copy of the plans and specifications to be
used in construction; and (iv) an appraisal for the Home. No material changes in
the plans and specifications, estimated construction costs or title condition of
the Lot shall be agreed to by Borrower without Bank's prior written consent.
4.4. Advances with respect to each Home shall be made first to
allow Borrower to pay the RLC Commitment Fee in connection with such Home and
any applicable advance to pay down the Acquisition Loan relative to the affected
Lot, but such Lot shall not be released from the lien of the Deed of Trust as a
result of such paydown. Loan funds for construction of said Home shall be
advanced on approved inspection by Bank when the following stages have been
completed:
(a) Five percent (5%) First Advance: Permits obtained,
site laid out, trenching completed and rebar in place, footings poured.
(b) Ten percent (10%) Second Advance: Stem walls poured.
(c) Fifteen percent (15%) Third Advance: Underground set
and soil backfilled.
(d) Twenty percent (20%) Fourth Advance: ABC in place
and graded, copper plumbing in place, floor slabs poured and set.
(e) Twenty-five percent (25%) Fifth Advance: Lumber and
trusses on site.
(f) Thirty percent (30%) Sixth Advance: Framing and
rough carpentry complete.
(g) Thirty-five percent (35%) Seventh Advance: Rough
plumbing, HVAC and electric complete.
(h) Forty percent (40%) Eighth Advance: Rough Inspection
complete and passed, roof dry, windows and sliding doors set in place.
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2.5. Upon Bank's demand from time to time, Borrower shall give
to Bank a list of all contractors, subcontractors and material suppliers who
will be supplying labor and materials for the construction of Homes.
2.6. All advances for construction of a spec Home shall be
repaid to Bank not later than 12 months from the date of the initial advance
under the RLC with respect to such spec Home. All advances for pre-sold Homes
shall be repaid to Bank not later than 7 months from the date of the initial
advance under the RLC with respect to such pre-sold Home; provided, however,
such 7 month period may be extended only one time for an additional 5 months
(resulting in a total term for such advance of 12 months) upon notification by
Borrower, accompanied by an additional commitment fee of one quarter of one
percent (1/4%) received by Bank prior to the expiration of the initial 7 month
period. In any event, all advances for construction of Homes shall be repaid to
Bank not later than the Maturity Date.
3. PURPOSES OF THE RLC.
The RLC proceeds shall be used to finance the construction of pre-sold
Homes and not more than a total of two (2) spec Homes on the Property. Bank will
advance such amounts with respect to the construction of such Homes not to
exceed the limits described in Section 4.1 hereof.
4. DISBURSEMENT OF THE RLC.
4.1. Borrower may request advances under the RLC from time to
time. Bank will lend Borrower such amounts as Borrower may request within a
reasonable time after such request upon the express conditions that: (a) all
such action shall have been taken and documents shall have been executed and
delivered which are or may be necessary to perfect or to continue the perfection
of Bank's liens and security interests; (b) there shall exist no Event of
Default or event which with the giving of notice or the passage of time or both,
would be an Event of Default hereunder; (c) the total debit balance of
Borrower's RLC, after reflecting any advances requested, shall not exceed the
amounts set forth in Section 2.1; (d) advances under the RLC for each Home do
not exceed the lesser of (i) 80% of the appraised value of such pre-sold Home
as it is to be constructed as shown in an appraisal report obtained at
Borrower's expense and satisfactory in all respects to Bank in its sole
discretion, or 75% of the appraised value of such spec Home as it is to be
constructed as shown in an appraisal report obtained at Borrower's expense and
satisfactory in all respects to Bank in its sole discretion, as applicable, (ii)
80% of the gross sales price of such pre-sold Home, (iii) the Estimated Loan
Value attributed to the particular model for such Home as set forth in Exhibit
B, attached hereto, or (iv) 100% of the actual cost of constructing the Home in
accordance with the plans and specifications and cost breakdown; and (e) the
requested advance meets the additional requirements set forth below.
4.2. Any requests by Borrower for an initial advance under the
RLC for any given pre-sold Home shall be accompanied by the following, in form
and substance satisfactory to Bank and at Borrower's expense: (i) a copy of an
arms-length sales contract for full and fair consideration and for which
Borrower shall have collected earnest money with respect to the pre-sold Home on
which an advance is requested; (ii) a copy of a permanent loan pre-qualification
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(i) Forty-five percent (45%) Ninth Advance: Stucco lath
insulation installed.
(j) Fifty percent (50%) Tenth Advance: Stucco first coat
applied, drywall stock on site.
(k) Fifty-five percent (55%) Eleventh Advance: Drywall
hung and taped.
(l) Sixty percent (60%) Twelfth Advance: Drywall joints
floated, stucco finish coat applied.
(m) Sixty-five percent (65%) Thirteenth Advance:
Interior walls sanded, dry wall textured.
(n) Seventy percent (70%) Fourteenth Advance: Doors and
trim on site, exterior paint complete.
(o) Seventy-five percent (75%) Fifteenth Advance: Trim
carpentry complete, interior paint complete.
(p) Eighty percent (80%) Sixteenth Advance: Cabinets on
site, roof complete.
(q) Eighty-five percent(85%) Seventeenth Advance:
Cabinets installed, countertops set.
(r) Ninety percent (90%) Eighteenth Advance: Interior
hardware, plumbing, electrical, HVAC and trim is complete.
(s) Ninety-five percent (95%) Nineteenth Advance:
Pre-cleaning complete, appliances are installed.
(t) One Hundred percent (100%), or the balance of the
Loan as provided in Section 4.1 hereof, whichever is less when all work has been
completed, including floor coverings are installed, final cleaning is complete
and all city inspections are complete and approved and provide the Bank with
the final city inspection and termite certificate.
Notwithstanding anything contained herein to the contrary, prior to any
advances for construction or advances to reimburse Borrower for previously
incurred construction costs, Borrower shall permit Bank and Bank's inspector
to make an inspection of the Home to be completed in order to determine the
percentage of such completion and the amount to be advanced.
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4.5. Each request for an advance under the RLC Note shall be in
writing on a form satisfactory to Bank. Each such request shall be made at least
five (5) days prior to the date on which the advance is required, and shall be
accompanied by evidence in form and substance satisfactory to Bank (including
but not limited to certificates and affidavits of Borrower, and reports of
Bank's inspector as required by Bank) showing: (a) percentage of completion or
stage of completion as set forth in Section 4.3 above; (b) that all outstanding
claims due for labor, materials, fixtures and equipment have been paid, except
claims contested in good faith by Borrower; (c) that there are no recorded liens
outstanding against the real property except the Bank's liens, those liens
approved in writing by Bank, and except liens bonded over in accordance with
A.R.S. Section 33-1004; (d) that Borrower has complied with all of Borrower's
obligations under this Agreement; (e) that all construction prior to the date of
the request for an advance has been accomplished in accordance with the plans
and specifications; (f) that all funds previously disbursed have been properly
applied to the costs of construction; (g) if requested by Bank, copies of all
bills or statements of expenses for which the advance is requested; (h) that all
change orders which require the approval of Bank shall have been approved in
writing by Bank; and (i) that the amount of the undisbursed loan proceeds is
sufficient to pay the cost of completing construction in accordance with the
plans and specifications.
4.6. If at any time during the course of construction of a Home
Bank determines that the undisbursed loan funds available for such construction
plus the items prepaid by Borrower and not reimbursed by Bank are insufficient
to pay the remaining costs of construction, Bank may, at its option, either (i)
cause Borrower to deposit the amount of such deficiency in an account with Bank
to be used to pay such costs; or (ii) cause Borrower to expend such funds as are
necessary to make up such deficiency and Borrower shall furnish the Bank with
satisfactory proof of any such expenditures.
4.7. Bank reserves the right, in its discretion, to defer,
reduce or decline payment of any item when in Bank's reasonable judgment the
payment is not justified by the value of the work in place or if such item is
not covered by the cost breakdowns referred to herein.
4.8. If requested by Bank, Borrower shall furnish statements
from each contractor, subcontractor and supplier:
(a) Stating the amount of its contract and the amount
paid to date;
(b) Acknowledging full payment less retainer for all
work done and materials supplied; and
(c) Waiving any mechanic's or material-man's lien on the
Property for work done to the date of disbursement, payment for which is covered
by that or prior disbursements, and waiving any lien on equipment purchased.
4.9. At no time and in no event shall Bank be obligated to
disburse funds for construction:
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(a) In excess of the amount recommended by Bank's
Inspector;
(b) If Bank is unsatisfied with the progress of
construction;
(c) If in the sole opinion of Bank the estimated
remaining costs of construction in accordance with the plans and specifications
exceeds the remaining undisbursed portion of loan proceeds for such construction
and Borrower fails to make up such deficiency in accordance with Section 4.6;
(d) If the improvements shall have been damaged by fire
or other casualty and Bank shall not have received insurance proceeds or other
cash funds from Borrower sufficient in the sole judgment of Bank to effect the
restoration of the improvements in accordance with the plans and specifications
prior to the maturity of the RLC Note;
(e) If Bank's Deed of Trust covering the Lot and Home
under construction for which the draw is requested shall not be in a first lien
position; or
(f) If any Event of Default hereunder shall have
occurred or any event which with the giving of notice or passage of time, or
both, would constitute an Event of Default hereunder shall have occurred.
4.10. At its option, Bank may make any or all advances directly
to Borrower, or to Borrower's subcontractors or material suppliers, or jointly
to the Borrower and any subcontractor or material supplier, and the execution of
this Agreement by Borrower shall, and hereby does, constitute an irrevocable
authorization to so advance the funds. No further direction or authorization
from Borrower shall be necessary to warrant such direct advances and all such
advances shall satisfy pro tanto the obligations of Bank hereunder and shall be
covered and secured by the Deed of Trust as fully as if made only to Borrower,
regardless of the disposition thereof by such person. Bank, at its option, may
pay suppliers of all furniture, fixtures and equipment directly.
4.11. No advance of loan proceeds hereunder shall constitute a
waiver of any of the conditions to any further advances nor, in the event
Borrower is unable to satisfy any such condition, shall any such waiver have the
effect of precluding Bank from thereafter declaring such inability to be an
Event of Default.
4.12. Borrower acknowledges that any inspections or any
examinations made by Bank, or lien waivers, receipts or other instruments
obtained by Bank, are made or obtained solely for Bank's benefit and not in
any way for the benefit or protection of Borrower or any third party.
4.13. Borrower shall permit Bank and its representatives and
agents to enter upon any Lot and to inspect the construction of the Home and all
materials to be used in the construction thereof and to cause Borrower's
contractors and subcontractors to cooperate with Bank during such inspections.
If required by Bank, Borrower shall pay Bank the applicable inspection fee for
each inspection. Borrower agrees that the Bank has no obligation in carrying
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out or supervising the construction program. Bank, in its discretion, may waive
any inspection or the furnishing of lien waivers or receipts or other proof of
payment or any other condition to a disbursement and make disbursements of the
loans solely upon the statements and recommendations of Borrower, and such
waiver shall not constitute a waiver of any of the conditions to any later
disbursements.
4.14. Borrower shall diligently pursue construction of all Homes
to completion in accordance herewith and with the plans and specifications
delivered to Bank and in full compliance with all construction, use, building,
zoning and other similar requirements of any governmental authority. The
Borrower covenants that all Homes will be constructed and completed free and
clear of all liens, claims or assessments against the Lots except Bank's liens.
Borrower agrees that construction of each Home shall be completed within the
applicable time periods for repayment of advances specified in Section 2.6. In
the event Borrower's buyer defaults under the purchase agreement during the
construction of any pre-sold Home, Borrower shall notify the Bank immediately of
such event and immediately market such Home for sale. Borrower agrees that so
long as any loan under this Agreement may be outstanding, Borrower will borrow
no other funds, directly or indirectly, for the purpose of construction on the
Lots nor cause any lien other than Bank's to be placed against the Lots.
Borrower will not allow any Home buyers to take possession of any Home or part
thereof, until Bank's lien upon such Home and Lot is paid in full, and the Lot
has been released from the lien of the Deed of Trust.
5. Model Loan.
5.1. Subject to the terms and conditions of this Agreement,
Bank will establish for Borrower a line of credit against which Bank will make
advances not to exceed the sum of $485,000.00 for the purposes of constructing
two model homes (the "Model Loan"). The Acquisition Loan, RLC and Model Loan are
sometimes referred to herein as the "Loans."
5.2. The Model Loan shall be evidenced by a Promissory Note (the
"Model Note") of even date herewith in the face amount of $485,000.00 payable in
accordance with the terms thereof. Interest on the principal amount outstanding
under the Model Loan shall be charged at an annual rate equal to 1% in excess of
the prime rate of interest as the same is published in the western edition of
the Wall Street Journal. The interest rate shall be adjusted as of the close of
business during any day during which the prime rate of interest has changed.
When a range of rates has been published, the higher of the rates will be used.
If the prime rate becomes unavailable during the term of this Loan, Bank may
designate a substitute index after notice to Borrower. Bank will advise Borrower
of the current prime rate upon Borrower's request. Borrower understands that
Bank may make loans based on other rates as well. Interest on the Note shall be
computed for the actual number of days that principal is outstanding, on the
basis of a 360 day year. Interest under the Model Loan shall be due and payable
monthly. All unpaid principal and interest shall be due and payable in full on
the date twelve (12) months following the date of the Model Note (the "Model
Maturity Date"). Provided Borrower is not in default, Borrower may elect to
extend the Model Maturity Date one time for an additional six (6) months by
giving Bank written notice ten (10) days prior to the then Model Maturity Date.
The Acquisition Note, RLC Note and Model Note are sometimes referred to herein
as the "Notes".
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6. MODEL LOAN COMMITMENT FEE: EXTENSION FEE.
Borrower shall pay to Bank a commitment fee and service charge for the
making and servicing of the Model Loan in the amount of $4,850.00 (the "Model
Commitment Fee") which shall be fully earned and non-refundable upon payment.
The Model Commitment Fee is due and payable upon the execution hereof out of
Model Loan proceeds. If Borrower elects to extend the Model Maturity Date,
Borrower shall pay to Bank an extension fee and service charge for extending the
Model Maturity Date in the amount of one-half of one percent of the face amount
of the Model Note less any principal balance thereof which has been repaid (the
"Model Maturity Extension Fee"). The Model Maturity Extension Fee is due and
payable by Borrower upon the Borrower's providing to Bank written notice of its
election to extend the Model Maturity Date, which shall be fully earned and
non-refundable upon payment.
7. PURPOSES OF THE MODEL LOAN.
Advances under the Model Loan shall be used only for the payment of the
costs and expenses to allow Borrower to construct two Model Homes and pay the
Model Commitment Fee.
8. DISBURSEMENT OF THE MODEL LOAN.
8.1. Bank shall make an advance for the benefit of the Borrower
to pay the Model Commitment Fee.
8.2. Advances for construction of the Model Homes shall be made
in the same manner as advances are to be made under the RLC; provided; however,
that advances under the Model Loan for each Model Home shall not exceed the
lesser of (i) 75% of the appraised value of such Model Home as it is to be
constructed as shown in an appraisal report obtained at Borrower's expense and
satisfactory in all respects to Bank in its sole discretion, (ii) the Estimated
Loan Value (less the Lot release price) attributed to the particular model for
such Model Home as set forth in Exhibit "C," attached hereto, or (iii) 100% of
the actual cost of constructing the Model Home in accordance with the plans and
specifications and cost breakdown (less any amount attributable to the Lot
release from the Acquisition Loan).
9. SECURITY.
9.1. As security for the payment of the Loans, and all other
liabilities and obligations of Borrower to Bank, now existing or hereafter
created, Borrower shall modify the Deed of Trust pursuant to Bank's form to
secure the payment and performance of the RLC and the Model Loan, as well as the
Acquisition Loan. The Deed of Trust shall be and remain a first and prior lien
on the Property, and all fixtures and attachments of and to the buildings now or
hereafter on the Property and those to be erected thereon, and shall assign all
leases and rents and purchase agreements on the Property to Bank, all subject
only to those exceptions set forth in Section 11 hereof.
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9.2. Borrower shall execute and deliver to Bank from time to
time upon the request of Bank, such financing statements or other documents
reasonably required by Bank to perfect or continue Bank's liens and security
interest described herein.
10. GUARANTIES.
Borrower shall cause its obligations to pay and perform under the Loans
to at all times be fully guaranteed by William Cleverly, a married man dealing
with his sole and separate property, and by Steve Hilton and Benee Hilton,
husband and wife (the "Guarantors"). Guarantors shall execute modifications to
the existing continuing guaranties relating to the Acquisition Loan (the
"Guaranties") so as to have them also guaranty the RLC and the Model Loan.
11. TITLE INSURANCE.
Borrower, at its cost and expense, shall cause the Title Company to
issue to Bank at the time of the first disbursement on the RLC or the Model Loan
an endorsement to the ALTA Extended Coverage Mortgage Title Insurance Policy,
with Number 3R and 5 Endorsements, insuring the Deed of Trust, to increase such
Policy's coverage amount by $3,485,000.00 insuring the Deed of Trust in Bank's
favor to be a valid first lien and encumbrance on the Property subject only to
the matters listed as exceptions therein.
12. RELEASES OF THE DEED OF TRUST.
So long as no Event of Default has occurred, and there shall not have
occurred any event which with the giving of notice or the passage of time, or
both, would constitute an Event of Default hereunder, Bank shall release the
lien of the Deed of Trust for each Lot with a Home thereon upon the sale thereof
and payment to Bank in cash of the sum equal to $56,500.00 (so long as the
Acquisition Loan remains unpaid with regard to the applicable Lot) plus all
advances made to Borrower under the RLC or Model Loan, as the case may be,
relating to such Home and Lot to be released, all as shown on Borrower's loan
account (the "Release Price"). Once the Acquisition Loan is paid in full, the
Release Price for each Lot with Home thereon shall equal the sum of all advances
made to Borrower under the RLC or Model Loan, as the case may be, relating to
such Home and Lot to be released, all as shown on Borrower's loan account.
Payments of interest under the Notes shall not be applied toward the Release
Price of any Lot from the lien of the Deed of Trust.
13. INSURANCE.
13.1. Borrower shall obtain the following insurance, together
with such other insurance or evidence of insurance as Bank may reasonably
require:
(a) Insurance against loss or damage by fire, lightning
and other casualties, with a uniform standard extended coverage endorsement,
such insurance to be in an amount not less than the full replacement value of
the completed improvements, exclusive of footings and foundations, as determined
by a recognized appraiser or insurer selected by the
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Borrower and approved by Bank. During the construction period, such policy shall
be written in the so-called "Builder's Risk Completed Value Non-Reporting Form"
and shall contain a provision granting the insured permission to complete and/or
occupy.
(b) Insurance protecting the Borrower and Bank against
loss or losses from liability imposed by law or assumed in any written contract
and arising from personal injury, including bodily injury or death, or a limit
of liability of not less than $500,000.00 (combined single limit for personal
injury, including bodily injury or death, and property damage) and a blanket
excess liability policy in an amount not less than $1,000,000.00 protecting the
Borrower and Bank against any loss or liability or damage for personal injury,
including bodily injury or death, or property damage.
(c) A policy of flood insurance in the maximum amount
available with respect to the Project under the Flood Disaster Protection Act of
1973, as amended. This requirement will be waived upon presentation of evidence
satisfactory to Bank that no portion of any Lot is located within an area
identified by the U.S. Department of Housing and Urban Development as having
special flood hazards.
(d) Upon completion of any Home, insurance on such Home
insuring against loss by fire and other hazards and casualties as are now
included in "extended coverage" policies in an amount equal to the maximum
insurable value of the improvements. The policy shall at all times have attached
thereto the standard non-contributory mortgagee clause with loss payable to
Bank.
13.2. With regard to each policy of insurance required to be
maintained by Borrower pursuant to Section 13.1, Borrower shall deliver to Bank
certified copies of such policies, together with appropriate endorsements
thereto, evidence of payment of premiums thereon and written agreement of the
insurer or insurers therein to give Bank 30 days' prior written notice of
intention to cancel. All insurance shall be carried in responsible insurance
companies which shall have been approved by Bank and which shall be rated not
less than A, class XV or better in Best's Key Rating Guide.
13.3. Borrower shall cooperate with Bank in obtaining for Bank
the benefits of any insurance or other proceeds lawfully or equitably payable to
it in connection with the Loans and the collection of any indebtedness or
obligation of Borrower to Bank incurred hereunder (including the payment by
Borrower of the expense of an independent appraisal on behalf of Bank in case of
a fire or other casualty affecting any Lot or Home).
14. CONDITIONS PRECEDENT.
Bank's obligation to make each advance hereunder is contingent upon each
of the following occurrences in addition to the other terms and conditions
contained herein (provided Bank may waive any such occurrence for an advance
without such waiver constituting a waiver of such occurrence for any later
advance):
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(a) All of Bank's liens and security interests securing
the Loans shall have been validly perfected;
(b) Receipt of the title insurance policy (or policies)
described above;
(c) Receipt of updated appraisals acceptable to Bank for
the Improvements and each Home: and
(d) Receipt of such documentation as Bank may reasonably
require, including, without limitation, the Guaranties, Notes, a permanent
lender commitment letter, and purchase contracts for such Home, all in form and
substance satisfactory to Bank.
15. COVENANTS AND WARRANTIES.
Borrower represents, warrants and agrees as follows:
(a) All information given to Bank in order to support
Borrower's loan request, and all information set forth in any financial
statements given by Borrower, and Guarantors to Bank, is true, correct and
complete;
(b) MM, MMT and MHC are and will continue to be
corporations duly organized and validly existing under the laws of the State of
Arizona;
(c) Borrower has full power to enter into this Agreement
and to perform all obligations herein contained and contemplated;
(d) This Agreement, the Notes, the Deed of Trust, and
all other documents executed by Borrower in favor of Bank (i) are and will be in
all respects legal, valid, and binding, (ii) are enforceable against Borrower
according to their terms, and (iii) will grant to Bank a direct, valid and
enforceable first lien upon the Property;
(e) The consummation of the transactions hereby
contemplated and the performance of the obligations of the Borrower hereunder
and by virtue of the Loans and the Deed of Trust will not result in any breach
of, or constitute a default under any mortgage, deed of trust, lease, loan or
credit agreement, articles of incorporation, bylaws or other instrument to which
Borrower is a party or by which it may be bound or affected;
(f) There are no actions, suits or proceedings pending,
or to the knowledge of Borrower threatened, against or affecting it or the
Guarantors, or involving the validity or enforceability of the Loans or the Deed
of Trust, or the priority of the liens thereof, at law or in equity, or before
or by any governmental authority, and Borrower is not in default with respect to
any order, writ, injunction or decree of any court or any governmental
authority;
(g) All financial statements provided and to be provided
hereunder have been and shall be prepared in accordance with generally accepted
accounting principles consistently applied. Borrower warrants and represents as
to each such financial statement that
-12-
<PAGE> 13
it fairly presents the financial condition of Borrower and that since the date
of such financial statement there has been no material adverse change in the
financial condition of Borrower. Bank or its agents shall have the right without
hindrance or delay to inspect, check, audit and make extracts from Borrower's
books, records and accounts including without limitation all journals, orders,
receipts and any correspondence and other data relating to the books, records
and accounts. Bank, or any persons designated by it, shall have the right to
make such verifications concerning Borrower's businesses as Bank may consider
reasonable under the circumstances;
(h) All utility services will be available on the Lots,
and Borrower has obtained all necessary permits and permissions required from
all governmental and other authorities for access to and use of such services in
connection with the development;
(i) There is no delinquent tax or delinquent assessment
respecting any Lot;
(j) All applicable requirements of local, Arizona, and
federal law relating to the subdivision involved and the sale of homes therein
have been complied with, or will be complied with at the time such compliance is
required by law;
(k) There are no restrictions or zoning regulations
which will restrict or prevent the proposed construction on and use of the Lots;
(l) The plans and specifications for the Homes to be
constructed on the Lots which Borrower delivers to Bank hereunder shall be true
and correct copies of the plans and specifications used in construction, and
Borrower hereby certifies that said plans and specifications are identical to
those used in preparation of the appraisal reports referred to above;
(m) Borrower has received no notice of and to the best
of its knowledge there is no violation of any law, municipal ordinance or order,
or any requirement of the State of Arizona, or any municipal department or
governmental authority, which violation relates to or affects the Lots or the
Homes to be constructed thereon;
(n) All building permits required for construction of
Homes in accordance with the plans and specifications will be or have been
obtained, and copies of such building permits will be delivered promptly to Bank
if requested;
(o) Borrower is and will at all times continue to be the
lawful owner of each Lot, except for sales made in the ordinary course of
business for a full and fair consideration. Borrower will not create or suffer
to exist any mortgage, pledge, lien, charge, encumbrance or security interest in
or upon any Lot except for Bank's liens;
(p) Within 30 days following the end of the relevant
quarter, Borrower shall furnish Bank with Borrower's quarterly compiled
financial statements prepared on an accrual basis in accordance with genera1ly
accepted accounting principles and work in progress reports furnished to Bank
(within 30 days following the end of the relevant quarter,) and
-13-
<PAGE> 14
prepared by a certified public accountant or internally prepared and signed by
either William Cleverly or Steve Hilton as officers of Borrower. Such statements
shall consist of a balance sheet and profit and loss statement in such
reasonable detail as Bank may request. Borrower shall furnish Bank with
Borrower's annual audited financial statements within 90 days after the end of
Borrower's fiscal year prepared by a certified public accountant acceptable to
Bank and on an accrual basis in accordance with generally accepted accounting
principles; Borrower further authorizes Bank to discuss such financial
statements with Borrower's CPA;
(q) All financial statements delivered to Bank by the
Guarantors fairly represent the financial condition of the Guarantors at the
times and for the periods therein stated; and since the date of these financial
statements, there has been no material change in the financial condition or any
other status of any Guarantor. Within 30 days following Borrowers fiscal year
end, Borrower shall cause each Guarantor to provide its financial statement to
Bank, in form satisfactory to Bank, and all such statements shall indicate all
assets held in trust. Guarantors shall further provide Bank with personal income
tax returns and schedules, signed and dated, within 30 days of the required
filing dates;
(r) Borrower has filed all tax returns and reports
required by law to be filed and all taxes, fees, assessments, and other
governmental charges upon Borrower or upon any of its properties or income that
are due and payable have been paid; Within 30 days from the required filing
date, Borrower shall provide Bank with copies of all federal and state income
tax returns and schedules signed and dated by an Officer of Borrower,
(s) MHC is and will at all times continue to be in
compliance with all covenants contained in the Indenture and all other documents
relating to the $8,000,000.00 in Senior Subordinated Notes issued by MHC on
October 11, 1994.
(t) Upon request from Bank, at least quarterly, Borrower
shall certify in writing to Bank that it is in compliance with the warranties
and covenants contained herein;
(u) Borrower will immediately inform Bank in writing of
any litigation threatened or instituted which might have a material adverse
affect upon any Lot or the financial condition of Borrower or Guarantors and, at
Bank's request, will furnish to Bank a summary of all such litigation;
(v) Borrower will promptly inform Bank of the occurrence
of any Event of Default or event which with the giving of notice or passage of
time or both would be an Event of Default hereunder, and
(w) Each of the warranties made by Borrower herein shall
be considered to have been made again as of the time Borrower delivers to Bank a
request for an advance under the Loans or Bank makes an advance pursuant to this
Agreement.
-14-
<PAGE> 15
16. CONSTRUCTION COSTS AND INSPECTIONS.
16. 1. Borrower will give Bank immediate notice of: (i) any and
all proposed significant changes in construction costs by means of the
contractors submitting to Bank's Inspector a change order log which shall
include all current and pending change orders; (ii) all proposed significant
changes in major subcontractors or major suppliers; (iii) all proposed
significant structural changes or changes material to the Home plans, and (iv)
any and all significant proposed changes in the amounts of any other items in
any Home or Model budget. No such changes shall be made by Borrower without the
prior written consent of Bank. Amounts not drawn under any one line item on any
budget may be added to another line item on such budget with prior written
consent of Bank as follows: In the event there are Bank approved costs in excess
of the amount shown in the Home or Model budget in any cost category described
therein, and there are funds available in any other cost category (for which the
work is completed and fully paid) in an amount sufficient to pay such excess
costs, then Bank may authorize a transfer of funds out of the cost category
containing such excess and into the cost category that is exceeding its Home
or Model budget amount. Upon the completion of all work relating to any
specific cost category, any amount remaining undisbursed under such cost
category shall be transferred out of such cost category and into the
applicable contingency cost category. Any changes which result in an increase
in the Model budget or any Home budget shall be paid for by Borrower.
16.2. Bank is authorized to contract with such persons or
agencies as Bank may choose in its discretion ("Bank's Inspector") for the
purpose of reviewing the Home plans, performing inspections of the Homes and
Model Homes, and monitoring the progress of construction of the same, which
inspection shall be made with such frequency as Bank shall determine in the
reasonable exercise of its discretion.
16.3. Borrower shall permit Bank's Inspector and Bank's
representatives and agents to enter upon the Property and approved off-site
storage areas to inspect the improvements in the Homes and all materials to be
used in the construction thereof. Any inspections or determinations made by
Bank's Inspector or Bank or instruments obtained by Bank, are made or obtained
solely for the benefit of Bank and its successors and assigns, and not in any
way for the benefit or protection of Borrower. Borrower shall pay all fees of
Bank's (third party) Inspector promptly when billed for the same by Bank.
17. EVENTS OF DEFAULT.
Any of the following shall be an Event of Default hereunder.
(a) If Borrower shall fail to pay any principal or
interest under the Notes within ten (10) days after notice to Borrower by Bank;
(b) If any warranty or representation herein contained
shall prove to be untrue;
-15-
<PAGE> 16
(c) If Borrower breaches any of its agreements contained
herein not otherwise described in this Section 17;
(d) If the construction work is abandoned or stopped for
a continuous period of 15 days, and not to exceed 30 days in the aggregate,
(except for a temporary stoppage due to a strike, shortage or unavailability of
materials, adverse weather conditions or an act of God);
(e) If any of the Homes shall be materially damaged or
destroyed by fire or other casualty, provided, however, that it shall not be an
Event of Default if Bank receives insurance proceeds or cash funds from Borrower
sufficient to repair or restore the improvements, the improvements can be
repaired or restored and fully completed, and Borrower expeditiously proceeds to
so repair or restore;
(f) The commencement of any case under the Bankruptcy
Code, Title 11 of the United States Bankruptcy Code, or the commencement of any
other bankruptcy, arrangement, reorganization, insolvency, receivership,
custodianship, or similar proceeding under any state or federal law by or
against Borrower, or any Guarantor (provided it shall not be an Event of Default
hereunder if such entity obtains dismissal of any involuntary proceeding within
sixty (60) days of the date of filing thereof); or if Borrower, or any Guarantor
is generally not paying its debts as they become due;
(g) If a mechanic's or materialmen's lien is filed
against a Lot and Borrower does not contest in good faith the assertion of
such a lien and immediately record and serve a surety bond pursuant to A.R.S.
Section 33-1004;
(h) If any judgment should be entered in any suit or
legal action materially affecting any Lot, Borrower, or any Guarantor, which is
not promptly satisfied or bonded over in a manner satisfactory to Bank pending
appeal;
(i) If Borrower's business is discontinued or suspended
for any reason or if Borrower's existence is dissolved or terminated;
(j) If Borrower or any Guarantor defaults on any other
loan it may have with Bank;
(k) If Borrower is unable to satisfy any condition to
its right to a disbursement hereunder after demand is made by Bank,
(l) If any action, rule, law or decision of any
legislative or administrative body or of any court should materially impair or
materially and adversely affect the enforceability of the loan documents;
(m) If there is a material adverse change in Borrower's
or any Guarantor's financial condition, or if the collateral becomes
unsatisfactory in character or value, or if Bank shall reasonably deem itself
insecure.
-16-
<PAGE> 17
18. REMEDIES OF BANK.
18. 1. Upon the occurrence of any Event of Default, Bank may at
its option and without further notice do one or more of the following:
(a) Withhold making any further advances hereunder and
under the Notes, it being agreed that Bank may also take such action upon the
occurrence of an event which would be an Event of Default except for any notice
and cure provisions set forth above;
(b) Declare the amount of the loan proceeds then
advanced under the Loans and the Notes, together with all costs and expenses,
immediately due and payable;
(c) Take possession of any real property encumbered by
any of the Bank's deeds of trust through agents, employ security watchmen, and
cause the Homes to be completed in whole or in part at the expense of Borrower
using the remaining loan proceeds under the Notes for such purpose and charging
any additional expense to Borrower, which sums shall be secured by the Deed of
Trust;
(d) Foreclose the Deed of Trust or cause the exercise of
the power of sale granted therein, and exercise any rights and remedies given to
Bank in all other documents securing the Loans;
(e) Apply any remaining loan funds to the direct payment
of bills, claims or liens of laborers or materialmen which Bank in its judgment
believes to be valid;
(f) File suit for any sums owing or for damages; and
(g) Take such other action as is allowed by law and
exercise any rights in any manner it may deem necessary to protect its interest.
18.2. Any and all remedies conferred upon Bank shall be deemed
cumulative with, and nonexclusive of any other remedy conferred hereby or by
law, and Bank in the exercise of any one remedy shall not be precluded from the
exercise of any other.
19. FIXTURES.
Borrower agrees that all items of fixtures and all items of property
which might be determined to be fixtures as defined in the Uniform Commercial
Code and the laws of the State of Arizona, will be fully paid promptly after
installation and billing by such subcontractor, and no one has or will have a
security interest therein.
20. ATTORNEYS' FEES AND EXPENSES.
20. 1. Borrower shall pay all costs of closing the Loans and all
expenses of Bank with respect thereto, including, but not limited to, inspection
fees, legal fees (including legal fees incurred by Bank subsequent to the
closing of the Loans in connection with the disbursement,
-17-
<PAGE> 18
administration, collection or satisfaction of the Loans) advances, recording
expense, surveys, taxes, expenses of foreclosure (including reasonable
attorneys' fees) and similar items. Said attorneys' fees and costs may, at
Bank's option, be deducted from the disbursements of Loan proceeds in any manner
deemed appropriate by Bank.
20.2. In addition to any liability Borrower may have under
Arizona Revised Statutes Section 12-341.01, Borrower shall pay Bank's
attorneys' fees and costs incurred in the collection of any indebtedness
hereunder, or in enforcing this Agreement, whether or not suit is brought, and
any attorneys' fees and costs incurred by Bank in any proceeding under the
United States Bankruptcy Code in order to collect any indebtedness hereunder
or to preserve, protect or realize upon any security for such indebtedness.
21. MISCELLANEOUS.
21.1. This Agreement is made solely between Borrower and Bank,
and no other person shall have any right of action hereunder. The loan proceeds
are not a fund held for the benefit of laborers, materialmen or others. The
parties expressly agree that no person shall be a third party beneficiary to
this Agreement.
21.2. Bank may waive any of the requirements made of Borrower
herein, and any such waiver shall not constitute a waiver of any of the other
requirements made of Borrower hereunder. The failure of Bank to exercise any
right with respect to the declaration of any default shall not be deemed or
construed to constitute a waiver by Bank of such default or to preclude Bank
from exercising any right with respect to such default at a later date or with
respect to any subsequent default by Borrower.
21.3. Except as otherwise expressly provided herein, Borrower
agrees that there is no obligation or commitment on the part of Bank to renew
the Loans or to make any additional loans to Borrower.
21.4. Borrower agrees to and shall indemnify Bank from any
liability, claims or losses resulting from the disbursement of loan proceeds, or
from the condition of the real property whether related to hazardous waste on
the Property, the quality of construction or otherwise, and whether arising
before, during or after the term of the Loans. This provision shall survive the
repayment of the Loans and shall continue in full force and effect as long as
the possibility of such liability, claims or losses exist.
21.5. This Agreement and the rights, duties and obligations of
the parties hereto shall be governed by and construed in accordance with the
laws of the State of Arizona. Borrower hereby agrees that any suit or proceeding
in connection herewith may be brought in the State of Arizona and Borrower
irrevocably submits to jurisdiction in any court in such State.
21.6. TIME IS OF THE ESSENCE HEREOF.
21.7. This Agreement shall inure and be binding on the parties
hereto, and their respective successors and assigns; provided, however, that
neither this Agreement nor any rights
-18-
<PAGE> 19
or obligations hereunder shall be assignable by Borrower without the prior
express written consent of Bank, and any purported assignment made in
contravention hereof shall be void.
21.8. Any communications between the parties hereto or notices
provided herein to be given may be given by mailing the same by United States
certified or registered mail, return receipt requested, postage pre-paid,
addressed as follows, or to such other address as either party may in writing
hereafter indicate:
If to Borrower:
MONTEREY MANAGEMENT, INC.
6263 North Scottsdale Road
Suite 220
Scottsdale, Arizona 85250
Attn: David A. Walls
If to Bank:
National Bank of Arizona
P.O. Box 80440
Phoenix, Arizona 85060-0440
Attn: Marjorie L. Willis
Any such notice shall be deemed received for purposes of this Agreement
forty-eight (48) hours after dispatch.
22. ARBITRATION DISCLOSURES.
22.1. ARBITRATION IS USUALLY FINAL AND BINDING ON THE PARTIES
AND SUBJECT TO ONLY VERY LIMITED REVIEW BY A COURT.
22.2. THE PARTIES ARE WAIVING THEIR RIGHT TO LITIGATE IN COURT,
INCLUDING THEIR RIGHT TO A JURY TRIAL.
22.3. PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED AND
DIFFERENT FROM COURT PROCEEDINGS.
22.4. ARBITRATORS' AWARDS ARE NOT REQUIRED TO INCLUDE FACTUAL
FINDINGS OR LEGAL REASONING AND ANY PARTY'S RIGHT TO APPEAL OR TO SEEK
MODIFICATION OF RULINGS BY ARBITRATORS IS STRICTLY LIMITED.
22.5. A PANEL OF ARBITRATORS MIGHT INCLUDE AN ARBITRATOR WHO IS
OR WAS AFFILIATED WITH THE BANKING INDUSTRY.
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<PAGE> 20
23. ARBITRATION PROVISIONS.
23.1. Any controversy or claim between or among the parties,
including but not limited to those arising out of or relating to this Agreement
or any agreements or instruments relating hereto or delivered in connection
herewith, and including but not limited to a claim based on or arising from an
alleged tort, shall at the request of any party be determined by arbitration in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association. The arbitration proceedings shall be conducted in Phoenix, Arizona.
The arbitrator(s) shall have the qualifications set forth in subparagraph 23.3
hereto. All statutes of limitations which would otherwise be applicable in a
judicial action brought by a party shall apply to any arbitration or reference
proceeding hereunder.
23.2. In any judicial action or proceeding arising out of or
relating to this Agreement or any agreements or instruments relating hereto or
delivered in connection herewith, including but not limited to a claim based on
or arising from an alleged tort, if the controversy or claim is not submitted to
arbitration as provided and limited in subparagraph 23.1 hereto, all decisions
of fact and law shall be determined by a reference in accordance with Rule 53 of
the Federal Rules of Civil Procedure or Rule 53 of the Arizona Rules of Civil
Procedure or other comparable, applicable reference procedure. The parties shall
designate to the court the referee(s) selected under the auspices of the
American Arbitration Association in the same manner as arbitrators are selected
in Association sponsored arbitration proceedings. The referee(s) shall have the
qualifications set forth in subparagraph 23.3 hereto.
23.3. The arbitrator(s) or referee(s) shall be selected in
accordance with the rules of the American Arbitration Association from panels
maintained by the Association. A single arbitrator or referee shall be
knowledgeable in the subject matter of the dispute. Where three arbitrators or
referees conduct an arbitration or reference proceeding, the claim shall be
decided by a majority vote of the three arbitrators or referees, at least one of
whom must be knowledgeable in the subject matter of the dispute and at least one
of whom must be a practicing attorney. The arbitrator(s) or referee(s) shall
award recovery of all costs and fees (including attorneys' fees, administrative
fees, arbitrator's fees, and court costs). The arbitrator(s) or referee(s) also
may grant provisional or ancillary remedies such as, for example, injunctive
relief, attachment, or the appointment of a receiver, either during the pendency
of the arbitration or reference proceeding or as part of the arbitration or
reference award.
23.4. Judgment upon an arbitration or reference award may be
entered in any court having jurisdiction, subject to the following limitation:
the arbitration or reference award is binding upon the parties only if the
amount does not exceed Four Million Dollars ($4,000,000.00); if the award
exceeds that limit, either party may commence legal action for a court trial de
novo. Such legal action must be filed within thirty (30) days following the date
of the arbitration or reference award; if such legal action is not filed within
that time period, the amount of the arbitration or reference award shall be
binding. The computation of the total amount of an arbitration or reference
award shall include amounts awarded for arbitration fees, attorneys' fees,
interest and other related costs.
-20-
<PAGE> 21
23.5. At the Lender's option, foreclosure under a deed of trust
or mortgage may be accomplished either by exercise of a power of sale under the
deed of trust or mortgage or by judicial foreclosure. The institution and
maintenance of an action for judicial relief or pursuit of a provisional or
ancillary remedy shall not constitute a waiver of the right of any party,
including the plaintiff, to submit the controversy or claim to arbitration if
any other party contests such action for judicial relief.
23.6. Notwithstanding the applicability of other law to any
other provision of this Agreement, the Federal Arbitration Act, 9 U.S.C. 1 et
seq., shall apply to the construction and interpretation of this arbitration
paragraph.
-21-
<PAGE> 22
In witness whereof, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.
MONTEREY MANAGEMENT, INC., an Arizona
corporation
By: /s/ David A. Wells
--------------------------
Its: Vice President
-------------------------
MONTEREY MANAGEMENT-TUCSON, INC.,
an Arizona corporation
By: /s/ Bill Cleverly
--------------------------
Its: Vice President
-------------------------
MONTEREY HOMES CORPORATION, an Arizona
corporation, dba Monterey Homes
By: /s/ David A. Wells
--------------------------
Its: Vice President
-------------------------
"Borrower"
NATIONAL BANK OF ARIZONA, a national
banking association
By:
---------------------------
Its:
--------------------------
"Bank"
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<PAGE> 23
LIST OF EXHIBITS
Exhibit "A" - Legal Description of the Property (First Recital)
Exhibit "B" - Estimated Loan Value-Homes (Section 4)
Exhibit "C" - Estimated Loan Value-Models (Section 8.2)
-23-
<PAGE> 24
EXHIBIT "A"
No. 153544
PARCEL 1:
Lots 1, 2, 4, 6 through 21, 23 through 40, and 44 through 46, 48 through 51, 53
and 54, of THE LAKES AT CASTLE ROCK, according to the plat of record in the
office of the County Recorder of Pima County, Arizona, recorded in Book 34, of
Maps, Page 44.
EXCEPTING therefrom that portion of Lots 2, 3, 9 thru 14, and 17, THE LAKES AT
CASTLE ROCK, Lots 1 thru 67 & Common Area "A" & "B", according to the plat
thereof as recorded in Book 34 of Maps and Plats at Page 44, Records of Pima
County, Arizona, lying West of the following described line:
Commencing at the Southwest corner of said Lot 17;
Thence North 89 degrees 53 minutes 44 seconds East along the Southerly line of
said Lot 17 a distance of 30.82 feet, to the Point of Beginning;
Thence North 00 degrees 14 minutes 51 seconds West 384.87 feet;
Thence North 85 degrees 36 minutes 02 seconds East 5.41 feet;
Thence North 00 degrees 27 minutes 49 seconds East 295.96 feet;
Thence South 89 degrees 11 minutes 40 seconds West 8.11 feet;
Thence North 00 degrees 01 minutes 37 seconds West 177.05 feet;
Thence North 00 degrees 01 minutes 00 seconds East 146.07 feet;
Thence North 89 degrees 40 minutes 06 seconds East 8.68 feet;
Thence North 00 degrees 18 minutes 56 seconds West 23.43 feet;
Thence North 87 degrees 13 minutes 54 seconds West 8.69 feet;
Thence North 00 degrees 06 minutes 10 seconds West 160.50 feet to
the Northerly line of said Lot 9;
Thence North 00 degrees 13 minutes 05 seconds West 402.83 feet to
the Southerly line of said Lot 3;
Thence North 00 degrees 03 minutes 33 seconds West 494.71 feet to the Northerly
line of said Lot 2, said point being the Point of Terminus.
-2-
<PAGE> 25
No. 153544
PARCEL 2:
That portion of land lying in the Abandoned Right of Way, as described in Docket
6808, Page 833, Records of Pima County, Arizona, lying West of the following
described line:
Commencing at the Southeast corner of Lot 23 of THE LAKES AT CASTLE ROCK, Lots 1
thru 67 & Common Area "A" & "B" according to the plat recorded in Book 34 of
Maps and Plats at Page 44, Records of Pima County, Arizona;
Thence North 89 degrees 43 minutes 51 seconds East 3.75 feet, to the Point of
Beginning of the herein described parcel;
Thence North 00 degrees 09 minutes 32 seconds West 241.87 feet;
Thence North 00 degrees 15 minutes 16 seconds West 395.24 feet;
Thence North 00 degrees 15 minutes 04 seconds West 284.21 feet;
Thence North 00 degrees 16 minutes 40 seconds West 206.66 feet;
Thence North 00 degrees 15 minutes 02 seconds West 293.49 feet to the Point of
Terminus.
PARCEL 3:
All that part of Lot 1 of PALOMITA BLANCA as recorded in Book 46 of Maps and
Plats at page 18 in the Pima County Recorder's office, Pima County, Arizona
lying Easterly of the Southerly extension of the Westerly line of Lot 4 of The
Lakes at Castle Rock as recorded in Book 34 of Maps and Plats at page 44 said
Pima County Recorder's office and Northerly of the following described line;
Commencing at the Northeast corner of said Lot 1;
Thence South 00 degrees 06 minutes 16 seconds East along the East line of said
Lot 1 a distance of 6.69 feet to the Point of Beginning;
Thence South 88 degrees 11 minutes 12 seconds West, to a point on the said
Southerly extension of the Westerly line of said Lot 4.
-3-
<PAGE> 26
No. 153544
PARCEL 4:
All that part of Lot 2 of PALOMITA BLANCA as recorded in Book 46 of Maps and
Plats at Page 18 in the Pima County Recorder's Office, Pima County, Arizona
lying Westerly of the Southerly extension of the Easterly line of Lot 4 of The
Lakes at Castle Rock as recorded in Book 34 of Maps and Plats at Page 44 said
Pima County Recorder's Office and Northerly of the following described line;
Commencing at the Southwest corner of said Lot 4;
Thence South 13 degrees 55 minutes 33 seconds West along the Southerly extension
of the West line of said Lot 4 a distance of 7.94 feet to the Point of
Beginning;
Thence North 88 degrees 10 minutes 33 seconds East, to a point on the said
Southerly extension of the Easterly line of said Lot 4.
PARCEL 5:
A portion of the Northwest quarter of the Southeast quarter of Section 34,
Township 13 South, Range 15 East, Gila and Salt River Base and Meridian, Pima
County, Arizona, being a portion of the Unsubdivided parcel lying adjacent to
Lots 3-7 of The Lakes at Castle Rock, a subdivision recorded in the Pima County
Recorder's Office in Book 34 of Maps and Plats at Page 44, Pima County, Arizona,
said portion being described as follows:
Beginning at the Northwest corner of said Lot 6;
Thence South 00 degrees 06 minutes 16 seconds East upon the West line of said
Lot 6, a distance of 205.83 feet;
Thence North 57 degrees 08 minutes 39 seconds West, 1.80 feet;
Thence North 00 degrees 23 minutes 45 seconds West, 204.85 feet;
Thence North 89 degrees 47 minutes 33 seconds East, 2.55 feet to the Point of
Beginning.
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<PAGE> 27
NO. 153544
PARCEL 6:
A portion of the Northwest quarter of the Southeast quarter of Section 34,
Township 13 South, Range 15 East, Gila and Salt River Base and Meridian, Pima
County, Arizona, being a portion of the unsubdivided parcel lying adjacent to
Lots 3-7 of The Lakes at Castle Rock, a subdivision recorded in the Pima County
Recorder's Office in Book 34 of Maps and Plats at page 44, Pima County, Arizona,
said portion being described as follows:
Beginning at the Northwest corner of said Lot 7;
Thence South 00 degrees 06 minutes 16 seconds East upon the West line of said
Lot 7, a distance of 197.00 feet;
Thence South 89 degrees 47 minutes 33 seconds West. 0.50 feet;
Thence North 00 degrees 23 minutes 45 seconds West, 197.98 feet;
Thence South 57 degrees 08 minutes 39 seconds East, 1.80 feet to the Point of
Beginning.
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<PAGE> 28
EXHIBIT "B"
ESTIMATED LOAN VALUE - HOMES
<TABLE>
<S> <C>
9401 - SantaFe $214,900.00
9402 - Taos $235,300.00
9403 - Ventana $245,300.00
</TABLE>
<PAGE> 29
EXHIBIT "C"
ESTIMATED LOAN VALUE - MODELS
<TABLE>
<S> <C>
Lot #39 - Taos $237,500.00
Lot #38 - Ventana $247,500.00
</TABLE>
<PAGE> 1
EXHIBIT 10(m)
CONSTRUCTION LOAN AGREEMENT
DATE: March 22, 1996
PARTIES: MONTEREY MANAGEMENT, INC., an Arizona corporation ("MMI"),
MONTEREY MANAGEMENT TUCSON, INC., an Arizona corporation ("MMT"),
and MONTEREY HOMES CORPORATION, an Arizona corporation, dba
Monterey Homes ("MHC") MMI, MMT and MHC are jointly and
severally referred to herein as "Borrower."
NATIONAL BANK OF ARIZONA, a national banking association ("Bank")
RECITALS:
Pursuant to the Option Agreement and Escrow Instructions between
Robertson Stephens Company, Inc., a California corporation ("Optionor"), and MMI
dated November 9, 1994 (the "Parcel F Option Agreement"), Borrower is acquiring
Lots 309 through 364 of The Lakes at Castle Rock, according to the Plat recorded
in Book 47 of Maps, Page 49, official records of Pima County (the "Parcel F
Lots"), which subdivision is located in the vicinity of Tanque Verde Road and
Woodland Drive in Tucson, Arizona.
Pursuant to the Option Agreement and Escrow Instructions between
Optionor and MMI dated November 9, 1994 (the "Parcel G Option Agreement") (the
Parcel F Option Agreement and the Parcel G Option Agreement are sometimes
referred to herein collectively as the "Option Agreements"), the Borrower is
acquiring Lots 243 through 308 of The Lakes at Castle Rock, (the "Parcel G
Lots"). The Parcel F Lots and the Parcel G Lots are sometimes referred to
collectively herein as the "Lots," or individually as a "Lot."
Borrower desires to obtain from Bank a $5,500,000.00 revolving line of
credit to finance the acquisition costs of the Lots pursuant to the Option
Agreements and the construction of presold homes and a maximum of two (2) not
pre-sold, i.e., "spec" homes ("Homes"), in each of Parcel F and Parcel G,
totalling not more than four (4) spec homes.
Borrower also desires to obtain from Bank a $514,165.00 line of credit
to finance the construction of four model homes on Lots 360 through 363 in
Parcel F; and a $563,283.00 line of credit to finance the construction of three
model homes on Lots 305 through 307 in Parcel G.
Bank is willing to establish for Borrower the credit facilities
described above (the "Loans"), but only on the terms and conditions set forth
herein.
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Now, therefore, in consideration of the mutual covenants and agreements
herein contained, the parties agree as follows:
AGREEMENTS:
1. REVOLVING LINE OF CREDIT.
a. Subject to the terms and conditions of this Agreement, Bank
will establish for Borrower a revolving line of credit (the "RLC") against which
Bank will make advances not to exceed the sum of $5,500,000.00 in the aggregate
at any one time outstanding.
b. The RLC shall be evidenced by a promissory note in a form
prepared and approved by Bank (the "RLC Note"). Interest on the principal amount
outstanding under the RLC shall be charged at a rate equal to three quarters of
one percent (3/4%) in excess of the prime rate of interest as the same is
published in the western edition of the Wall Street Journal. The interest rate
shall be adjusted as of the close of business of any day during which the prime
rate of interest is changed. When a range of rates has been published, the
higher of the rates will be used. If the prime rate becomes unavailable during
the term of this Loan, Bank may designate a substitute index after notice to
Borrower. Bank will advise Borrower of the current prime rate upon Borrower's
request. Borrower understands that Bank may make loans based on other rates as
well. Interest on the Note shall be computed for the actual number of days that
principal is outstanding, on the basis of a 360 day year. Interest under the RLC
shall be due and payable monthly. All unpaid principal and interest shall be due
and payable in full on the date twenty-four (24) months following the date of
the RLC Note (the "RLC Maturity Date"). Borrower shall be entitled to postpone
the Maturity Date upon written notice to Lender prior to the Maturity Date one
(1) time for an additional six (6) months to the date thirty (30) months
following the date of the RLC Note.
c. Borrower agrees to pay to Bank a commitment fee for each Home
to be constructed in an amount equal to: one percent (1%) of the Estimated Loan
Value available under the RLC to construct such Home as provided in Section 3.1
hereof if such Home is a spec Home; and one-half of one percent (1/2%) of the
Estimated Loan Value available under the RLC to construct such Home as provided
in Section 3.1 hereof if such Home is pre-sold. Such fee shall be payable at the
same time as the initial disbursement under the RLC for such Home and may be
paid out of the RLC.
d. Advances under the RLC shall be used to finance the
construction of Homes on the Lots. All disbursements under the RLC shall be made
in accordance with Section 3 hereof. For each Home, Bank shall record in
Borrower's revolving loan account on the books of Bank all advances made by Bank
to Borrower on the RLC, all charges, expenses, and other items properly
chargeable to Borrower, all payments made by Borrower and any other appropriate
debits and credits. The debit balance of Borrower's revolving loan account shall
reflect for each Home the amount of Borrower's indebtedness from time to time
under the RLC for such Home.
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e. Upon Bank's demand from time to time, Borrower shall give to
Bank a list of all contractors, subcontractors and material suppliers who will
be supplying labor and materials for the construction of Homes.
f. All advances for construction of a spec Home shall be repaid
to Bank not later than 12 months from the date of the initial advance under the
RLC with respect to such spec Home. All advances for pre-sold Homes shall be
repaid to Bank not later than 7 months from the date of the initial advance
under the RLC with respect to such pre-sold Home; provided, however, such 7
month period may be extended only one time for an additional 5 months (resulting
in a total term for such advance of 12 months) upon notification by Borrower,
accompanied by an additional commitment fee of one quarter of one percent (1/4%)
received by Bank prior to the expiration of the initial 7 month period. In any
event, all advances for construction of Homes shall be repaid to Bank not later
than the Maturity Date.
2. PURPOSES OF THE RLC.
The RLC proceeds shall be used to finance the construction of pre-sold
Homes and not more than a total of four (4) spec Homes on the Lots, with not
more than two (2) spec Homes on Parcel F and not more than two (2) spec Homes on
Parcel G. Bank will advance such amounts with respect to the construction of
such Homes not to exceed the limits described in Section 3.1 hereof.
3. DISBURSEMENT OF THE RLC.
a. Borrower may request advances under the RLC from time to
time. Bank will lend Borrower such amounts as Borrower may request within a
reasonable time after such request upon the express conditions that: (a) all
such action shall have been taken and documents shall have been executed and
delivered which are or may be necessary to perfect or to continue the perfection
of Bank's liens and security interests including, without limitation, execution
and delivery of Lender's standard form Deed of Trust and UCC-1 financing
statements for the Lot on which the Home is to be built and collateral
assignments of the Borrower's rights under the Option Agreements in form and
substance acceptable to Bank in its sole and absolute discretion; (b) there
shall exist no Event of Default or event which with the giving of notice or the
passage of time or both, would be an Event of Default hereunder; (c) the total
debit balance of Borrower's RLC, after reflecting any advances requested, shall
not exceed the amounts set forth in Section 1.1; (d) advances under the RLC for
each Home do not exceed the lesser of (i) 80% of the appraised value of such
pre-sold Home as it is to be constructed as shown in an appraisal report
obtained at Borrower's expense and satisfactory in all respects to Bank in its
sole discretion, or 75% of the appraised value of such spec Home as it is to be
constructed as shown in an appraisal report obtained at Borrower's expense and
satisfactory in all respects to Bank in its sole discretion, as applicable, (ii)
80% of the gross sales price of such pre-sold Home, (iii) the Estimated Loan
Value attributed to the particular model for such Home as set forth in Exhibit
A, attached hereto, or (iv) 100% of the actual cost of constructing the Home in
accordance with the plans and specifications and cost breakdown; and (e) the
requested advance meets the additional requirements set forth below.
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b. Any requests by Borrower for an initial advance under the RLC
for any given pre-sold Home shall be accompanied by the following, in form and
substance satisfactory to Bank and at Borrower's expense: (i) a copy of an
arms-length sales contract for full and fair consideration and for which
Borrower shall have collected earnest money with respect to the pre-sold Home on
which an advance is requested; (ii) a copy of a permanent loan pre-qualification
letter with respect to the pre-sold Home; (iii) Lender's standard form Deed of
Trust and UCC-1 financing statements for the Lot on which the Home is to be
built; (iv) a preliminary title report or bringdown endorsement on the affected
Lot insuring Bank's first lien position under the RLC; (v) a breakdown of actual
costs for the construction of the pre-sold Home; (vi) a copy of the plans and
specifications to be used in construction; and (vii) an appraisal for the
pre-sold Home. No material changes in the plans and specifications, estimated
construction costs, permanent lender commitment or title condition of the Lot
shall be agreed to by Borrower without Bank's prior written consent.
c. Any requests by Borrower for an initial advance under the RLC
for any given spec Home shall be accompanied by the following, in form and
substance satisfactory to Bank and at Borrower's expense: (i) Lender's standard
form Deed of Trust and UCC-I financing statements for the Lot on which the Home
is to be built; (ii) a preliminary title report or bringdown endorsement on the
affected Lot insuring Bank's first lien position under the RLC; (iii) a
breakdown of actual costs for the construction of the Home; (iv) a copy of the
plans and specifications to be used in construction; and (v) an appraisal for
the Home. No material changes in the plans and specifications, estimated
construction costs or title condition of the Lot shall be agreed to by Borrower
without Bank's prior written consent.
d. Advances with respect to each Home shall be made first to
allow Borrower to pay the RLC Commitment Fee in connection with such Home and
the advance to acquire the affected Lot pursuant to the applicable Option
Agreement. Loan funds for construction of said Home shall be advanced on
approved inspection by Bank when the following stages have been completed:
(1) Five percent (5%) First Advance: Permits obtained,
site laid out, trenching completed and rebar in place, footings poured.
(2) Ten percent (10%) Second Advance: Stem walls poured.
(3) Fifteen percent (15%) Third Advance: Underground set
and soil backfilled.
(4) Twenty percent (20%) Fourth Advance: ABC in place
and graded, copper plumbing in place, floor slabs poured and set.
(5) Twenty-five percent (25%) Fifth Advance: Lumber and
trusses on site.
(6) Thirty percent (30%) Sixth Advance: Framing and
rough carpentry complete.
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(7) Thirty-five percent (35%) Seventh Advance: Rough
plumbing, HVAC and electric complete.
(8) Forty percent (40%) Eighth Advance: Rough Inspection
complete and passed, roof dry, windows and sliding doors set in place.
(9) Forty-five percent (45%) Ninth Advance: Stucco lath
insulation installed.
(10) Fifty percent (50%) Tenth Advance: Stucco first
coat applied, drywall stock on site.
(11) Fifty-five percent (55%) Eleventh Advance: Drywall
hung and taped.
(12) Sixty percent (60%) Twelfth Advance: Drywall joints
floated, stucco finish coat applied.
(13) Sixty-five percent (65%) Thirteenth Advance:
Interior walls sanded, dry wall textured.
(14) Seventy percent (70%) Fourteenth Advance: Doors and
trim on site, exterior paint complete.
(15) Seventy-five percent (75%) Fifteenth Advance: Trim
carpentry complete, interior paint complete.
(16) Eighty percent (80%) Sixteenth Advance: Cabinets on
site, roof complete.
(17) Eighty-five percent (85%) Seventeenth Advance:
Cabinets installed, countertops set.
(18) Ninety percent (90%) Eighteenth Advance: Interior
hardware, plumbing, electrical, HVAC and trim is complete.
(19) Ninety-five percent (95%) Nineteenth Advance:
Pre-cleaning complete, appliances are installed.
(20) One Hundred percent (100%), or the balance of the
Loan as provided in Section 3.1 hereof, whichever is less when all work has been
completed, including floor coverings are installed, final cleaning is complete
and all city inspections are complete and approved and provide the Bank with the
final city inspection and termite certificate.
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Notwithstanding anything contained herein to the contrary, prior to any
advances for construction or advances to reimburse Borrower for previously
incurred construction costs, Borrower shall permit Bank and Bank's inspector to
make an inspection of the Home to be completed in order to determine the
percentage of such completion and the amount to be advanced.
e. Each request for an advance under the RLC Note shall be in
writing on a form satisfactory to Bank. Each such request shall be made at least
five (5) days prior to the date on which the advance is required, and shall be
accompanied by evidence in form and substance satisfactory to Bank (including
but not limited to certificates and affidavits of Borrower, and reports of
Bank's inspector as required by Bank) showing: (a) percentage of completion or
stage of completion as set forth in Section 3.3 above; (b) that all outstanding
claims due for labor, materials, fixtures and equipment have been paid, except
claims contested in good faith by Borrower; (c) that there are no recorded liens
outstanding against the real property except the Bank's liens, those liens
approved in writing by Bank, and except liens bonded over in accordance with
A.R.S. Section 33-1004; (d) that Borrower has complied with all of Borrower's
obligations under this Agreement; (e) that all construction prior to the date of
the request for an advance has been accomplished in accordance with the plans
and specifications; (f) that all funds previously disbursed have been properly
applied to the costs of construction; (g) if requested by Bank, copies of all
bills or statements of expenses for which the advance is requested; (h) that all
change orders which require the approval of Bank shall have been approved in
writing by Bank; and (i) that the amount of the undisbursed loan proceeds is
sufficient to pay the cost of completing construction in accordance with the
plans and specifications.
f. If at any time during the course of construction of a Home,
Bank determines that the undisbursed loan funds available for such construction
plus the items prepaid by Borrower and not reimbursed by Bank are insufficient
to pay the remaining costs of construction, Bank may, at its option, either (i)
cause Borrower to deposit the amount of such deficiency in an account with Bank
to be used to pay such costs; or (ii) cause Borrower to expend such funds as are
necessary to make up such deficiency and Borrower shall furnish the Bank with
satisfactory proof of any such expenditures.
g. Bank reserves the right, in its discretion, to defer, reduce
or decline payment of any item when in Bank's reasonable judgment the payment is
not justified by the value of the work in place or if such item is not covered
by the cost breakdowns referred to herein.
h. If requested by Bank, Borrower shall furnish statements from
each contractor, subcontractor and supplier:
(1) Stating the amount of its contract and the amount
paid to date;
(2) Acknowledging full payment less retainer for all
work done and materials supplied; and
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(3) Waiving any mechanic's or material-man's lien on the
Property for work done to the date of disbursement, payment for which is covered
by that or prior disbursements, and waiving any lien on equipment purchased.
i. At no time and in no event shall Bank be obligated to
disburse funds for construction:
(1) In excess of the amount recommended by Bank's
Inspector;
(2) If Bank is unsatisfied with the progress of
construction;
(3) If in the sole opinion of Bank the estimated
remaining costs of construction in accordance with the plans and specifications
exceeds the remaining undisbursed portion of loan proceeds for such construction
and Borrower fails to make up such deficiency in accordance with Section 3.6;
(4) If the improvements shall have been damaged by fire
or other casualty and Bank shall not have received insurance proceeds or other
cash funds from Borrower sufficient in the sole judgment of Bank to effect the
restoration of the improvements in accordance with the plans and specifications
prior to the maturity of the RLC Note;
(5) If Bank's Deed of Trust covering the Lot and Home
under construction for which the draw is requested shall not be in a first lien
position; or
(6) If any Event of Default hereunder shall have
occurred or any event which with the giving of notice or passage of time, or
both, would constitute an Event of Default hereunder shall have occurred.
j. At its option, Bank may make any or all advances directly to
Borrower, or to Borrower's subcontractors or material suppliers, or jointly to
the Borrower and any subcontractor or material supplier, and the execution of
this Agreement by Borrower shall, and hereby does, constitute an irrevocable
authorization to so advance the funds. No further direction or authorization
from Borrower shall be necessary to warrant such direct advances and all such
advances shall satisfy pro tanto the obligations of Bank hereunder and shall be
covered and secured by the Deed of Trust as fully as if made only to Borrower,
regardless of the disposition thereof by such person. Bank, at its option, may
pay suppliers of all furniture, fixtures and equipment directly.
k. No advance of loan proceeds hereunder shall constitute a
waiver of any of the conditions to any further advances nor, in the event
Borrower is unable to satisfy any such condition, shall any such waiver have the
effect of precluding Bank from thereafter declaring such inability to be an
Event of Default.
l. Borrower acknowledges that any inspections or any
examinations made by Bank, or lien waivers, receipts or other instruments
obtained by Bank, are made or obtained
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solely for Bank's benefit and not in any way for the benefit or protection of
Borrower or any third party.
m. Borrower shall permit Bank and its representatives and agents to
enter upon any Lot and to inspect the construction of the Home and all materials
to be used in the construction thereof and to cause Borrower's contractors and
subcontractors to cooperate with Bank during such inspections. If required by
Bank, Borrower shall pay Bank the applicable inspection fee for each inspection.
Borrower agrees that the Bank has no obligation in carrying out or supervising
the construction program. Bank, in its discretion, may waive any inspection or
the furnishing of lien waivers or receipts or other proof of payment or any
other condition to a disbursement and make disbursements of the loans solely
upon the statements and recommendations of Borrower, and such waiver shall not
constitute a waiver of any of the conditions to any later disbursements.
n. Borrower shall diligently pursue construction of all Homes to
completion in accordance herewith and with the plans and specifications
delivered to Bank and in full compliance with all construction, use, building,
zoning and other similar requirements of any governmental authority. The
Borrower covenants that all Homes will be constructed and completed free and
clear of all liens, claims or assessments against the Lots except Bank's liens.
Borrower agrees that construction of each Home shall be completed within the
applicable time periods for repayment of advances specified in Section 1.6. In
the event Borrower's buyer defaults under the purchase agreement during the
construction of any pre-sold Home, Borrower shall notify the Bank immediately of
such event and immediately market such Home for sale. Borrower agrees that so
long as any loan under this Agreement may be outstanding, Borrower will borrow
no other funds, directly or indirectly, for the purpose of construction on the
Lots nor cause any lien other than Bank's to be placed against the Lots.
Borrower will not allow any Home buyers to take possession of any Home or part
thereof, until Bank's lien upon such Home and Lot is paid in full, and the Lot
has been released from the lien of the Deed of Trust.
4. MODEL LOANS.
a. Subject to the terms and conditions of this Agreement, Bank will
establish for Borrower two (2) lines of credit against which Bank will make
advances not to exceed the sums of $514,165.00 (the "Parcel F Model Loan") and
$563,283.00 (the "Parcel G Model Loan") for the purpose of constructing the
permitted model homes. The Parcel F Model Loan and the Parcel G Model Loan are
referred to herein collectively as the "Model Loans." The proceeds of the Parcel
F Model Loan shall be used for the purpose of constructing model homes on four
(4) of the Parcel F Lots. The proceeds of the Parcel G Model Loan shall be used
for the purpose of constructing model homes on three (3) of the Parcel G Lots.
The RLC and the Model Loans are sometimes referred to herein as the "Loans."
b. The Parcel F Model Loan shall be evidenced by a Promissory Note
(the "Parcel F Model Note") of even date herewith in the face amount of
$514,165.00 payable in accordance with the terms thereof. The Parcel G Model
Loan shall be evidenced by a Promissory Note (the "Parcel G Model Note") of even
date herewith in the face amount of $563,283.00 payable in accordance with the
terms thereof. The Parcel F Model Note and the
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Parcel G Model Note are referred to herein collectively as the "Model Notes."
Interest on the principal amount outstanding under the Model Loans shall be
charged at an annual rate equal to three-quarters percent (3/4%) in excess of
the prime rate of interest as the same is published in the western edition of
the Wall Street Journal. The interest rate shall be adjusted as of the close of
business during any day during which the prime rate of interest has changed.
When a range of rates has been published, the higher of the rates will be used.
If the prime rate becomes unavailable during the term of this Loan, Bank may
designate a substitute index after notice to Borrower. Bank will advise Borrower
of the current prime rate upon Borrower's request. Borrower understands that
Bank may make loans based on other rates as well. Interest on the Note shall be
computed for the actual number of days that principal is outstanding, on the
basis of a 360 day year. Interest under the Model Loans shall be due and payable
monthly. All unpaid principal and interest shall be due and payable in full on
the date twelve (12) months following the date of the Model Notes (the "Model
Maturity Date"). Provided Borrower is not in default, Borrower may elect to
extend the Model Maturity Date of either or both of the Model Notes one time for
an additional six (6) months by giving Bank written notice ten (10) days prior
to the then Model Maturity Date. The RLC Note and the Model Notes are sometimes
referred to herein as the "Notes."
5. MODEL LOAN COMMITMENT FEES: EXTENSION FEE(S).
Borrower shall pay to Bank a commitment fee and service charge for the
making and servicing of the Model Loans in the amount of $5,141.65 for the
Parcel F Model Loan and in the amount of $5,632.83 for the Parcel G Model Loan
(collectively, the "Model Commitment Fees") which shall be fully earned and
non-refundable upon payment. The Model Commitment Fees are due and payable upon
the execution hereof out of the proceeds of the respective Model Loans. If
Borrower elects to extend the Model Maturity Date for either or both of the
Model Notes, Borrower shall pay to Bank an extension fee and service charge for
extending the Model Maturity Date in the amount of one-half of one percent of
the face amount of the applicable Model Note or Notes so extended, less any
principal balance thereof which has been repaid (the "Model Maturity Extension
Fee(s)"). The Model Maturity Extension Fee(s) is (are) due and payable by
Borrower upon the Borrower's providing to Bank written notice of its election to
extend the Model Maturity Date(s), which shall be fully earned and
non-refundable upon payment.
6. PURPOSES OF THE MODEL LOANS.
Advances under the Model Loans shall be used only for the payment of the
costs and expenses to allow Borrower to pay the respective Model Commitment Fees
and to build model homes (the "Permitted Model Homes") as follows: The proceeds
of the Parcel F Model Loans shall be used for the purpose of building four (4)
model homes on four (4) of the Parcel F Lots. The proceeds of the Parcel G Model
Loan shall be used for the purpose of building three (3) model homes on three
(3) of the Parcel G Lots.
7. DISBURSEMENT OF THE MODEL LOANS.
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a. Bank shall make an advance for the benefit of the Borrower to pay
the Model Commitment Fees.
b. Advances for construction of the Permitted Model Homes shall be
made in the same manner as advances are to be made under the RLC; provided;
however, that advances under the Model Loan for construction of each Permitted
Model Home shall not exceed the lesser of (i) 75% of the appraised value of
such Permitted Model Home as it is to be constructed as shown in an appraisal
report obtained at Borrower's expense and satisfactory in all respects to Bank
in its sole discretion, (ii) the Estimated Loan Value (less the price paid to
acquire the Lot on which the model home is located pursuant to the applicable
Option Agreement) attributed to the particular model for such Permitted Model
Home as set forth in Exhibit "B," attached hereto, or (iii) 100% of the actual
cost of constructing the Permitted Model Home in accordance with the plans and
specifications and cost breakdown (less the price paid to acquire the Lot on
which the Permitted Model Home is located pursuant to the applicable Option
Agreement).
8. SECURITY.
a. As security for the payment of the Loans, and all other
liabilities and obligations of Borrower to Bank, now existing or hereafter
created, Borrower shall execute and deliver to Lender for recording Lender's
standard form Deed of Trust and UCC-1 financing statements. The Deeds of Trust
shall be and remain a first and prior lien on the Lots on which any Homes or
Permitted Model Homes are to be constructed with proceeds of the Loans, and all
fixtures and attachments of and to the structures now or hereafter on the Lots
and those to be erected thereon, and shall assign all leases and rents and
purchase agreements on the Lots to Bank, all subject only to those exceptions
set forth in Section 10 hereof. Borrower shall also execute and deliver to Bank
collateral assignments of Borrower's rights under the Option Agreements in form
and substance acceptable to Bank in its sole and absolute discretion.
b. Borrower shall execute and deliver to Bank from time to time upon
the request of Bank, such financing statements or other documents reasonably
required by Bank to perfect or continue Bank's liens and security interest
described herein.
9. GUARANTIES.
Borrower shall cause its obligations to pay and perform under the Loans to
at all times be fully guaranteed by William Cleverly, a married man dealing with
his sole and separate property, and by Steve Hilton and Benee Hilton, husband
and wife (the "Guarantors"). Guarantors shall execute and deliver to Bank its
form of continuing guaranties relating to the Loans (the "Guaranties").
10. TITLE INSURANCE.
Borrower, at its cost and expense, shall cause the Title Company to issue
to Bank at the time of each initial disbursement under the RLC or a Model Loan
an ALTA Extended Coverage Mortgage Title Insurance Policy in the amount of total
advances, to be made in connection with
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the acquisition of the Lot and the construction of the Home or Permitted Model
Home, with Number 3R and 5 Endorsements, insuring the Deed of Trust to be
recorded against the applicable Lot in Bank's favor to be a valid first lien and
encumbrance on the applicable Lot subject only to the matters approved by Bank
and listed as exceptions therein.
11. RELEASES OF DEEDS OF TRUST.
So long as no Event of Default has occurred, and there shall not have
occurred any event which with the giving of notice or the passage of time, or
both, would constitute an Event of Default hereunder, Bank shall release the
lien of the Deed of Trust for each Lot with a Home or Permitted Model Home
thereon upon the sale thereof and payment to Bank in cash of the sum equal to
all advances made to Borrower under the RLC or Model Loan, as the case may be,
relating to the acquisition of the applicable Lot and the construction of the
Home or Permitted Model Home and applicable Lot to be released, all as shown on
Borrower's loan account (the "Release Price"). Payments of interest under the
Notes shall not be applied toward the Release Price of any Lot from the lien of
the applicable Deed of Trust.
12. INSURANCE.
a. With respect to each Lot then encumbered by a Deed of Trust,
Borrower shall obtain the following insurance, together with such other
insurance or evidence of insurance as Bank may reasonably require:
(1) Insurance against loss or damage by fire, lightning and
other casualties, with a uniform standard extended coverage endorsement, such
insurance to be in an amount not less than the full replacement value of the
completed improvements, exclusive of footings and foundations, as determined by
a recognized appraiser or insurer selected by the Borrower and approved by Bank.
During the construction period, such policy shall be written in the so-called
"Builder's Risk Completed Value Non-Reporting Form" and shall contain a
provision granting the insured permission to complete and/or occupy.
(2) Insurance protecting the Borrower and Bank against loss or
losses from liability imposed by law or assumed in any written contract and
arising from personal injury, including bodily injury or death, or a limit of
liability of not less than $500,000.00 (combined single limit for personal
injury, including bodily injury or death, and property damage) and a blanket
excess liability policy in an amount not less than $1,000,000.00 protecting the
Borrower and Bank against any loss or liability or damage for personal injury,
including bodily injury or death, or property damage.
(3) A policy of flood insurance in the maximum amount
available with respect to the Project under the Flood Disaster Protection Act of
1973, as amended. This requirement will be waived upon presentation of evidence
satisfactory to Bank that no portion of any Lot is located within an area
identified by the U.S. Department of Housing and Urban Development as having
special flood hazards.
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(4) Upon completion of any Home or Permitted Model Home,
insurance on such Home or Permitted Model Home insuring against loss by fire and
other hazards and casualties as are now included in "extended coverage" policies
in an amount equal to the maximum insurable value of the improvements. The
policy shall at all times have attached thereto the standard non-contributory
mortgagee clause with loss payable to Bank.
b. With regard to each policy of insurance required to be maintained
by Borrower pursuant to Section 12. 1, Borrower shall deliver to Bank certified
copies of such policies, together with appropriate endorsements thereto,
evidence of payment of premiums thereon and written agreement of the insurer or
insurers therein to give Bank 30 days' prior written notice of intention to
cancel. All insurance shall be carried in responsible insurance companies which
shall have been approved by Bank and which shall be rated not less than A, class
XV or better in Best's Key Rating Guide.
c. Borrower shall cooperate with Bank in obtaining for Bank the
benefits of any insurance or other proceeds lawfully or equitably payable to it
in connection with the Loans and the collection of any indebtedness or
obligation of Borrower to Bank incurred hereunder (including the payment by
Borrower of the expense of an independent appraisal on behalf of Bank in case of
a fire or other casualty affecting any Lot, Home or Permitted Model Home).
13. CONDITIONS PRECEDENT.
Bank's obligation to make each advance hereunder is contingent upon each
of the following occurrences in addition to the other terms and conditions
contained herein (provided Bank may waive any such occurrence for an advance
without such waiver constituting a waiver of such occurrence for any later
advance):
(1) All of Bank's liens and security interests securing the
Loans shall have been validly perfected;
(2) Receipt of the title insurance policy (or policies)
described above;
(3) Receipt of updated appraisals acceptable to Bank for each
Home or Permitted Model Home, as appropriate; and
(4) Receipt of such documentation as Bank may reasonably
require, including, without limitation, the Guaranties, the Deeds of Trust,
Notes, a permanent lender commitment letter, and purchase contracts for such
Home, all in form and substance satisfactory to Bank.
14. COVENANTS AND WARRANTIES.
Borrower represents, warrants and agrees as follows:
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<PAGE> 12
(1) All information given to Bank in order to support
Borrower's loan request, and all information set forth in any financial
statements given by Borrower, and Guarantors to Bank, is true, correct and
complete;
(2) MMI, MMT and MHC are and will continue to be corporations
duly organized and validly existing under the laws of the State of Arizona;
(3) Borrower has full power to enter into this Agreement and
to perform all obligations herein contained and contemplated;
(4) This Agreement, the Notes, the Deeds of Trust, and all
other documents executed by Borrower in favor of Bank (i) are and will be in all
respects legal, valid, and binding, (ii) are enforceable against Borrower
according to their terms, and (iii) will grant to Bank a direct, valid and
enforceable first lien upon the Lots;
(5) The consummation of the transactions hereby contemplated
and the performance of the obligations of the Borrower hereunder and by virtue
of the Loans and the Deeds of Trust will not result in any breach of, or
constitute a default under any mortgage, deed of trust, lease, loan or credit
agreement, articles of incorporation, bylaws or other instrument to which
Borrower is a party or by which it may be bound or affected;
(6) There are no actions, suits or proceedings pending, or to
the knowledge of Borrower threatened, against or affecting it or the Guarantors,
or involving the validity or enforceability of the Loans or the Deeds of Trust,
or the priority of the liens thereof, at law or in equity, or before or by any
governmental authority, and Borrower is not in default with respect to any
order, writ, injunction or decree of any court or any governmental authority;
(7) All financial statements provided and to be provided
hereunder have been and shall be prepared in accordance with generally accepted
accounting principles consistently applied. Borrower warrants and represents as
to each such financial statement that it fairly presents the financial condition
of Borrower and that since the date of such financial statement there has been
no material adverse change in the financial condition of Borrower. Bank or its
agents shall have the right without hindrance or delay to inspect, check, audit
and make extracts from Borrower's books, records and accounts including without
limitation all journals, orders, receipts and any correspondence and other data
relating to the books, records and accounts. Bank, or any persons designated by
it, shall have the right to make such verifications concerning Borrower's
businesses as Bank may consider reasonable under the circumstances;
(8) All utility services are available on the Lots, and
Borrower has obtained all necessary permits and permissions required from all
governmental and other authorities for access to and use of such services in
connection with the construction of Homes and the Permitted Model Homes;
(9) There is no delinquent tax or delinquent assessment
respecting any Lot;
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<PAGE> 13
(10) All applicable requirements of local, Arizona, and
federal law relating to the subdivision involved and the sale of homes therein
have been complied with, or will be complied with at the time such compliance is
required by law;
(11) There are no restrictions or zoning regulations which
will restrict or prevent the proposed construction on and use of the Lots;
(12) The plans and specifications for the Homes and Permitted
Model Homes to be constructed on the Lots which Borrower delivers to Bank
hereunder shall be true and correct copies of the plans and specifications used
in construction, and Borrower hereby certifies that said plans and
specifications are identical to those used in preparation of the appraisal
reports referred to above;
(13) Borrower has received no notice of and to the best of its
knowledge there is no violation of any law, municipal ordinance or order, or any
requirement of the State of Arizona, or any municipal department or governmental
authority, which violation relates to or affects the Lots or the Homes and
Permitted Model Homes to be constructed thereon;
(14) All building permits required for construction of Homes
and Permitted Model Homes in accordance with the plans and specifications will
be or have been obtained, and copies of such building permits will be delivered
promptly to Bank if requested;
(15) At all times following their acquisition by Borrower
pursuant to the Option Agreements, Borrower will continue to be the lawful owner
of each such Lot, except for sales made in the ordinary course of business for a
full and fair consideration. Borrower will not create or suffer to exist any
mortgage, pledge, lien, charge, encumbrance or security interest in or upon any
Lot upon which a Deed of Trust has been recorded except for Bank's liens;
(16) Within 30 days following the end of the relevant quarter,
Borrower shall furnish Bank with Borrower's quarterly compiled financial
statements prepared on an accrual basis in accordance with generally accepted
accounting principles and work in progress reports furnished to Bank (within 30
days following the end of the relevant quarter,) and prepared by a certified
public accountant or internally prepared and signed by either William Cleverly
or Steve Hilton as officers of Borrower. Such statements shall consist of a
balance sheet and profit and loss statement in such reasonable detail as Bank
may request. Borrower shall furnish Bank with Borrower's annual audited
financial statements within 90 days after the end of Borrower's fiscal year
prepared by a certified public accountant acceptable to Bank and on an accrual
basis in accordance with generally accepted accounting principles; Borrower
further authorizes Bank to discuss such financial statements with Borrower's
CPA;
(17) All financial statements delivered to Bank by the
Guarantors fairly represent the financial condition of the Guarantors at the
times and for the periods therein stated; and since the date of these financial
statements, there has been no material change in the financial condition or any
other status of any Guarantor. Within 30 days following Borrower's fiscal year
end, Borrower shall cause each Guarantor to provide its financial statement to
Bank, in form satisfactory to Bank, and all such statements shall indicate all
assets held in trust.
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<PAGE> 14
Guarantors shall further provide Bank with personal income tax returns and
schedules, signed and dated, within 30 days of the required filing dates;
(18) Borrower has filed all tax returns and reports required
by law to be filed and all taxes, fees, assessments, and other governmental
charges upon Borrower or upon any of its properties or income that are due and
payable have been paid; Within 30 days from the required filing date, Borrower
shall provide Bank with copies of all federal and state income tax returns and
schedules signed and dated by an Officer of Borrower;
(19) MHC is and will at all times continue to be in compliance
with all covenants contained in the Indenture and all other documents relating
to the $8,000,000.00 in Senior Subordinated Notes issued by MHC on October 11,
1994.
(20) Upon request from Bank, at least quarterly, Borrower
shall certify in writing to Bank that it is in compliance with the warranties
and covenants contained herein;
(21) Borrower will immediately inform Bank in writing of any
litigation threatened or instituted which might have a material adverse affect
upon any Lot or the financial condition of Borrower or Guarantors and, at Bank's
request, will furnish to Bank a summary of all such litigation;
(22) Borrower will promptly inform Bank of the occurrence of
any Event of Default or event which with the giving of notice or passage of time
or both would be an Event of Default hereunder; and
(23) Each of the warranties made by Borrower herein shall be
considered to have been made again as of the time Borrower delivers to Bank a
request for an advance under the Loans or Bank makes an advance pursuant to this
Agreement.
15. Construction Costs and Inspections.
a. Borrower will give Bank immediate notice of: (i) any and all
proposed significant changes in construction costs by means of the contractors
submitting to Bank's Inspector a change order log which shall include all
current and pending change orders; (ii) all proposed significant changes in
major subcontractors or major suppliers; (iii) all proposed significant
structural changes or changes material to the Home or Permitted Model Home
plans, and (iv) any and all significant proposed changes in the amounts of any
other items in any Home or Permitted Model Home budget. No such changes shall be
made by Borrower without the prior written consent of Bank. Amounts not drawn
under any one line item on any budget may be added to another line item on such
budget with prior written consent of Bank as follows: In the event there are
Bank approved costs in excess of the amount shown in the Home or Permitted Model
Home budget in any cost category described therein, and there are funds
available in any other cost category (for which the work is completed and fully
paid) in an amount sufficient to pay such excess costs, then Bank may authorize
a transfer of funds out of the cost category containing such excess and into the
cost category that is exceeding its Home or Permitted Model Home budget amount.
Upon the completion of all work relating to any
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<PAGE> 15
specific cost category, any amount remaining undisbursed under such cost
category shall be transferred out of such cost category and into the applicable
contingency cost category. Any changes which result in an increase in the Model
budget or Permitted Model Home budget shall be paid for by Borrower.
b. Bank is authorized to contract with such persons or agencies as
Bank may choose in its discretion ("Bank's Inspector") for the purpose of
reviewing the Home or Permitted Model Home plans, performing inspections of the
Homes or Permitted Model Home, and monitoring the progress of construction of
the same, which inspection shall be made with such frequency as Bank shall
determine in the reasonable exercise of its discretion.
c. Borrower shall permit Bank's Inspector and Bank's representatives
and agents to enter upon the Lots and approved off-site storage areas to inspect
the improvements in the Homes or Permitted Model Home and all materials to be
used in the construction thereof. Any inspections or determinations made by
Bank's Inspector or Bank or instruments obtained by Bank, are made or obtained
solely for the benefit of Bank and its successors and assigns, and not in any
way for the benefit or protection of Borrower. Borrower shall pay all fees of
Bank's (third party) Inspector promptly when billed for the same by Bank.
16. EVENTS OF DEFAULT.
Any of the following shall be an Event of Default hereunder:
(1) If Borrower shall fail to pay any principal or interest
under the Notes within ten (10) days after notice to Borrower by Bank;
(2) If any warranty or representation herein contained shall
prove to be untrue;
(3) If Borrower breaches any of its agreements contained
herein not otherwise described in this Section 16;
(4) If the construction work is abandoned or stopped for a
continuous period of 15 days, and not to exceed 30 days in the aggregate,
(except for a temporary stoppage due to a strike, shortage or unavailability of
materials, adverse weather conditions or an act of God);
(5) If any of the Homes or Permitted Model Home shall be
materially damaged or destroyed by fire or other casualty, provided, however,
that it shall not be an Event of Default if Bank receives insurance proceeds or
cash funds from Borrower sufficient to repair or restore the improvements, the
improvements can be repaired or restored and fully completed, and Borrower
expeditiously proceeds to so repair or restore;
(6) The commencement of any case under the United States
Bankruptcy Code, or the commencement of any other bankruptcy, arrangement,
reorganization, insolvency, receivership, custodianship, or similar proceeding
under any state or federal law by
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<PAGE> 16
or against Borrower, or any Guarantor (provided it shall not be an Event of
Default hereunder if such entity or person obtains dismissal of any involuntary
proceeding within sixty (60) days of the date of filing thereof); or if
Borrower, or any Guarantor is generally not paying its or their debts as they
become due;
(7) If a mechanic's or materialmen's lien is filed against a
Lot and Borrower does not contest in good faith the assertion of such a lien and
immediately record and serve a surety bond pursuant to A.R.S. Section 33-1004;
(8) If any judgment should be entered in any suit or legal
action materially affecting any Lot, Borrower, or any Guarantor, which is not
promptly satisfied or bonded over in a manner satisfactory to Bank pending
appeal;
(9) If Borrower's business is discontinued or suspended for
any reason or if Borrower's existence is dissolved or terminated;
(10) If Borrower or any Guarantor defaults on any other loan
it may have with Bank;
(11) If Borrower is unable to satisfy any condition to its
right to a disbursement hereunder after demand is made by Bank;
(12) If any action, rule, law or decision of any legislative
or administrative body or of any court should materially impair or materially
and adversely affect the enforceability of the loan documents;
(13) If there is a material adverse change in Borrower's or
any Guarantor's financial condition, or if the collateral becomes unsatisfactory
in character or value, or if Bank shall reasonably deem itself insecure.
17. REMEDIES OF BANK.
a. Upon the occurrence of any Event of Default, Bank may at its
option and without further notice do one or more of the following:
(1) Withhold making any further advances hereunder and under
the Notes, it being agreed that Bank may also take such action upon the
occurrence of an event which would be an Event of Default except for any notice
and cure provisions set forth above;
(2) Declare the amount of the loan proceeds then advanced
under the Loans and the Notes, together with all costs and expenses, immediately
due and payable;
(3) Take possession of any real property encumbered by any of
the Bank's Deeds of Trust through agents, employ security watchmen, and cause
the Homes and the Permitted Model Homes to be completed in whole or in part at
the expense of Borrower using
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<PAGE> 17
the remaining loan proceeds under the Notes for such purpose and charging any
additional expense to Borrower, which sums shall be secured by the Deeds of
Trust;
(4) Foreclose the Deeds of Trust or cause the exercise of the
power of sale granted therein, and exercise any rights and remedies given to
Bank in all other documents securing the Loans;
(5) Apply any remaining Loan funds to the direct payment of
bills, claims or liens of laborers or materialmen which Bank in its judgment
believes to be valid;
(6) File suit for any sums owing or for damages; and
(7) Take such other action as is allowed by law and exercise
any rights in any manner it may deem necessary to protect its interest.
b. Any and all remedies conferred upon Bank shall be deemed
cumulative with, and nonexclusive of any other remedy conferred hereby or by
law, and Bank in the exercise of any one remedy shall not be precluded from the
exercise of any other.
18. FIXTURES.
Borrower agrees that all items of fixtures and all items of property which
might be determined to be fixtures as defined in the Uniform Commercial Code and
the laws of the State of Arizona, will be fully paid promptly after installation
and billing by such subcontractor, and no one has or will have a security
interest therein.
19. ATTORNEYS' FEES AND EXPENSES.
a. Borrower shall pay all costs of closing the Loans and all
expenses of Bank with respect thereto, including, but not limited to, inspection
fees, legal fees (including legal fees incurred by Bank subsequent to the
closing of the Loans in connection with the disbursement, administration,
collection or satisfaction of the Loans) advances, recording expense, surveys,
taxes, expenses of foreclosure (including reasonable attorneys' fees) and
similar items. Said attorneys' fees and costs may, at Bank's option, be deducted
from the disbursements of Loan proceeds in any manner deemed appropriate by
Bank.
b. In addition to any liability Borrower may have under Arizona
Revised Statutes Section 12-341.01, Borrower shall pay Bank's attorneys' fees
and costs incurred in the collection of any indebtedness hereunder, or in
enforcing this Agreement, whether or not suit is brought, and any attorneys'
fees and costs incurred by Bank in any proceeding under the United States
Bankruptcy Code in order to collect any indebtedness hereunder or to preserve,
protect or realize upon any security for such indebtedness.
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<PAGE> 18
20. MISCELLANEOUS.
a. This Agreement is made solely between Borrower and Bank, and no
other person shall have any right of action hereunder. The loan proceeds are not
a fund held for the benefit of laborers, materialmen or others. The parties
expressly agree that no person shall be a third party beneficiary to this
Agreement.
b. Bank may waive any of the requirements made of Borrower herein,
and any such waiver shall not constitute a waiver of any of the other
requirements made of Borrower hereunder. The failure of Bank to exercise any
right with respect to the declaration of any default shall not be deemed or
construed to constitute a waiver by Bank of such default or to preclude Bank
from exercising any right with respect to such default at a later date or with
respect to any subsequent default by Borrower.
c. Except as otherwise expressly provided herein, Borrower agrees
that there is no obligation or commitment on the part of Bank to renew the Loans
or to make any additional loans to Borrower.
d. Borrower agrees to and shall indemnify Bank from any liability,
claims or losses resulting from the disbursement of loan proceeds, or from the
condition of the real property whether related to hazardous waste on the
Property, the quality of construction or otherwise, and whether arising before,
during or after the term of the Loans. This provision shall survive the
repayment of the Loans and shall continue in full force and effect as long as
the possibility of such liability, claims or losses exist.
e. This Agreement and the rights, duties and obligations of the
parties hereto shall be governed by and construed in accordance with the laws of
the State of Arizona. Borrower hereby agrees that any suit or proceeding in
connection herewith may be brought in the State of Arizona and Borrower
irrevocably submits to jurisdiction in any court in such State.
f. Time is of the essence hereof.
g. This Agreement shall inure and be binding on the parties hereto,
and their respective successors and assigns; provided, however, that neither
this Agreement nor any rights or obligations hereunder shall be assignable by
Borrower without the prior express written consent of Bank, and any purported
assignment made in contravention hereof shall be void.
h. Any communications between the parties hereto or notices provided
herein to be given may be given by mailing the same by United States certified
or registered mail, return receipt requested, postage pre-paid, addressed as
follows, or to such other address as either party may in writing hereafter
indicate:
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<PAGE> 19
If to Borrower:
MONTEREY MANAGEMENT, INC.
6613 North Scottsdale Road
Suite 220
Scottsdale, Arizona 85250
If to Bank:
National Bank of Arizona
P.O. Box 80440
Phoenix, Arizona 85060-0440
Attn: Marjorie L. Willis
Any such notice shall be deemed received for purposes of this Agreement
forty-eight (48) hours after dispatch.
21. ARBITRATION DISCLOSURES.
a. ARBITRATION IS USUALLY FINAL AND BINDING ON THE PARTIES AND
SUBJECT TO ONLY VERY LIMITED REVIEW BY A COURT.
b. THE PARTIES ARE WAIVING THEIR RIGHT TO LITIGATE IN COURT,
INCLUDING THEIR RIGHT TO A JURY TRIAL.
c. PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED AND DIFFERENT
FROM COURT PROCEEDINGS.
d. ARBITRATORS' AWARDS ARE NOT REQUIRED TO INCLUDE FACTUAL FINDINGS
OR LEGAL REASONING AND ANY PARTY'S RIGHT TO APPEAL OR TO SEEK MODIFICATION OF
RULINGS BY ARBITRATORS IS STRICTLY LIMITED.
e. A PANEL OF ARBITRATORS MIGHT INCLUDE AN ARBITRATOR WHO IS OR WAS
AFFILIATED WITH THE BANKING INDUSTRY.
22. ARBITRATION PROVISIONS.
a. Any controversy or claim between or among the parties, including
but not limited to those arising out of or relating to this Agreement or any
agreements or instruments relating hereto or delivered in connection herewith,
and including but not limited to a claim based on or arising from an alleged
tort, shall at the request of any party be determined by arbitration in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association. The arbitration proceedings shall be conducted in Phoenix, Arizona.
The arbitrator(s) shall have the qualifications set forth in subparagraph 22.3
hereto. All statutes of
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<PAGE> 20
limitations which would otherwise be applicable in a judicial action brought by
a party shall apply to any arbitration or reference proceeding hereunder.
b. In any judicial action or proceeding arising out of or relating
to this Agreement or any agreements or instruments relating hereto or delivered
in connection herewith, including but not limited to a claim based on or arising
from an alleged tort, if the controversy or claim is not submitted to
arbitration as provided and limited in subparagraph 22.1 hereto, all decisions
of fact and law shall be determined by a reference in accordance with Rule 53 of
the Federal Rules of Civil Procedure or Rule 53 of the Arizona Rules of Civil
Procedure or other comparable, applicable reference procedure. The parties shall
designate to the court the referee(s) selected under the auspices of the
American Arbitration Association in the same manner as arbitrators are selected
in Association sponsored arbitration proceedings. The referee(s) shall have the
qualifications set forth in subparagraph 22.3 hereto.
c. The arbitrator(s) or referee(s) shall be selected in accordance
with the rules of the American Arbitration Association from panels maintained by
the Association. A single arbitrator or referee shall be knowledgeable in the
subject matter of the dispute. Where three arbitrators or referees conduct an
arbitration or reference proceeding, the claim shall be decided by a majority
vote of the three arbitrators or referees, at least one of whom must be
knowledgeable in the subject matter of the dispute and at least one of whom must
be a practicing attorney. The arbitrator(s) or referee(s) shall award recovery
of all costs and fees (including attorneys' fees, administrative fees,
arbitrator's fees, and court costs). The arbitrator(s) or referee(s) also may
grant provisional or ancillary remedies such as, for example, injunctive relief,
attachment, or the appointment of a receiver, either during the pendency of the
arbitration or reference proceeding or as part of the arbitration or reference
award.
d. Judgment upon an arbitration or reference award may be entered in
any court having jurisdiction, subject to the following limitation: the
arbitration or reference award is binding upon the parties only if the amount
does not exceed Four Million Dollars ($4,000,000.00); if the award exceeds that
limit, either party may commence legal action for a court trial de novo. Such
legal action must be filed within thirty (30) days following the date of the
arbitration or reference award; if such legal action is not filed within that
time period, the amount of the arbitration or reference award shall be binding.
The computation of the total amount of an arbitration or reference award shall
include amounts awarded for arbitration fees, attorneys' fees, interest and
other related costs.
e. At the Lender's option, foreclosure under a deed of trust or
mortgage may be accomplished either by exercise of a power of sale under the
deed of trust or mortgage or by judicial foreclosure. The institution and
maintenance of an action for judicial relief or pursuit of a provisional or
ancillary remedy shall not constitute a waiver of the right of any party,
including the plaintiff, to submit the controversy or claim to arbitration if
any other party contests such action for judicial relief.
f. Notwithstanding the applicability of other law to any other
provision of this Agreement, the Federal Arbitration Act, 9 U.S.C. 1 et seq.,
shall apply to the construction and interpretation of this arbitration
paragraph.
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<PAGE> 21
In witness whereof, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.
MONTEREY MANAGEMENT, INC., an Arizona
corporation
By: /s/ William W. Cleverly
------------------------------------------
William W. Cleverly
Its: President
--------------------------------------
MONTEREY MANAGEMENT-TUCSON, INC.,
an Arizona corporation
By: /s/ William W. Cleverly
------------------------------------------
William W. Cleverly
Its: President
--------------------------------------
MONTEREY HOMES CORPORATION, an Arizona
corporation, dba Monterey Homes
By: /s/ William W. Cleverly
------------------------------------------
William W. Cleverly
Its: President
--------------------------------------
"Borrower"
NATIONAL BANK OF ARIZONA, a national
banking association
By: /s/ Raymond S. Haverstock
------------------------------------------
Its: V.P.
--------------------------------------
"Bank"
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<PAGE> 22
LIST OF EXHIBITS
Exhibit "A" - Estimated Loan Value-Homes (Section 3)
Exhibit "B" - Estimated Loan Value-Permitted Model Homes (Section 7.2)
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<PAGE> 23
EXHIBIT "A"
Estimated Loan Value-Homes
9311 $166,128.00
9312 173,135.00
9313 178,361.00
9314 224,020.00
9316 220,059.00
9521 114,093.00
9522 121,174.00
9523 131,554.00
9525 141,054.00
9526 146,012.00
<PAGE> 24
EXHIBIT "B"
Estimated Loan Value-Permitted Model Homes
9311 $166,128.00
9312 173,135.00
9314 224,020.00
9521 114,391.00
9522 121,489.00
9523 131,896.00
9526 146,389.00
<PAGE> 1
EXHIBIT 10(n)
LOAN AGREEMENT
BY THIS AGREEMENT made and entered into as of the 22nd day of March, 1996,
MONTEREY MANAGEMENT, INC., an Arizona corporation, dba MONTEREY HOMES, whose
address is 6263 North Scottsdale Road, Scottsdale, Arizona 85252 (hereinafter
called "Borrower"), and BANK ONE, ARIZONA, NA, a national banking association,
whose address is Post Office Box 29542, Phoenix, Arizona 85038, Attention:
Western Region Real Estate, Department A387 (hereinafter called "Lender"), for
and in consideration of the recitals and mutual promises contained herein,
confirm and agree as follows:
SECTION 1. RECITALS; DEFINITIONS
1.1 Loan. Borrower has applied to Lender for a loan in the amount of FIVE
MILLION THREE HUNDRED SIXTY THOUSAND AND NO/100 DOLLARS ($5,360,000.00) (the
'Loan") for the purpose of acquiring or completing acquisition of the real
property described on Schedule "A" attached hereto and by this reference
incorporated herein (the "Real Property"), and constructing thereon certain
offsite improvements (the "Improvements") according to final plans and
specifications approved by Lender (the "Plans and Specifications"). The
Improvements are to consist of paving, curbs, sidewalks, landscaping, water,
sewer and other utilities, entry features and other infrastructure improvements.
The Real Property is to be developed into a 56 lot subdivision to be known as
Lincoln Place, located on approximately 19.4 acres north of Lincoln Drive
between 74th and 75th Streets in Scottsdale, Arizona.
1.2 Definitions. For the purposes of this Agreement, unless the context
otherwise requires, the following terms shall have the respective meanings
assigned to them in this Paragraph 1.2 or in the paragraph hereof referred to
below:
"Advance" and "Advances": See Paragraph 2.3.
"Agreement" means this Loan Agreement.
"Appraisal": See Paragraph 5.3(c).
"Borrower" means Monterey Management, Inc., an Arizona corporation, dba
Monterey Homes.
"Borrower's Funds Account": See Paragraph 7.18.
"Closing Date" means the earlier of the date of the initial Advance or the
recording of the Deed of Trust.
"Cost and Equity Breakdown": See Paragraph 2.3.
<PAGE> 2
"Deed of Trust": See Paragraph 4.1 (a).
"Disbursement Request": See Paragraph 2.4(a).
"Event of Default": See Paragraph 11.1.
"Guarantors" means William W. Cleverly, Steven J. Hilton and Benee J.
Hilton.
"Improvements": See Paragraph 1.1.
"Lander" means Bank One, Arizona, NA, a national banking association.
"Loan": See Paragraph 1.1.
"Lot Release Price": See Paragraph 4.3.
"Maximum Loan Amount": See Paragraph 2.1.
"Note": See Paragraph 2.2.
"Plans and Specifications": See Paragraph 1.1.
"Prime Rate" means the interest rate per annum designated by Bank One,
Arizona, NA, a national banking association, or its successors, as its "Prime
Rate," as publicly announced by that bank from time to time as a means of
pricing credit extensions to some customers and is neither tied to any external
interest rate or index nor necessarily the lowest rate of interest charged by
that bank at any given time for any particular class of customer or credit
extension.
"Real Property": See Paragraph 1.1.
"Retention Funds": See Paragraph 2.3(c).
"Security Documents": See Paragraph 4.2.
"Title Policy": See Paragraph 5.3(e).
SECTION 2. COMMITMENT; ADVANCES
2.1 Commitment. Subject to the conditions herein set forth, Lender agrees
to make the Loan available to or for the benefit of Borrower, and Borrower
agrees to draw upon the Loan, in the manner and upon the terms and conditions
herein expressed, an amount (the "Maximum Loan Amount") not to exceed the lesser
of the following:
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<PAGE> 3
(a) $5,360,000.00.
(b) An amount not to exceed eighty percent (80%) of the bulk
wholesale value of the Real Property and Improvements as evidenced by the
Appraisal, as it may be updated.
2.2 Note. The Loan shall be evidenced by a Promissory Note (the "Note") of
Borrower, executed and delivered simultaneously with the execution of this
Agreement, in the amount of $5,360,000.00, payable to Lender upon the terms and
conditions contained therein which may include, but need not be limited to, the
following:
(a) Interest Rate. Interest shall accrue at the rate of one-half
percent (0.5%) per annum in excess of the Prime Rate. The interest rate
shall change from time to time on the effective date of, and in conformity
with, changes in the Prime Rate.
(b) Interest Payments. All accrued interest shall be due and payable
on the first day of each and every month commencing with the first month
after the date of the Note.
(c) Maturity. The entire unpaid principal balance, all accrued and
unpaid interest and all other amounts payable under the Note shall be due
and payable in full on March 22, 1998.
(d) Extension Option. At the option of Borrower, the maturity date
of the Note may be extended an additional six (6) months to September 22,
1998, subject to the following terms and conditions:
(i) Borrower (A) at least thirty (30) days prior to the
commencement of the extension period shall have given Lender written
notice that Borrower desires such extension, and (B) shall have paid
to Lender in cash or immediately available funds on or before the
commencement of the extension period an extension fee in an amount
equal to one-half percent (0.5%) of the sum of the then outstanding
principal amount of the Loan plus all amounts that are committed but
not yet advanced under the Loan;
(ii) Lender, in its reasonable discretion, shall have
determined that there has been no material adverse change in the
financial condition of Borrower;
(iii) No Event of Default and no event, that with the giving
of notice or the passage of time, or both, would be an
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Event of Default, shall have occurred and be continuing on the date
of Borrower's notice of extension to Lender or on the commencement
of the extension period;
(iv) Borrower shall be in compliance with the Lot Release
Price payment requirements of Paragraph 4.4 hereof; and
(v) If required by Lender, an update of the Appraisal; the
amount of the Loan shall not exceed eighty percent (80%) of the bulk
wholesale value of the Real Property and Improvements as shown by
such update. If for any reason the loan-to-value percentage exceeds
said percentage, then Borrower shall upon Lender's demand,
immediately reduce the unpaid principal balance of the Loan to
reduce the loan-to-value percentage to, at or below said percentage.
2.3 Advances. Disbursements under the Loan are referred to herein
individually as an "Advance" and collectively as "Advances." Lender shall make
Advances, subject to all of the terms and conditions provided herein, in the
following manner, only in the amounts and for the cost item set forth in the
Cost and Equity Breakdown attached hereto as Schedule "B" and by this reference
incorporated herein (the "Cost and Equity Breakdown"):
(a) Initially, Lender shall make an Advance in an amount not to
exceed the amounts set forth on the Cost and Equity Breakdown for the
costs items identified thereon as Land Acquisition Cost, Title/Close Fee,
Legal Fee, Appraisal/Review Fee and Loan Fee.
(b) The portion of the Loan allocated on the Cost and Equity
Breakdown for interest reserve shall be held by Lender as an interest
reserve, and Lender shall make Advances thereof to pay interest when due
under the Loan. If funds are not available from the interest reserve to
pay interest due under the Loan, Borrower shall pay such interest from its
own funds.
(c) Lender shall make Advances of the remaining portion of the Loan,
allocated on the Cost and Equity Breakdown for direct and indirect costs
and expenses for construction of the Improvements, in accordance with one
or more of the options described below; upon the occurrence of any event
described in Option Two below, Lender may cease Advances under Option One
and thereafter make Advances under Option Two:
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Option One
Upon receipt by Lender of a Disbursement Request described below,
together with all of the items described in Paragraph 2.4 hereof that are
required by Lender in connection with that Advance, Lender shall make
Advances no more frequently than monthly, as construction progresses, in
amounts equal to: (i) expenditures for labor performed and material
supplied under the construction contract for construction of the
Improvements in accordance with the Plans and Specifications during the
period immediately preceding that Advance plus (ii) indirect construction
costs actually paid or incurred by Borrower that have not been covered by
previous Advances. Indirect construction costs shall mean those costs
related to the construction of the Improvements or development of the Real
Property, other than the cost of labor and materials, and include, but
are not limited to, title insurance premiums, permit fees, architect and
engineering fees, legal fees, loan fees, taxes and interest during
construction, but do not include any profit to Borrower or any affiliate
of Borrower. Notwithstanding the foregoing, at Lender's option, Lender may
hold back ten percent (10%) of the costs of construction (hereinafter
called the "Retention Funds") related to the major scopes of work
generally described as "Grading," "Sewer," "Water," "Concrete," and
"Paving." Subject to the provisions for Advances contained herein, and so
long as there is no Event of Default hereunder, Lender may disburse a
portion of the Retention Funds for the scopes of work described above.
Subject to the provisions of this Agreement, and so long as there is no
Event of Default hereunder, any remaining Retention Funds shall be
disbursed upon a date to be determined at Lender's discretion but not
later than forty-five (45) days after receipt by Lender of the items
specified above and receipt and approval by Lender of the items described
in Paragraph 2.5 hereof.
Option Two
Upon the occurrence of any Event of Default, or at any time that
Lender determines from its own inspection that the Improvements are not
being constructed according to the Plans and Specifications or in
conformity with cost estimates approved by Lender or that requisite and
acceptable standards of workmanship are not being met, Lender shall have
the right, but not the obligation, to take over and complete construction
of the Improvements by or through any agent, contractor or subcontractor
of its selection and may make Advances and disburse any funds deposited
with Lender by Borrower in payment of the costs, expenses, fees,
attorneys' fees and other charges, together with reasonable allowances for
supervision, incurred in connection with such taking over and completion.
In the event proceeds of the Loan and amounts deposited by Borrower are
insufficient to pay all of the same, the unpaid amount thereof shall be an
indebtedness of Borrower to Lender, payable immediately without
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demand or notice, shall bear interest at the highest rate payable under
the Note, and shall be secured by all of the Security Documents.
(d) Until a final plat is recorded satisfactory to Lender, legally
subdividing the Real Property into not less than 56 lots, Borrower shall
only be entitled to Advances under Paragraphs 2.3(a) and (b) above.
2.4 Disbursement Request. When Borrower believes it is entitled to an
Advance, Borrower shall furnish Lender with the following, all in form and
content satisfactory to Lender:
(a) A Disbursement Request, together with AIA Forms G702 and G703
(and such other forms as may from time to time be approved or required by
Lender), setting forth such details concerning the construction of the
Improvements as Lender may require, including the amounts expended to the
date of the Disbursement Request for the Improvements, the amounts then
due and unpaid for construction of the Improvements and an itemized
estimate of the amount necessary to complete the Improvements. Any
materials covered by a Disbursement Request must be suitably stored at the
construction site, inventoried, and safeguarded and insured against loss,
damage, and theft.
(b) The certification by Borrower, the supervising architect, if
any, the contractor, and at Lender's option an independent architect or
engineer of Lender's selection, that: (i) all work performed is in
substantial accordance with the Plans and Specifications; (ii) all
governmental licenses and permits required for the Improvements as then
completed have been obtained and will be exhibited to Lender upon request;
(iii) the Improvements as then completed do not violate, and, if further
completed in accordance with the Plans and Specifications, will not
violate, any law, ordinance, rule or regulation; and (iv) the remaining
undisbursed proceeds of the Loan plus the then existing balance of any
Borrower's Funds Account held by Lender are sufficient to pay for the
completion of the Improvements.
(c) The certification by Borrower that no Event of Default exists,
and no event has occurred and no condition exists that, after notice or
lapse of time, or both, would constitute an Event of Default.
(d) Paid invoices and lien waivers relating to the construction of
the Improvements for all work through the date of the previous
Disbursement Request and invoices for all work covered by the current
Disbursement Request.
(e) Evidence that any inspection required by any master developer,
state, city or other governmental authority has been completed with
results satisfactory to that authority.
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(f) Such other information and documents as Lender may reasonably
require.
2.5 Completion of Improvements. Upon completion of the Improvements,
Borrower shall furnish Lender with the following, all in form and content
satisfactory to Lender, as a condition precedent to disbursement of any
remaining Retention Funds:
(a) Such additional endorsements to the Title Policy or such
additional policies of title insurance with endorsements thereto as Lender
may require, with a liability limit not less than the Title Policy amount,
issued by the title company issuing the Title Policy with coverage and in
form satisfactory to Lender, insuring Lender's interest under the Deed of
Trust as a valid lien on the Real Property, excepting only such items as
shall have been approved in writing by Lender and providing affirmative
insurance therein against mechanics' liens, materialmen's liens or claims
or liens in the nature thereof on account of any construction of the
Improvements;
(b) If requested by Lender, the execution of AIA Form G704 or other
document satisfactory to Lender by Borrower's engineer, contractor (if
any) and Borrower;
(c) If requested by Lender, a notice of completion on Lender's
approved form executed by Borrower and duly recorded in the county
recorder's office where the Real Property is located;
(d) If requested by Lender, an "as-built" ALTA survey of the Real
Property or other satisfactory evidence, showing the location of the
completed Improvements, the location of all points of access to the Real
Property and the Improvements and the location of all easements affecting
the Real Property and certifying that there are no encroachments of the
Improvements onto any easements affecting the Real Property or onto any
adjoining property and that all applicable setback requirements and other
restrictions have been complied with;
(e) "As-built" plans and specifications of the Improvements, showing
the final specifications of all Improvements;
(f) If requested by Lender, the execution of AIA Form G706
(Contractor's Affidavit of Payment of Debts), AIA Form G706A (Contractor's
Affidavit of Release of Liens), and AIA Form G707 (Consent of Surety of
Final Payment);
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(g) Unconditional lien waivers on Lender's approved form from any
party that has recorded a preliminary notice of lien against the Real
Property and Improvements; and
(h) Final offsite acceptance letter from the applicable governmental
authority as may be necessary to evidence completion of the Improvements.
2.6 Inspections. Borrower shall pay for all inspections, whether made by
an independent architect, engineer, or other inspector, or by Lender made
pursuant to this Agreement, which amounts shall be deducted by Lender from the
Loan to the extent funds allocated for such purpose remain available. Borrower
shall pay to Lender $100.00 per inspection to defray the cost of such
inspection, whether such inspection is performed by an independent contractor or
by Lender. To the extent not otherwise provided for in the Cost and Equity
Breakdown, Borrower shall pay such costs from funds other than the proceeds of
the Loan.
2.7 Method of Advance. Any Advance made by Lender under any option for
disbursement, or so much thereof as Lender may consider proper, may be disbursed
to Borrower or its order or, at Lender's election, directly to the persons
furnishing labor and/or materials, or to both. Lender shall have no obligation
to see that the disbursements made by it to Borrower or any designee of Borrower
are actually used by that party to pay for labor and materials furnished for
construction of the Improvements. Borrower acknowledges that this is its
responsibility, and Borrower assumes all risks in connection with any
disbursement to any such designee.
2.8 Protection of Lender. Lender may withhold from any Advance or, on
account of subsequently discovered evidence, withhold from a later Advance, or
require Borrower to repay to Lender any earlier Advance, as Lender in its sole
discretion considers necessary to protect Lender from loss on account of (i)
defective work on the Improvements that has not been remedied, (ii) any
obligation required by this Agreement to have been performed that has not been
performed, (iii) liens filed against the Real Property and Improvements or
reasonable evidence that such liens will be filed (other than in connection with
work the cost of which is being properly contested in accordance with the
provisions hereof), (iv) failure of Borrower to make payments to contractors or
subcontractors for material or labor (other than in connection with work the
cost of which is being properly contested in accordance with the provisions
hereof), or (v) a reasonable doubt by Lender that construction of the
Improvements can be completed with the undisbursed proceeds of the Loan, plus
any amounts deposited by Borrower with Lender. Subject to the other provisions
of this Agreement, any amount so withheld shall be disbursed after the basis for
such withholding has been cured or removed.
2.9 Withholding Advances. Under any option for Advances, Lender, in its
discretion, may withhold any payment or portion thereof until Lender has
received releases of lien, waivers of lien or paid bills in form satisfactory to
it for work through the date of the previous
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Disbursement Request. Lender shall have no obligation to require and/or obtain
lien waivers or receipts, and, although Lender requires presentation to it of
lien waivers and/or receipts, Lender shall have no responsibility for the
validity thereof nor for the correctness of the amounts indicated thereon. No
Advance by Lender shall constitute approval of any certification or relieve any
person making such certification of responsibility therefor.
2.10 Advances for Insurance, Taxes, Assessments and Liens. Lender, from
time to time, may, but shall not be obligated to, make Advances in payment of
insurance premiums, taxes, assessments, liens or encumbrances existing against
the Real Property and Improvements, interest accrued and payable upon the Loan,
and any charges and expenses that are the obligation of Borrower under this
Agreement or any Security Document and any charges or matters necessary to
preserve the Real Property and the Improvements or to cure any Event of Default.
2.11 Satisfaction of Conditions. Although Lender shall have no obligation
to make any Advance unless and until all of the conditions and prior
performances set forth herein have been kept, fulfilled or performed, and until
all inspections, certifications, releases, waivers, or paid bills or other
requirements set forth in Section 2 have been made, delivered and complied with,
Lender, at its sole discretion, may make Advances prior to that time without
waiving or releasing any of the requirements or conditions of this Agreement;
but Borrower shall continue to be strictly obligated and subject thereto, and
all such conditions, prior performances and other requirements shall
nevertheless be strictly and punctually complied with, fulfilled and performed;
and, notwithstanding any such disbursement, Lender, at its sole discretion, may
discontinue any further Advances at any time until all of the conditions, prior
performances and other requirements of this Agreement have been strictly
fulfilled, performed and complied with.
2.12 Disputes. In the event of any dispute that, in the good faith opinion
of Lender; may endanger the timely completion of the Improvements or the
fulfillment of any condition precedent or covenant herein, Lender may agree to
make Advances for the account of Borrower without prejudice to Borrower's
rights, if any, to recover such funds from the party to whom paid. Such
agreement or agreements may take any form that Lender in its reasonable
discretion deems proper, including, without limitation, agreements to indemnify
a title insurer against possible assertion of lien claims and agreements to pay
disputed amounts to contractors in the event Borrower is unable or unwilling to
pay the same. All sums paid or agreed to be paid pursuant to such agreement
shall be for the account of Borrower and shall be charged as an Advance.
2.13 Right to Advances. Borrower shall have no right to any Advance other
than to have the same disbursed by Lender in accordance with one or more of the
disbursement provisions contained in this Agreement. Any assignment or transfer,
voluntary or involuntary, of this Agreement or any right hereunder shall not be
binding upon or in any way affect Lender without its written consent; Lender may
make Advances under one or more of the disbursement provisions herein,
notwithstanding any such assignment or transfer.
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2.14 Excess Advances. Borrower shall immediately repay any Advance
received by Borrower in excess of the amount Borrower is entitled to under the
provisions of this Agreement.
2.15 Disbursement Request Date. Borrower shall provide Lender with
Disbursement Requests each month on or before a date agreed upon by Borrower and
Lender, and Lender shall be obligated to make Advances no more frequently than
once per month.
SECTION 3. LOAN FEES
3.1 Loan Fee. Lender has earned and Borrower has paid or shall pay to
Lender prior to or at the time of recording of the Deed of Trust, a
non-refundable Loan fee in the amount of $26,800.00. In the event Borrower shall
exercise the six-month extension option in accordance with the terms of the
Note, Borrower shall pay to Lender the non-refundable extension fee set forth in
Paragraph 2.2(d)(i) above, in an amount equal to one-half percent (0.5%) of the
then outstanding principal balance of the Loan plus all amounts that are
committed but not yet advanced under the Loan.
SECTION 4. SECURITY; RELEASES; REQUIRED LOT RELEASE PRICE PAYMENTS
4.1 Security. Borrower shall cause the Loan and Borrower's obligations
under this Agreement to be secured by the following:
(a) A Deed of Trust, Assignment of Rents, Security Agreement and
Fixture Filing (severally and collectively, the "Deed of Trust")
constituting:
(i) A first and prior lien on the Real Property and
Improvements, subject only to such matters as specifically approved
by Lender therein;
(ii) A valid and effectual assignment of rents and leases
covering the Real Property and Improvements;
(iii) A valid and effectual security agreement granting Lender
a first and prior security interest in all of the property described
below in, to, or under which Borrower now has or hereafter acquires
any right, title or interest, whether present, future, or contingent
(but excluding all personal property used in connection with, or
arising from, any business of Borrower other than the ownership,
development, maintenance, leasing, management, operation, sale or
other disposition of the Real Property): all equipment, inventory,
accounts, general intangibles, instruments, documents, and chattel
paper, as those terms are
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defined in the Uniform Commercial Code, and all other personal
property of any kind (including without limitation money and rights
to the payment of money), whether now existing or hereafter created,
that are now or at any time hereafter (A) in the possession or
control of Lender in any capacity; (B) erected upon, attached to, or
appurtenant to, the Real Property; (C) located or used solely on the
Real Property or identified for use solely on the Real Property
(whether stored on the Real Property or elsewhere); or (D) used in
connection with, arising from, related to, or associated with the
Real Property or any of the personal property described herein, the
construction of any improvements on the Real Property, the
ownership, development, maintenance, leasing, management, or
operation of the Real Property, the use or enjoyment of the Real
Property, or the operation of any business conducted on the Real
Property; together with all products and proceeds of all of the
foregoing, in any form;
(b) Valid and effectual assignments of Borrower's interest in the
Plans and Specifications, all construction, architects' and engineers'
contracts, all operating, management and supervision agreements relating
to the ownership, development, construction and maintenance of the Real
Property and Improvements;
together with any UCC financing statements for filing and/or recording and any
other items required by Lender to fully perfect the liens and security interests
of Lender.
4.2 Security Documents. All of the documents required by Lender to grant
and perfect the liens and security interests required herein shall be in form
satisfactory to Lender and may be referred to herein as the "Security
Documents."
4.3 Releases. The Deed of Trust provides for the partial release of
subdivided lots constituting the Real Property upon the terms and conditions
contained herein and in the Deed of Trust, including the payment of a lot
release price in the amount of $121,500.00 for each lot (each such release price
hereinafter called, the "Lot Release Price"). Each Lot Release Price received in
connection with the Loan shall be applied as a prepayment of the outstanding
principal balance under the Note in the manner provided therein for prepayments
of principal. Regular payments of interest due under the Note shall not apply
toward any release price.
4.4 Required Lot Release Price Payments. Commencing with the 3-month
period beginning on November 1, 1996, and ending on January 31, 1997, and
continuing each and every 3-month period thereafter, Borrower shall satisfy the
conditions set forth in Paragraph 4.3 hereof and shall pay to Lender the Lot
Release Price on not less than six (6) of the subdivided lots constituting the
Real Property during each and every such 3-month period. Lot Release
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Price payments received in excess of the requirements of this Paragraph during
any 3-month period shall be credited to the satisfaction of the requirements
hereof in future 3-month periods.
4.5 Release of Common Areas. Notwithstanding any other provision contained
in this Agreement or the Security Documents, after the recordation of a final
plat subdividing the Real Property into fifty-six (56) lots and certain common
area tracts and concurrently with Borrower's conveyance of the common area
tracts to the Lincoln Place Community Association to be formed by Borrower,
Lender shall execute any and all documents necessary to release the lien of the
Security Documents from all common area tracts so that after such event the lien
of the Security Documents shall affect only the lots shown in the final plat.
SECTION 5. CONDITIONS PRECEDENT FOR CLOSING
The obligation of Lender to make the Loan and each and every Advance is
subject to the following express conditions precedent, all of which, unless
otherwise provided below, shall have been satisfied prior to the recording of
the Deed of Trust:
5.1 Loan Documents. Borrower shall have executed (or obtained the
execution or issuing of) and delivered to Lender the following documents, all in
form satisfactory to Lender:
(a) The Note;
(b) The Security Documents:
(i) Deed of Trust;
(ii) Assignment of Plans and Specifications and Rights under
Engineering Contract;
(iii) UCC-l Financing Statement(s).
(c) Unconditional Guarantees of Payment executed by Guarantors;
(d) Guarantees of Completion and Performance executed by Guarantors;
(e) Environmental Indemnity Agreement executed by Borrower and
Guarantors; and
(f) Arbitration Resolution executed by Borrower and Guarantors.
5.2 Fees. Lender shall have received the Loan fee required in Paragraph
3.1 hereof.
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5.3 Other Conditions. Borrower, at its expense, shall have obtained and
delivered to Lender (except that the appraisal required below shall be ordered
by Lender at Borrower's expense) the following items, all of which shall be in
form and content satisfactory to Lender and shall be subject to approval in
writing by Lender:
(a) The Plans and Specifications approved by any required
governmental entity.
(b) A cost breakdown itemizing the gross costs, including direct and
indirect costs, for the Improvements, certified to be correct to the best
knowledge and belief of Borrower.
(c) A current appraisal (the "Appraisal") of the Real Property and
Improvements by an appraiser acceptable to Lender, reviewed and found to
be satisfactory by Lender and showing a bulk wholesale value for the Real
Property and completed Improvements such that the amount of the Loan shall
not exceed an amount equal to eighty percent (80%) of said bulk wholesale
value. Lender may require reappraisals at Borrower's expense.
(d) A copy of the proposed plat for the Real Property and a current
survey of the Real Property by a licensed surveyor acceptable to Lender
describing the boundaries of the Real Property and showing all means of
ingress and egress, rights-of-way, easements (each of which shall be
identified by docket and page or recording number where recorded) and all
other customary and relevant information pursuant to ALTA standards and
any title company requirements. If required by Lender, following
completion of the Improvements, Borrower shall furnish to Lender an ALTA
"as built" survey showing the location of the Improvements upon the Real
Property and showing all easements and other matters affecting the site.
All surveys shall be certified to Lender and the title company issuing the
Title Policy.
(e) An ALTA extended coverage mortgagee's title insurance policy
[ALTA Loan Policy - 1970 (Rev. 10-17-70)] or similar policy acceptable to
Lender (the "Title Policy"), with such endorsements as Lender may require,
issued by a title insurance company satisfactory to Lender in the amount
of the Loan insuring the lien of the Deed of Trust to be a first and
prior lien upon the Real Property as security for all Advances pursuant
to the terms of this Agreement, subject only to such exceptions as Lender
may expressly approve in writing, and insuring against any lien claims
that could arise out of the construction of the Improvements on the Real
Property. During the course of construction of the Improvements, Borrower
shall provide Lender with such title insurance endorsements as Lender may
require, including any endorsements Lender may require to insure that the
Improvements shall have been constructed
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within the boundaries of the Real Property and in accordance with all
applicable laws, covenants and restrictions. Upon completion of the
Improvements, Borrower shall deliver to Lender such further endorsements
to the title insurance policy as Lender may require.
(f) A soils report, including drainage, boring and compacting data,
together with such hydrology and other engineering reports that Lender may
require, all of which shall be acceptable to Lender, shall be by engineers
acceptable to Lender and shall indicate that the condition of the Real
Property is suitable for construction of the Improvements without
extraordinary land preparation. Any recommendations in the approved soils,
hydrology and other engineering reports must be complied with and
incorporated into the Plans and Specifications.
(g) An environmental questionnaire and disclosure statement
completed and signed by Borrower covering the current and former condition
and uses of the Real Property and adjacent property, and, if required by
Lender, followed by a current preliminary environmental assessment (Phase
I assessment) of the Real Property and adjacent property, plus any
sampling and analysis (Phase II assessment) or special limited assessment
that Lender may require after review of the Phase I assessment, together
with any other environmental investigations and reports that Lender may
require, all of which shall be by an environmental consulting firm
acceptable to Lender and none of which shall reveal any existing or
potential environmental condition adversely affecting the use or value of
the Real Property.
(h) Evidence that the Real Property is properly zoned for the
Improvements and their intended use and that such zoning is final and not
subject to challenge.
(i) Policies of insurance providing the following:
(i) Liability. Commercial general liability insurance
protecting Borrower and Lender against loss or losses from liability
imposed by law or assumed in any agreement, document, or instrument
and arising from bodily injury, death, or property damage with a
limit of liability of not less than $1,000,000.00 per occurrence and
$2,000,000.00 general aggregate. Also, "umbrella" excess liability
insurance in an amount not less than $5,000,000.00. Such policies
must be written on an occurrence basis so as to provide blanket
contractual liability, broad form property damage coverage, and
coverage for products and completed operations. In addition, there
shall be obtained and
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<PAGE> 15
maintained business motor vehicle liability insurance protecting
Borrower and Lender against loss or losses from liability relating
to motor vehicles owned, non-owned, or hired used by Borrower, any
contractor, any subcontractor, or any other person in any manner
related to the Real Property with a limit of liability of not less
than $2,000,000.00 (combined single limit for personal injury
(including bodily injury and death) and property damage).
(ii) Property. Fire and extended coverage insurance on the
Improvements in an amount not less than the full insurable value on
a replacement cost basis of the insured Improvements and personal
property related thereto. During the construction period, such
policy shall be written in the so-called "Builder's Risk Completed
Value Non-Reporting Form" with no coinsurance requirement and shall
contain a provision granting the insured permission to complete.
(iii) Flood. A policy or policies of flood insurance in the
maximum amount of flood insurance available with respect to the Real
Property under the Flood Disaster Protection Act of 1973, as
amended. This requirement will be waived upon presentation of
evidence satisfactory to the Lender that no portion of the Real
Property is located within an area identified by the U.S. Department
of Housing and Urban Development as having special flood hazards.
(iv) Workman's Compensation. Workman's compensation insurance,
disability benefits insurance, and such other forms of insurance as
required by law covering loss resulting from injury, sickness,
disability, or death of employees of Borrower, any contractor, and
any subcontractor located on or assigned to the Real Property.
Borrower shall cause each contractor and each subcontractor having
employees located on or assigned to the Real Property to obtain and
maintain this same coverage for all eligible employees.
(v) Engineer. If required by Lender, each engineer, each soils
engineer, and each environmental contractor employed by Borrower in
connection with the Real Property shall maintain engineer's
professional liability insurance with a limit of liability of not
less than the amount approved by Lender.
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(vi) Architect. If required by Lender, each architect employed
by Borrower in connection with the Project shall maintain
architect's professional liability insurance with a limit of
liability of not less than the amount approved by Lender.
(vii) Other. Such other insurance as Lender may require, which
may include, without limitation, errors and omissions insurance with
respect to the contractors, architects and engineers, insurance
covering vandalism and malicious mischief, sprinkler leakage, rent
abatement and/or business loss.
All insurance policies (i) shall be issued by an insurance company
acceptable to Lender, (ii) name Lender as an additional insured on all
liability insurance and first mortgagee on all casualty insurance, (iii)
provide that Lender is to receive thirty (30) days written notice prior to
cancellation, and (iv) be in an original form to be held by Lender.
(j) Evidence whether the Real Property, or any part thereof, lies
within a "special flood hazard area" as designated on maps prepared by the
Department of Housing and Urban Development.
(k) Evidence that all utilities and services to the Real Property
and Improvements, including without limitation water, sewer, gas, electric
and telephone, are available, or will be available as required, and will
be provided in amounts that are sufficient to service future onsite
improvements for their intended use.
(1) Upon issuance, copies of all grading permits and all building
permits issued by the municipality having jurisdiction over the Real
Property and Improvements and permitting construction of the Improvements
in accordance with the Plans and Specifications.
(m) Copies of all lease agreements, if any, affecting the Real
Property and Improvements.
(n) Copies of all other agreements between Borrower and any
architects, engineers, managers or supervisors related to the construction
and maintenance of the Real Property and Improvements, together with
written agreements by such persons or entities that they will perform for
Lender the services contracted to Borrower, notwithstanding the occurrence
of any Event of Default and any trustee's sale or foreclosure of the Deed
of Trust (provided that such persons or entities continue to receive
payments under their respective
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contracts), and the consent of such persons or entities to the collateral
assignment by Borrower to Lender of their respective contracts.
(o) If required by Lender, a list of the contractor, all
subcontractors, suppliers and materialmen employed or retained to be
employed in connection with the construction of the Improvements, together
with, if required by Lender, copies of each such contract. Such list shall
show the name, address and telephone number of each such person, a general
statement of the nature of the work to be done, the labor and material to
be supplied, the names of materialmen if known, and the approximate dollar
value of such labor or work with respect to each.
(p) Copies of any Declaration of Covenants, Conditions and
Restrictions and related documents pertaining to the Real Property and the
Improvements.
(q) Evidence that all taxes and assessments levied against or
affecting the Real Property have been paid current, together with, if
required by Lender, a Type B tax service contract for the Real Property.
(r) If Borrower, any partner or member in Borrower or any guarantor
of the Loan is other than a natural person: (i) a copy of the
organizational documents for that entity; (ii) evidence of the proper
formation and good standing of that entity in the state of its
organization, (iii) evidence of qualification or registration of that
entity in the State of Arizona, if Arizona is not the state of its
organization, and (iv) proper resolutions, authorizations, certificates,
and such other documents as Lender may require, relating to the existence
and good standing of that entity and the authority of any person executing
documents on behalf of that entity. No change shall be made to any
organizational documents previously submitted to Lender without Lender's
prior written approval.
(s) A Job Progress Schedule showing the planned timing, progress of
construction and completion date for the Improvements.
(t) Such other information and documents as Lender may reasonably
require.
5.4 Legal Opinion. If required by Lender, Borrower, at its expense, shall
have provided Lender with a written opinion by counsel in form and substance
reasonably acceptable to Lender.
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5.5 Representations True. All representations and warranties by Borrower
shall remain true and correct and all agreements that Borrower is to have
performed or complied with by the date hereof shall have been performed or
complied with.
5.6 No Event of Default. No Event of Default exists, and no event has
occurred and no condition exists that, after notice or lapse of time, or both,
would constitute an Event of Default.
SECTION 6. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants to Lander as follows:
6.1 Recitals and Statements. The recitals and statements of intent
appearing in this Agreement are true and correct.
6.2 Organization and Good Standing. If Borrower is a corporation, limited
liability company, partnership or trust, Borrower (and, if applicable, each
partner or member of Borrower) is duly organized, validly existing and in good
standing under the laws of the state of its organization and is, to the extent
required by law, qualified to do business and is in good standing in the State
of Arizona and in each state in which it is doing business.
6.3 Power. Borrower has full power and authority to own its properties and
assets and to carry on its business as now being conducted. The execution,
delivery and performance of this Agreement, the Note and each of the Security
Documents have been duly authorized by all requisite action on the part of
Borrower.
6.4 Authority. Borrower is fully authorized and permitted to enter into
this Agreement, to execute any and all documentation required herein, to borrow
the amounts contemplated herein upon the terms set forth herein and to perform
the terms of this Agreement, none of which conflicts with any provision of any
law, rule or regulation applicable to Borrower. This Agreement, the Note and
each Security Document are valid and binding legal obligations of Borrower, and
each is enforceable in accordance with its terms, subject to bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to the
rights of creditors generally and general principles of equity.
6.5 Enforceable Liens. The liens, security interests and assignments
created by the Security Documents will, when granted and recorded or filed, be
valid, effective, properly perfected and enforceable liens, security interests
and assignments.
6.6 Enforceable Guarantees. Each Guarantee of Payment and each Guarantee
of Performance and Completion referred to in Paragraph 5.1 hereof constitutes a
legal, valid and binding obligation of each guarantor named therein according to
the terms thereof.
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6.7 No Breach. The execution, delivery and performance by Borrower of this
Agreement, the Note, the Security Documents and all other documents and
instruments relating to the Loan will not result in any breach of the terms,
conditions or provisions of, or constitute a default under, any agreement or
instrument under which Borrower is a party or is obligated. Borrower is not in
default in the performance or observance of any covenants, conditions or
provisions of any such agreement or instrument.
6.8 No Actions. No actions, suits or proceedings are pending or threatened
against Borrower that might materially and adversely affect the repayment of the
Loan, the performance by Borrower under this Agreement or the financial
condition, business or operations of Borrower.
6.9 Licenses. Borrower has obtained or shall obtain prior to commencement
of construction of the Improvements, and there shall thereafter remain in full
force and effect all licenses, permits, consents, approvals and authorizations
necessary or appropriate for the construction of the Improvements.
6.10 Financial Statements True. All financial statements, profit and loss
statements, statements as to ownership and other statements or reports
previously or hereafter given to Lender by or on behalf of Borrower are and
shall be true, complete and correct as of the date thereof. There has been no
material adverse change in the financial condition or the results of the
operation of Borrower since the latest financial statements of Borrower given to
Lender.
6.11 Filing of Taxes. Borrower has filed all federal, state and local tax
returns and has paid all of its current obligations before delinquent, including
all federal, state and local taxes and all other payments required under
federal, state or local law.
6.12 Affirmation of Representations and Warranties. Each request by
Borrower for an Advance shall constitute an affirmation on the part of Borrower
that the representations and warranties contained herein are true and correct as
of the time of such request and that the conditions precedent set forth in
Section 5 hereof have been fully satisfied. All representations and warranties
made herein shall survive the execution of this Agreement, all Advances and the
execution and delivery of all other documents and instruments in connection with
the Loan, so long as Lender has any commitment to lend to Borrower hereunder and
until the Loan and all indebtedness hereunder have been paid in full and all of
Borrower's obligations hereunder have been fully discharged.
SECTION 7. AFFIRMATIVE COVENANTS
So long as Lender has any commitment to lend to Borrower hereunder and
until the Loan and all other indebtedness hereunder have been paid in full and
all of Borrower's obligations hereunder have been fully discharged:
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7.1 Payment of Construction Costs. Borrower shall promptly pay for all
labor, materials, equipment and fixtures used in connection with the
construction of the Improvements and all other costs relating to the
Improvements except that Borrower may contest in good faith the validity or
amount thereof provided that Borrower shall have furnished to Lender a cash
deposit or other appropriate security in an amount and form satisfactory to
Lender to protect Lender against the creation of any lien on, or any sale or
forfeiture of, any property encumbered by the Security Documents. Upon the final
determination of Borrower's contest, Borrower shall promptly pay all sums, if
any, determined to be due. Any deposit or security provided by Borrower shall be
returned to Borrower upon the final determination of Borrower's contest and the
payment by Borrower of the sums, if any, determined to be due.
7.2 Completion of Improvements. Borrower shall commence construction of
the Improvements within a reasonable time (not more than one hundred twenty
(120) days) after the recording of the Deed of Trust, proceed without
interruption and promptly complete the Improvements not later than one (1) year
from the date of the recording of the Deed of Trust in a good and workmanlike
manner according to the Plans and Specifications, free from all liens and
encumbrances, and in accordance with all applicable ordinances and statutes,
including zoning laws, all covenants and restrictions running with the land, and
all regulations and building codes of any governmental or municipal agency
having jurisdiction over the Improvements.
7.3 Broken Priority. Borrower warrants that no labor or material has been
or will be furnished for construction of the Improvements until the Deed of
Trust has been recorded and the title company has committed to issue the Title
Policy; or, if construction has commenced, Borrower shall assure that all
necessary indemnification or other agreements are made, in form satisfactory to
the title company, so that Lender receives the Title Policy without exception
for mechanics' or materialmen's liens, as required herein.
7.4 Enforcement of Contracts. Borrower shall strictly enforce the
contracts for the construction of the Improvements to ensure that the
contractors are required to promptly and diligently perform all of their
obligations thereunder and in such a manner as to preserve Lender's security in
the Real Property and Improvements. No change, amendment or modification shall
be made to such contracts without the prior written consent of Lender except
changes, amendments or modifications that are to implement changes to the Plans
and Specifications permitted hereby.
7.5 Additional Contractor Lists. Borrower, promptly upon request of Lender
from time to time, shall furnish to Lender correct lists of the contractor, all
subcontractors, suppliers and materialmen employed or retained in connection
with the construction of the Improvements, together with, if required by Lender,
copies of each such contract. Each such list shall show the name, address and
telephone number of each such person, a general statement of the nature of the
work to be done, the labor and materials to be supplied, the names of
materialmen if known. and the approximate dollar value of such labor or work
with respect to each. Lender shall have the right to telephone or otherwise
communicate with the contractor, each
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subcontractor and materialman to verify the facts disclosed by said list or by
any disbursement request, or for any other purpose.
7.6 No Other Security Interests. No materials, equipment, fixtures or any
other part of the Improvements shall be purchased or installed under any
security agreement or other arrangements wherein the seller reserves or purports
to reserve the right to remove or to repossess any such items or to consider
them personal property after their incorporation into the Improvements.
7.7 Maintenance of Licenses and Permits. Borrower shall maintain in full
force and effect all rights and licenses necessary to carry on its business, and
all permits, licenses, consents and approvals necessary for the construction
and maintenance of the Improvements. Borrower shall maintain its present
existence and shall maintain executive personnel and management at a level of
experience and ability equivalent to present personnel and management.
7.8 Maintenance of Insurance. Borrower shall maintain in full force and
effect at all times all insurance coverages required to be provided as a
condition of any Advance.
7.9 Compliance with Loan Documents. Borrower shall make all payments of
interest and principal on the Loan and shall keep and comply with all terms,
conditions and provisions of the Security Documents.
7.10 Publicity. After the execution of this Agreement, any and all
publicity releases to newspapers of general or limited circulation or trade
publications announcing any of the financing by Lender provided for herein shall
be issued by or subject to prior approval by Lender. Lender, at its option and
at Borrower's expense, may erect a sign upon the Real Property indicating that
Lender is the source of the financing of the construction of the Improvements.
7.11 Notice of Completion. Upon completion of the Improvements, as
"completion" is defined in A.R.S. Section 33-993(B), Borrower shall promptly
record a "Notice of Completion" pursuant to A.R.S. Section 33-993.
7.12 Payment of Taxes. Borrower shall pay all of its current obligations
before delinquent, including all federal, state and local taxes and all other
payments required under federal, state or local law.
7.13 Books and Records; Access. Borrower shall maintain, in a safe place,
proper and accurate books and records relating to its operations and its
business affairs. Lender shall have the right from time to time to examine, and
to make abstracts from and photocopies of, Borrower's books and records.
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7.14 Financial Reports. Borrower shall maintain a standard, modem system
of accounting that reflects the application of generally accepted accounting
principles, consistently applied. Borrower shall furnish to Lender or cause to
be furnished to Lender the following in form satisfactory to Lender:
(a) Within ninety (90) days after the close of each fiscal year and
within sixty (60) days after the close of each interim quarterly
accounting period, financial statements of Borrower, including a balance
sheet, statement of income and expenses and statement of cash flows that
include the results of the financial operation of the Real Property, all
in reasonable detail and prepared according to generally accepted
accounting principles, consistently applied. Year end statements shall be
audited by an independent certified public accountant and interim
statements shall be certified by the chief financial officer of Borrower.
(b) Within ninety (90) days after the close of each calendar year,
personal financial statements of each individual Guarantor in form and
level of detail satisfactory to Lender. Annually, when filed, a complete
copy, including all Schedules, of the Federal Income Tax Returns for each
individual Guarantor.
(c) When requested by Lender, such further information as Lender may
reasonably request relating to any such financial statements and/or the
operation of the Real Property and Improvements.
7.15 Subsequent Actions. Borrower shall immediately inform Lender of any
actions, suits or proceedings involving Borrower that could materially and
adversely affect the repayment of the Loan, the performance by Borrower under
this Agreement, or the financial condition, business or operations of Borrower.
7.16 Compliance with HUD, FHA or VA. If applicable, Borrower shall obtain
or assure compliance with all requirements of any HUD regulations, any FHA or VA
loan insurance or loan guaranty commitment or any conventional loan commitment
applicable to any individual lots or units included in this development.
7.17 Further Assurances. Borrower shall execute and deliver such
additional documents and do such other acts as Lender may reasonably require in
connection with the Loan.
7.18 Borrower's Funds Account. If at any time or from time to time Lender,
in the exercise of its reasonable business judgment, determines that the
remaining undisbursed proceeds of the Loan plus the then existing balance of any
funds deposited with Lender pursuant to this Paragraph 7.18 (the "Borrower's
Funds Account") are insufficient to pay the total cost for the completion of the
Improvements, Lender may demand that an amount equal to such deficiency be
deposited with Lender to insure such completion and payment. All funds deposited
by
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Borrower pursuant to this Paragraph 7.18 shall be: (i) held in a
non-interest-bearing account selected by Lender in its sole and absolute
discretion, and (ii) disbursed by Lender in the manner provided herein for
Advances prior to, in conjunction with or after any or all Advances. All funds
at any time in the Borrower's funds account are hereby assigned to Lender as
additional security for the Loan and all other indebtedness of Borrower arising
hereunder.
7.19 Borrower Notices. Borrower shall promptly give notice in writing to
Lender of (i) the occurrence of any Event of Default, (ii) any change in the
name of Borrower, and in the case of a reorganization, any change in name,
identity or corporate structure, or (iii) any uninsured or partially insured
loss through fire, theft, liability or property damage.
7.20 Cross-Collateralization. At Lender's request, Borrower agrees to
provide cross-collateralization for all projects of Borrower then financed by
Lender, in form and substance acceptable to Lender.
7.21 Public Report. Borrower shall provide Lender with a copy of the
Arizona State Real Estate Commissioner's Public Report relating to the sale of
any individual lots or units included in this development as soon as that report
is issued.
7.22 Notice of Community Facilities District. Borrower shall immediately
give notice to Lender of any notification or advice that Borrower may receive
from any municipality or other third party of any intent or proposal to include
all or any part of the Real Property in a Community Facilities District. Lender
shall have the right to file a written objection to the inclusion of all or any
part of the Real Property in a Community Facilities District, either in its own
name or in the name of Borrower, and to appear at, and participate in, any
hearing with respect to the formation of any such district.
SECTION 8. NEGATIVE COVENANTS
So long as Lender has any commitment to lend to Borrower hereunder and
until the Loan and all other indebtedness hereunder have been paid in full and
all of Borrower's obligations hereunder have been fully discharged, Borrower
shall not, without receiving the prior written consent of Lender:
8.1 Dissolution or Liquidation. Dissolve or liquidate, or merge or
consolidate with or into any other entity, or turn over the management or
operation of its property, assets or business to any other person, firm or
corporation. Notwithstanding the previous sentence, Borrower may merge or
consolidate with or into any other entity where the creditworthiness of the
resulting entity is at least equal to that of Borrower prior to the merger or
consolidation, determined by Lender in its reasonable discretion.
8.2 Due on Sale or Encumbrance. Except as provided in Section 4, assign,
transfer or convey any of its right, title and interest in any property whether
real or personal encumbered
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by the Security Documents; create or suffer to be created any mortgage, pledge,
security interest, encumbrance or other lien on any property encumbered by the
Security Documents (other than liens arising from work the cost of which is
being properly contested in accordance with the terms hereof); or create or
suffer to be created any mortgage, pledge, security interest, encumbrance or
other lien on any other property or assets which it now owns or hereafter
acquires except in consideration of the contemporaneous receipt by it of
benefits equal or greater in value to the lien created.
8.3 Changes to Plans and Specifications. Make or permit any material
change in the Plans and Specifications. Any requested changes shall be submitted
on a form acceptable to Lender and accompanied by a copy of the portion of the
Plans and Specifications applicable to the changes. Prior to implementing any
change order, Borrower shall deposit with Lender sufficient cash to cover the
cost of all change orders that increase the cost of the Improvements. All such
funds shall be held by Lender and disbursed in the manner provided herein for
the Borrower's Funds Account and are hereby assigned to Lender as additional
security for the Loan and all other indebtedness of Borrower arising hereunder.
8.4 Change in Accounting Period. Change the times of commencement or
termination of its fiscal year or other accounting periods; or change its
methods of accounting other than to conform to generally accepted accounting
principles applied on a consistent basis.
8.5 Inclusion in Community Facilities District. Consent to, or vote in
favor of, the inclusion of all or any part of the Real Property in any Community
Facilities District formed pursuant to the Community Facilities District Act,
A.R.S. Section 48-701, et seq., as amended from time to time.
8.6 Loan to Value. Permit the unpaid principal balance of the Loan plus
all amounts committed and not yet advanced thereunder to exceed eighty percent
(80%) of the bulk wholesale value of the Real Property and the Improvements, as
if completed, as determined by Lender in its sole and absolute discretion. If
for any reason the loan-to-value percentage exceeds said percentage, then
Borrower shall upon Lender's demand, immediately reduce the unpaid principal
balance of the Loan to reduce the loan-to-value percentage to, at or below said
percentage.
8.7 Junior Encumbrance. Permit a second lien to be placed against the Real
Property in a principal amount that exceeds Seven Hundred Thousand And No/100
Dollars ($700,000.00).
SECTION 9. INSPECTION BY LENDER; STOPPAGE OF CONSTRUCTION
9.1 Entry on Real Property. Lender shall have the right, but not the
obligation, to enter at any reasonable times upon the Real Property and
Improvements to determine if the construction of the Improvements is in
conformity with the Plans and Specifications and all other requirements hereof
and to examine and make copies and extracts of any books, records, accounting
data and other documents, including without limitation all permits, licenses,
consents
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and approvals of governmental authorities having jurisdiction over Borrower, the
Improvements and the contractor and all subcontractors supplying labor and/or
materials in connection with the Improvements.
9.2 No Duty to Inspect. Lender shall have no duty to supervise or inspect
any construction or to inspect any books and records; any inspection by Lender
shall be for the sole purpose of protecting Lender's security and preserving
Lender's rights hereunder. Failure by Lender to inspect any work shall not
constitute a waiver of any of Lender's rights hereunder. Inspection not followed
by notice of an Event of Default shall not constitute a waiver of any Event of
Default then existing. Any inspection by Lender shall not be a representation by
Lender that there has been or will be compliance with the Plans and
Specifications or that the construction is free from defective materials or
workmanship, nor shall any inspection by Lender constitute approval of any
certification given to Lender or relieve any person making such certification of
responsibility therefor.
9.3 Stoppage of Construction. Upon discovery by Lender of any material
deviation from the Plans and Specifications or of defective or unworkmanlike
labor or materials being used in the construction of the Improvements, Lender
may immediately order stoppage of construction and demand that any
unsatisfactory work be replaced and that the condition be corrected, whether or
not any unsatisfactory work has already been incorporated into the Improvements.
After issuance of such an order in writing, the condition shall be corrected
within fifteen (15) days from the date of stoppage by Lender. Lender shall have
the right to withhold all further Advances until the condition is corrected and
no other work shall be done on the Improvements without the prior written
consent of Lender unless, and until, such condition has been fully corrected.
9.4 Appointment of Agent. Borrower irrevocably appoints, designates, and
authorizes Lender as its agent (said agency being coupled with an interest) to
file for record any notices of completion or any other notice that Lender deems
necessary or desirable to protect its interest hereunder or under the Security
Documents. This power of attorney is solely for the benefit and protection of
Lender, and its successors and assigns, and Lender shall have no obligation to
exercise this power in any event. This power of attorney is a power coupled with
an interest and shall be irrevocable so long as any part of the Loan or any
indebtedness or obligations of Borrower to Lender arising in connection with the
Loan remain unpaid or unperformed.
SECTION 10. WAIVER
10.1 Waiver. Borrower waives presentment, demand, protest and notices of
protest, nonpayment, partial payment and all other notices and formalities
except as expressly called for in this Agreement. Borrower consents to and
waives notice of: (i) the granting of indulgences or extensions of time of
payment, (ii) the taking or releasing of security, and (iii) the addition or
release of persons who may be or become primarily or secondarily liable for the
Loan or any
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other indebtedness arising in connection with the Loan, or any part thereof, and
all in such manner and at such time as Lender may deem advisable.
10.2 Delay or Omission. No delay or omission by Lender in exercising any
right, power or remedy hereunder, and no indulgence given to Borrower, with
respect to any term, condition or provision set forth herein, shall impair any
right, power or remedy of Lender under this Agreement, or be construed as a
waiver by Lender of, or acquiescence in, any Event of Default. Likewise, no such
delay, omission or indulgence by Lender shall be construed as a variation or
waiver of any of the terms, conditions or provisions of this Agreement. Any
actual waiver by Lender of any Event of Default shall not be a waiver of any
other prior or subsequent Event of Default or of the same Event of Default after
notice to Borrower demanding strict performance.
SECTION 11. DEFAULT
11.1 Event of Default. The occurrence of any of the following events or
conditions shall constitute an "Event of Default" under this Agreement:
(a) Any failure to pay any principal or interest under the Note when
the same shall become due and payable and such failure continues for ten
(10) days after notice thereof to Borrower, or the failure to pay any
other sum due under the Note, this Agreement or any Security Document when
the same shall become due and payable and such failure continues for ten
(10) days after notice thereof to Borrower. No notice, however, shall be
required after maturity of the Note.
(b) Any failure or neglect to perform or observe any of the
covenants, conditions or provisions of this Agreement, the Note, any
Security Document or any other document or instrument executed or
delivered in connection with the Loan (other than a failure or neglect
described in one or more of the other provisions of this Paragraph 11.1)
and such failure or neglect either cannot be remedied or, if it can be
remedied, it continues unremedied for a period of thirty (30) days after
notice thereof to Borrower.
(c) Any warranty, representation or statement contained in this
Agreement, in the Note or in any Security Document or any other document
or instrument executed or delivered in connection with the Loan, or made
or furnished to Lender by or on behalf of Borrower, that shall be or shall
prove to have been false when made or furnished.
(d) The filing by Borrower or any guarantor of the Loan (or against
Borrower or such guarantor to which Borrower or such guarantor acquiesces
or that is not dismissed within forty-five (45) days after the filing
thereof) of any
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proceeding under the federal bankruptcy laws now or hereafter existing or
any other similar statute now or hereafter in effect; the entry of an
order for relief under such laws with respect to Borrower or such
guarantor; or the appointment of a receiver, trustee, custodian or
conservator of all or any part of the assets of Borrower or such
guarantor.
(e) The insolvency of Borrower or any guarantor of the Loan; or the
execution by Borrower or such guarantor of an assignment for the benefit
of creditors; or the convening by Borrower or such guarantor of a meeting
of its creditors, or any class thereof, for purposes of effecting a
moratorium upon or extension or composition of its debts; or the failure
of Borrower or such guarantor to pay its debts as they mature; or if
Borrower or such guarantor is generally not paying its debts as they
mature.
(f) The admission in writing by Borrower or any guarantor of the
Loan that it is unable to pay its debts as they mature or that it is
generally not paying its debts as they mature.
(g) The death or incapacity of Borrower or, unless the estate of the
guarantor assumes the obligations of any such guarantor within ninety (90)
days of said guarantor's death, any guarantor of the Loan, if an
individual, or the liquidation, termination or dissolution of Borrower or
any such guarantor, if a corporation, limited liability company,
partnership or joint venture.
(h) Any levy or execution upon, or judicial seizure of, any portion
of any collateral or security for the Loan.
(i) Any attachment or garnishment of, or the existence or filing of
any lien or encumbrance, other than any lien or encumbrance permitted by
this Agreement or the Deed of Trust, against any portion of any collateral
or security for the Loan, that is not removed or released within fifteen
(15) days after its creation.
(j) The institution of any legal action or proceedings to enforce
any lien or encumbrance upon any portion of any collateral or security for
the Loan, that is not dismissed within fifteen (15) days after its
institution.
(k) The occurrence of any event of default under the Note, any of
the Security Documents or any other document or instrument executed or
delivered in connection with the Loan and the expiration of any applicable
notice and cure period.
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(l) The occurrence of any event of default under any document or
instrument given by Borrower, by any entity owned by Borrower or, if
Borrower is a corporation, limited liability company, partnership or
trust, by any entity owned by the same persons or entities that own
Borrower, in connection with any other indebtedness or obligation of
Borrower or such entity to Lender.
(m) The occurrence of any adverse change in the financial condition
of Borrower that Lender, in its reasonable discretion, deems material, or
if Lender in good faith shall believe that the prospect of payment or
performance of the Loan is impaired.
(n) Failure to record a final plat satisfactory to Lender, legally
subdividing the Real Property into not less than 56 lots within one
hundred twenty (120) days of the Closing Date.
11.2 Remedies. Upon the occurrence of any Event of Default and at any time
while such Event of Default is continuing, Lender may do one or more of the
following:
(a) Cease making Advances and declare the Loan and all other
indebtedness of Borrower hereunder immediately due and payable, without
notice or demand;
(b) Proceed to protect and enforce its rights and remedies under
this Agreement, the Note, and all Security Documents;
(c) Take over and complete construction of the Improvements by or
through any agent, contractor or subcontractor of its selection, and make
Advances in payment of the costs, expenses, fees, attorneys' fees and
other charges incurred in connection with such taking over and completion,
together with reasonable allowances for supervision; and
(d) Avail itself of any other relief to which Lender may be legally
or equitably entitled.
11.3 Enforcement Costs. Borrower shall pay all costs and expenses,
including without limitation costs of title searches and title policy
commitments, Uniform Commercial Code searches, court costs and reasonable
in-house and outside attorneys' fees, incurred by Lender in enforcing payment
and performance of the Loan and the other indebtedness and obligations of
Borrower hereunder or in exercising the rights and remedies of Lender hereunder.
All such costs and expenses shall be secured by all Security Documents. In the
event of any court proceedings, court costs and attorneys' fees shall be set by
the court and not by jury and shall be included in any judgment obtained by
Lender.
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SECTION 12. ACTION UPON AGREEMENT
12.1 No Third Parry Beneficiaries. This Agreement is made for the
sole protection and benefit of the parties hereto and no other person or
organization shall have any right of action hereon.
12.2 Integration. This Agreement embodies the entire Agreement of the
parties with regard to the subject matter hereof. There are no representations,
promises, warranties, understandings or agreements expressed or implied, oral or
otherwise, in relation thereto, except those expressly referred to or set forth
herein. Borrower acknowledges that the execution and delivery of this Agreement
is its free and voluntary act and deed, and that said execution and delivery
have not been induced by, nor done in reliance upon, any representations,
promises, warranties, understandings or agreements made by Lender, its agents,
officers, employees or representatives.
12.3 Modifications. No promise, representation, warranty or agreement
made subsequent to the execution and delivery of this Agreement by either party
hereto, and no revocation, partial or otherwise, or change, amendment or
addition to, or alteration or modification of, this Agreement shall be valid
unless the same shall be in writing signed by all parties hereto.
12.4 No Joint Venture. Lender and Borrower each have separate and
independent rights and obligations under this Agreement. Nothing contained
herein shall be construed as creating, forming or constituting any partnership,
joint venture, merger or consolidation of Borrower and Lender for any purpose or
in any respect.
SECTION 13. GENERAL
13.1 Survival. This Agreement shall survive the making of the Loan
and shall continue so long as any part of the Loan, or any extension or renewal
thereof, remains outstanding.
13.2 Discretionary Rights. All rights, powers and remedies granted
Lender herein, or otherwise available to Lender, are for the sole benefit and
protection of Lender, and Lender may exercise any such right, power or remedy at
its option and in its sole and absolute discretion without any obligation to do
so. In addition, if, under the terms hereof, Lender is given two or more
alternative courses of action, Lender may elect any alternative or combination
of alternatives, at its option and in its sole and absolute discretion. All
monies advanced by Lender under the terms hereof and all amounts paid, suffered
or incurred by Lender in exercising any authority granted herein, including
reasonable attorneys' fees, shall be secured by the Security Documents, shall
bear interest at the highest rate payable on the Loan until paid, and shall be
due and payable by Borrower to Lender immediately without demand.
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<PAGE> 30
13.3 Indemnity. Borrower shall indemnify and hold Lender harmless from
and against all claims, costs, expenses, actions, suits, proceedings, losses,
damages and liabilities of any kind whatsoever, including but not limited to
attorneys' fees and expenses, arising out of any matter relating, directly or
indirectly, to the Loan, to the ownership, development, construction, or sale of
the Real Property and Improvements, whether resulting from internal disputes of
Borrower, disputes between Borrower and any guarantor, or whether involving
other third persons or entities, or out of any other matter whatsoever related
to this Agreement, the Security Documents, or any property encumbered thereby,
but excluding any claim or liability which arises as the direct result of the
gross negligence or willful misconduct of Lender. This indemnity provision shall
continue in full force and effect and shall survive not only the making of the
Loan and the Advances but shall also survive the repayment of the Loan and the
performance of all of Borrower's other obligations hereunder.
13.4 Joint and Several. If Borrower consists of more than one person or
entity their liability shall be joint and several. The provisions hereof shall
apply to the parties according to the context thereof and without regard to the
number or gender of words or expressions used.
13.5 Time of Essence. Time is expressly made of the essence of this
Agreement.
13.6 Notices. All notices required or permitted to be given hereunder
shall be in writing and may be given in person or by United States mail, by
delivery service or by electronic transmission. Any notice directed to a party
to this Agreement shall become effective upon the earliest of the following: (i)
actual receipt by that party; (ii) delivery to the designated address of that
party, addressed to that party; or (iii) if given by certified or registered
United States mail, twenty-four (24) hours after deposit with the United States
Postal Service, postage prepaid, addressed to that party at its designated
address. The designated address of a party shall be the address of that party
shown at the beginning of this Agreement or such other address as that party,
from time to time, may specify by notice to the other parties.
13.7 Payment of Costs. Borrower shall pay all costs and expenses
arising from the preparation of this Agreement, the closing of the Loan, the
making of Advances and the monitoring and administration of the Loan, including
but not limited to title insurance premiums, other title company charges,
recording and filing fees, costs of Uniform Commercial Code searches, Lender's
in-house and outside attorneys' fees, Lender's processing and closing fees,
Lender's inspection fees, appraisal and appraisal review fees, any intangible or
recording taxes and any other charges that may be imposed on Lender as a direct
result of this transaction.
13.8 Choice of Law. This Agreement shall be governed by and construed
according to the laws of the State of Arizona, without giving effect to conflict
of laws principles.
13.9 Successors. Except as otherwise provided herein, this Agreement
shall be binding upon, and shall inure to the benefit of, the parties hereto and
their successors and assigns.
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<PAGE> 31
13.10 Headings. The headings or captions of sections and paragraphs
in this Agreement are for reference only, do not define or limit the provisions
of such sections or paragraphs, and shall not affect the interpretation of this
Agreement.
13.11 Participations. Lender, at any time, shall have the right to
sell, assign, transfer, negotiate or grant participation interests in the Loan
and in any documents and instruments executed in connection herewith. Borrower
hereby acknowledges and agrees that any such disposition shall give rise to a
direct obligation of Borrower to each such assignee or participant. Lender is
authorized to furnish to any participant or prospective participant any
information or document that Lender may have or obtain regarding the Loan,
Borrower or any guarantor of the Loan.
IN WITNESS WHEREOF, these presents are executed as of the date first
indicated above.
MONTEREY MANAGEMENT, INC., an Arizona
corporation, dba MONTEREY HOMES
By: /s/ Stephen J. Hilton
----------------------------------------
Name: Stephen J. Hilton
--------------------------------------
Title: Secretary
-------------------------------------
BORROWER
BANK ONE, ARIZONA, NA, a national banking
association
By: /s/ Gregory M. Gilbreath
----------------------------------------
Name: Gregory M. Gilbreath
--------------------------------------
Title: Vice President
-------------------------------------
LENDER
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<PAGE> 32
SCHEDULE "A"
Legal Description
All that real property situate in the County of Maricopa, State of Arizona, more
particularly described as follows:
PARCEL NO. 1:
The West half of the Southwest quarter of the Southeast quarter of the
Northwest quarter of Section 11, Township 2 North, Range 4 East of the Gila
and Salt River Base and Meridian, Maricopa County, Arizona.
EXCEPT the South 33 feet thereof.
PARCEL NO. 2:
The West half of the Northwest quarter of the Southeast quarter of the
Northwest quarter of Section 11, Township 2 North, Range 4 East of the Gila
and Salt River Base and Meridian, Maricopa County, Arizona.
PARCEL NO. 3:
The East half of the Northwest quarter of the Southeast quarter of the
Northwest quarter of Section 11, Township 2 North, Range 4 East of the Gila
and Salt River Base and Meridian, Maricopa County, Arizona.
PARCEL NO. 4:
The South 290 feet of the East half of the Southwest quarter of the Southeast
quarter of the Northwest quarter of Section 11, Township 2 North, Range 4 East
of the Gila and Salt River Base and Meridian, Maricopa County, Arizona;
EXCEPT the South 40 feet thereof; and
EXCEPT the East 20 feet thereof.
PARCEL NO. 5:
The North 300 feet of the East half of the Southwest quarter of the Southeast
quarter of the Northwest quarter of Section 11, Township 2 North, Range 4 East
of the Gila and Salt River Base and Meridian, Maricopa County, Arizona.
PARCEL NO. 6:
Being a portion of the Southeast quarter of the Northwest quarter of Section
11, Township 2 North, Range 4 East of the Gila and Salt River Base and
Meridian, Maricopa County, Arizona, being more particularly described as
follows:
<PAGE> 1
EXHIBIT 10(o)
AMENDED AND RESTATED LOAN AGREEMENT
THIS AMENDED AND RESTATED LOAN AGREEMENT (the "Agreement") is entered into as of
the 8th day of August 1995 by and between Monterey Management, Inc. and Monterey
Homes Corporation, Inc., jointly and severally (referred to as "Co-Borrower"
"Borrower" or "Borrowers," as appropriate in the context), and NORWEST BANK
ARIZONA, NATIONAL ASSOCIATION, a national banking association ("Bank").
RECITALS:
A. Monterey Management Inc., has acquired certain real property
located at 91st Street and Pinnacle Peak Road, Scottsdale,
Arizona. Monterey Management proposes to develop the land into a
61 lot subdivision and to construct upon the lots, 61 single
family residential houses (individually and collectively
referred to as the "Canada Hills Project") in accordance with
the plans, specifications, and engineering studies prepared by
Linderoth Associates Architects and Planners (the "Canada Hills
Plans").
B. Monterey Management Inc., has an option to acquire certain real
property pursuant to the terms of that certain Option Agreement
dated May 31, 1994, between Monterey Management Inc., and
Scottsdale Country Club Resort Complex Limited Partnership (the
"SCCRCLP Option Agreement"). Under the SCCRCLP Option Agreement
Monterey Management can acquire up to seventy-six (76) single
family residential lots located at the Scottsdale Country Club
East Nine, Scottsdale, Arizona. Monterey Management proposes to
construct upon the lots, 76 single family residential houses
(individually and collectively referred to as the "SCC Project")
in accordance with the plans, specifications, and engineering
studies prepared by Linderoth Associates Architects and Planners
(the "SCC Plans").
C. Monterey Management Inc., has an option to acquire certain real
property pursuant to the terms of that certain Option Agreement
dated August 30, 1993, between Monterey Management Inc., and DMB
a Delaware Limited Partnership (the "DMB Option Agreement").
Under the DMB Option Agreement Monterey Management can acquire
up to one hundred twenty (120) single family residential lots
located at the property located at 100th Street & Frank Lloyd
Wright Boulevard, Scottsdale, Arizona. Monterey Management
proposes to construct upon the lots, after acquisition, 120
single family residential houses (individually and collectively
referred to as the "Costa Verde Project") in accordance with the
plans, specifications, and engineering studies prepared by
Linderoth Associates Architects and Planners (the "Costa Verde
Plans").
D. Monterey Management Inc., has acquired certain real property
located on Shea Boulevard, east of Hayden Road in Scottsdale,
Arizona. Monterey Management proposes to construct upon the real
estate, 96 single family residential condominiums (individually
and collectively referred to as the "Vintage Project") (the
Canada Hills Project, the SCC Project, the Costa Verde Project
and the Vintage Project are referred to collectively herein as
the "Projects") in accordance with the plans, specifications,
and engineering studies prepared by Linderoth Associates
Architects and Planners (the "Vintage Plans") (the Canada Hills
Plans, the SCC Plans, the Costa Verde Plans and the Vintage
Plans are referred to collectively herein as the "Plans").
E. For purposes hereunder, any and all lots acquired or developed,
including the real property described in "Exhibit A" to this
Agreement, or residential units constructed by Monterey
Management, as a part of any of the Projects shall be referred
to as and
Page 1 of 25
<PAGE> 2
included within the definition of the "Property," when
acquired, developed or constructed.
F. Monterey Homes Corporation, Inc., shall be acquiring from
Monterey Management Inc.: (i) the completed single family
residences in the Canada Hills Project., under an option
agreement dated May 5, 1994 (the "Canada Hills Option"), (ii)
the completed single family residences in the SCC Project, under
an option agreement dated June 14, 1994 (the "SCC Option"),
(iii) the completed single family residences in the Costa Verde
Project, under an option agreement dated October 27, 1993 (the
"Costa Verde Option"), and (iv) the completed single family
condominium units in the Vintage Project, under an option
agreement dated April 7, 1995 (the "Vintage Option") (the Canada
Hills Option, the SCC Option, the Costa Verde Option and the
Vintage Option shall be referred to herein collectively as the
"Option Agreements"). References to "Property" with respect to
Monterey Homes Corporation shall only include those residences
which have been acquired under the Option Agreements.
G. Bank has previously extended to Co-Borrowers revolving lines of
credit to be used for financing of the Canada Hills Project, SCC
Project and the Costa Verde Project for a total financing, after
various amendments and modifications, of $10,500,000.00.
H. Co-Borrowers desire the Bank to consolidate the existing lines
into a single line and to increase the amount thereof to Twelve
Million Five Hundred Thousand and No/100 Dollars
($12,500,000.00) in order to provide financing for the Projects.
I. Bank is willing, subject to the terms and conditions hereof, to
make a loan to Co-Borrowers (the "Loan") in the amount of Twelve
Million Five Hundred Thousand and No/100 Dollars
($12,500,000.00) to consolidate the existing lines and provide
additional financing, which Loan shall be evidenced by a
Promissory Note, as modified by a Change in Terms Agreement (the
Promissory Note and the Change in Terms Agreement are sometimes
referred to collectively herein as the "Note"), and shall be
guaranteed by William W. Cleverly a married man dealing with his
sole and separate property and Steven J. Hilton and Benee
Hilton, husband and wife, jointly and severally (collectively
referred to as the "Guarantors"), who shall execute and deliver
(the "Guarantees") and
J. All obligations of Borrower and Guarantors hereunder and under
the Note shall be secured by a first and prior lien upon the
Property, the Projects, and all furniture, fixtures, equipment,
and all other personal property installed in, placed on, used in
connection with, or affixed in any manner to the Projects, all
proceeds thereof, and all substitutions and replacements which
are now owned or hereafter acquired by Borrower or its
successors in interest, all proceeds of insurance covering such
real or personal property, together with all replacements
thereof at any time installed in or affixed to the Property or
the Projects (collectively the "Collateral"), which security
interests shall be evidenced by: (i) the Deed of Trust,
Modification of Deed of Trust, and Assignment of Leases and
Rents, and (ii) such other security agreements, instruments, or
financing statements required hereunder (the "Security
Agreements").
AGREEMENTS:
NOW THEREFORE, in consideration of the promises and agreements contained herein
and for other good and valuable consideration, it is hereby agreed as follows:
Page 2 of 25
<PAGE> 3
1. a. CANADA HILLS:
i. The Canada Hills Construction Advances. Subject to the terms and conditions
of this Agreement, Borrower agrees to borrow from Bank and, so long as any
default described in Paragraph 8 hereof has not occurred, Bank agrees to advance
and disburse to or for the benefit of Borrower for the payment of costs set
forth in the project budget attached as "Exhibit B" (the "Canada Hills
Construction Project Costs"), in accordance with the terms of this Agreement a
sum not to exceed the lesser of 80% of value or 100% of the construction cost
for any presold unit plus the lot release price of $26,434.00 and the lesser of
80% of the construction cost plus the lot release price of $26,434.00 or 75% of
value for intentional unsold units. Anything contained in this Agreement to the
contrary notwithstanding, Bank shall not be obligated to extend credit to
Borrower in an amount in violation of any limitation or prohibition provided by
any applicable statute or regulation. At any one time, Borrower shall be allowed
to have under construction or completed no more than two (2) intentional unsold
units and no more than two (2) unsold units under the loan arising from fall
outs or failure to retain a bona fide presold contract. The balance of this
commitment shall be restricted to qualified presold units defined as having
received a two percent (2%) non-refundable downpayment plus a contingency free
contract and a permanent mortgage pre-qualification letter.
ii. Canada Hills Construction Advance Fees. Borrower shall pay a non-refundable
fee equal to one-half of one percent (1/2%) of the committed amount attributable
to each pre-sold unit started and one percent (1%) per intentional unsold unit
started under this commitment, payable at the time Borrower requests the first
disbursement for the construction of each such residence. AU residences to be
constructed are to be completed and Bank to be paid in full for the loan amount
committed for the construction of such residence no later than six (6) months
from the date of initial disbursement. Borrower will be required to notify Bank
at least fifteen (15) days in advance of the end of any six-month construction
period for any residence if such residence will not be completed and sold in
accordance with the six-month schedule and an extension is required. Bank will
provide an additional six (6) month period to complete construction and repay
the associated indebtedness for such unit during this fifteen (15) day period
upon payment of an extension fee equal to one-half of one percent (1/2%) of the
committed amount attributable to such unit. Unsold units or non-presold units
shall be granted an additional six-month period for completion of construction,
sale and repayment of the associated indebtedness for such unit upon payment of
an extension fee equal to one half of one percent (1/2%) of the committed
amount attributable to such unit and a ten percent (1O%) reduction of the
outstanding principal balance attributable to such unit.
b. SCC
i. The SCC Construction Advances. Subject to the terms and conditions of this
Agreement, Borrower agrees to borrow from Bank and, so long as any default
described in Paragraph 8 hereof has not occurred, Bank agrees to advance and
disburse to or for the benefit of Borrower for the payment of the costs set
forth in the project budget attached as "Exhibit C" (the "SCC Construction
Project Costs"), in accordance with the terms of this Agreement a sum not to
exceed the lesser of 80% of value or 100% of the construction cost for any
presold unit plus one of the following lot release prices $60,500.00 or
$93,500.00 or $15,500.00 and the lesser of 80% of the construction cost plus
one of the following lot release prices $60,500.00 or $93,500.00 or $15,500.00
or 75% of value for intentional unsold units. Anything contained in this
Agreement to the contrary notwithstanding, Bank shall not be obligated to extend
credit to Borrower in an amount in violation of any limitation or prohibition
provided by any applicable statute or regulation. At any one time, Borrower
shall be allowed to have under construction or
Page 3 of 25
<PAGE> 4
completed no more than five (5) intentional unsold units and no unsold units
under the loan arising from fall outs or failure to retain a bona fide presold
contract, if the intentional unsold limit of five (5) has been reached. The
balance of this commitment shall be restricted to qualified presold units
defined as those where there has been received a five percent (5%)
non-refundable deposit prior to the initial loan funding, an additional five
percent (5%) non-refundable deposit prior to the first construction draw and a
contingency free contract and a permanent mortgage pre-qualification letter.
ii. SCC Construction Advance Fees. Borrower shall pay a non-refundable fee equal
to one-half of one percent (1/2%) of the committed amount attributable to each
pre-sold unit started and one percent (1%) per intentional unsold unit started
under this commitment, payable at the time Borrower requests the first
disbursement for the construction of each such residence. All residences to be
constructed are to be completed and Bank to be paid in full for the loan amount
committed for the construction of such residence no later than nine (9) months
from the date of initial disbursement. Borrower will be required to notify Bank
at least fifteen (15) days in advance of the end of any nine-month construction
period for any residence if such residence will not be completed and sold in
accordance with the nine-month schedule and an extension is required. Bank will
provide an additional four (4) month period to complete construction and repay
the associated indebtedness for such unit during this fifteen (15) day period
upon payment of an extension fee equal to one-half of one percent (1/2%) of the
committed amount attributable to such unit. Unsold units or non-presold units
shall be granted an additional four-month period for completion of construction,
sale and repayment of the associated indebtedness for such unit upon payment of
an extension fee equal to one half of one percent (1/2%) of the committed amount
attributable to such unit and a ten percent (10%) reduction of the outstanding
principal balance attributable to such unit.
C. COSTA VERDE
i The Costa Verde Construction Advances. Subject to the terms and conditions of
this Agreement, Borrower agrees to borrow from Bank and, so long as any default
described in Paragraph 8 hereof has not occurred, Bank agrees to advance and
disburse to or for the benefit of Borrower for the payment of the costs set
forth in the project budget attached as "Exhibit D (the "Costa Verde
Construction Project Costs"), in accordance with the terms of this Agreement a
sum not to exceed the lesser of 80% of value or 100% of the construction cost
for any individual presold unit plus the lot release price of $43,479.00.
Anything contained in this Agreement to the contrary notwithstanding, Bank shall
not be obligated to extend credit to Borrower in an amount in violation of any
limitation or prohibition provided by any applicable statute or regulation. At
any one time, Borrower shall be allowed to have under construction or completed
no more than two (2) intentional unsold units and no more than two (2) unsold
units under the loan arising from fall outs or failure to retain a bona fide
presold contract. Bank agrees to advance and disburse for construction of
intentional unsold units to or for the benefit of Borrower in accordance with
the terms hereof a sum not to exceed the lesser of 80% of the construction cost
plus the lot release price of $43,479,000 or 75% of value for any individual
unsold unit for the payment of the costs set forth in the project budget
attached as "Exhibit D" (the "Costa Verde Construction Project Costs"). The
balance of this commitment shall be restricted to qualified presold units
defined as having received a two percent (2%) non-refundable downpayment plus a
contingency free contract and a permanent mortgage pre-qualification letter.
ii. Costa Verde Construction Advance Fees. Borrower shall pay a non-refundable
fee equal to one-half of one percent (1/2%) of the committed amount attributable
to each presold unit started and one percent (1%) per intentional unsold unit
started under this
Page 4 of 25
<PAGE> 5
commitment, payable at the time Borrower requests the first disbursement for the
construction of each such residence. All presold residences to be constructed
are to be completed and Bank to be paid in full for the loan amount committed
for the construction of such residence no later than six (6) months from the
date of initial disbursement. Borrower will be required to notify Bank at least
fifteen (15) days in advance of the end of any six-month construction period for
any residence if such residence will not be completed and sold in accordance
with the six-month schedule and an extension is required. Bank will provide an
additional four (4) month period to complete construction and repay the
associated indebtedness for such unit during this fifteen (15) day period upon
payment of an extension fee equal to one-half of one percent (1/2%) of the
committed amount attributable to such unit. Intentional unsold units or
non-presold units shall be completed and Bank to be paid in full no later than
nine (9) months from the date of initial disbursement and shall be granted an
additional four-month period for completion of construction, sale and repayment
of the associated indebtedness for such unit upon payment of an extension fee
equal to one-half of one (1/2%) of the committed amount attributable to such
unit and a ten percent (10%) reduction of the outstanding principal balance
attributable to such unit.
d. THE VINTAGE
i. The Vintage Construction Advances. Subject to the terms and conditions of
this Agreement, Borrower agrees to borrow from Bank and, so long as any default
described in Paragraph 8 hereof has not occurred, Bank agrees to advance and
disburse to or for the benefit of Borrower for the payment of the costs set
forth in the project budget attached as "Exhibit E" (the "Vintage Construction
Project Costs"), in accordance with the terms of this Agreement a sum not to
exceed the lesser of 80% of value or 95% of the construction cost for any
individual presold unit including the lot release price of $27,812.00. Anything
contained in this Agreement to the contrary notwithstanding, Bank shall not be
obligated to extend credit to Borrower in an amount in violation of any
limitation or prohibition provided by any applicable statute or regulation. At
any one time, Borrower shall be allowed to have under construction or completed
no more than six (6) unsold units. Bank agrees to advance and disburse for
construction of unsold units to or for the benefit of Borrower in accordance
with the terms hereof a sum not to exceed the lesser of 90% of the construction
cost including the lot release price of $27,812.00 or 70% of value for any
individual home for the payment of the costs set forth in the project budget
attached as "Exhibit E" (the "Vintage Construction Project Costs"). The balance
of this commitment shall be restricted to qualified presold units defined as
having received a two percent (2%) non-refundable downpayment plus a contingency
free contract and a permanent mortgage pre-qualification letter.
ii. Vintage Construction Advance Fees. Borrower shall pay a non-refundable fee
equal to one-half of one percent (1/2%) of the committed amount attributable to
each presold unit started and one percent (1%) per unsold unit started under
this commitment, payable at the time Borrower requests the first disbursement
for the construction of each such unit. All presold units to be constructed are
to be completed and Bank to be paid in full for the loan amount committed for
the construction of such unit no later than six (6) months from the date of
initial disbursement Borrower will be required to notify Bank at least fifteen
(15) days in advance of the end of any six-month construction period for any
presold unit if such unit will not be completed and sold in accordance with the
six-month schedule and an extension is required. Bank will provide an additional
three (3) month period to complete construction and repay the associated
indebtedness for such presold unit during this fifteen (15) day period upon
payment of an extension fee equal to one-half of one percent (1/2%) of the
committed amount attributable to such unit. Intentional unsold units or
non-presold units shall be completed and Bank to be paid in full no later
Page 5 of 25
<PAGE> 6
than six (6) months from the date of initial disbursement. No extension will be
granted for unsolds.
2. Interest Rate: Repayment, Prepayment. Interest on the loan shall be
calculated at an annual rate equal to one percent (1%) in excess of the Base
Rate on the basis of actual days elapsed in a year of 360 days. "Base Rate"
means the rate of interest established by the Bank from time to time as its
"base" or "prime" rate of interest. The rate is subject to change as often as
daily with each change in the Base Rate. Interest shall be payable monthly with
any unpaid principal and interest immediately due and payable at the maturity of
each unit's construction term. Borrower may prepay the Loan at any time in whole
or in part without premium or penalty upon written or telephonic notice to the
Bank, which notice must be received by Bank before 12:00 p.m. local time in
Arizona on any business day.
3. Conditions Precedent. Prior to the disbursement of any proceeds of
the Loan by Bank, the following conditions precedent must be satisfied:
a. Borrower must execute and deliver to Bank the Change in Terms
Agreement in the amount of the Loan, the Modification of Deed of Trust and
modifications thereof, such Security Agreements and UCC financing statements as
are required by Bank, and as are necessary to perfect a first and prior security
interest in favor of Bank in the Collateral, and such other documents as the
Bank or its legal counsel may require, all in form and substance satisfactory to
the Bank and its legal counsel..
b. Borrower must, at its expense, provide Bank with ALTA Lender's
extended coverage title insurance policies (or binding commitments therefor
satisfactory to Bank) in the combined amount of the Loan, insuring the
Modification of Deed of Trust and Deed of Trust of Bank and any modifications to
be valid first and prior liens upon the Property and Projects, subject only to
such exceptions as Bank may expressly approve in writing (the "Title Policies").
Such policies shall be issued by a title insurance company satisfactory to Bank
(the "Title Company"). Such policy shall also contain such other endorsements as
Bank may request, including #3R, #5, and #7 endorsements, and an endorsement
insuring that all advances of money made pursuant to this Agreement subsequent
to the date of the Title Policies are included within the coverage of the policy
and have the same first priority of lien. Such policy shall not contain any
so-called pending disbursement.
C. Borrower must provide evidence satisfactory to Bank that all taxes
and assessments levied against or affecting the Property have been paid current.
Bank reserves the right to impound funds or to demand such funds be pledged by
Borrower in amounts necessary to pay any taxes or assessments affecting the
Property that may become due during the term of the Loan.
d. Borrower must submit to Bank for its approval, at least five (5) days
prior to the first disbursement of the Loan proceeds following the execution
hereof, the original policies (or, at Bank's election, certificates therefor and
other evidence satisfactory to Bank) of the insurance coverage and proof of
premium payment therefor required under Paragraph 6.n hereof.
e. If any portion of the Property lies within a Special Flood Hazard
Area as designated on the maps of the Department of Housing and Urban
Development, Bank shall be provided with a National Flood Insurance Association
Standard Flood Insurance Policy for the duration of the Loan period in the
amount of the Loan commitment or in the maximum amount available with respect to
this particular type of property, whichever is less, if such insurance is
available under the National Flood Insurance Act of 1968 (the "1968 Act"). If
such coverage is not available, or not applicable to the Property, Borrower
shall obtain from its agents or provide to Bank a statement to the effect that
the Property does not fall within the Special Flood Hazard Area or that the
insurance is not available under the 1968 Act.
f. As the Co-Borrowers are corporations, Bank must receive, with respect
to each such entity, as applicable: (i) a copy of its Articles of Incorporation
and all amendments thereto certified by the Corporation Commission or the
Secretary of State of the state of incorporation; (ii) a copy of all current
Page 6 of 25
<PAGE> 7
bylaws and all amendments thereto certified by the secretary of the corporation,
(iii) a Certificate of Good Standing from the Arizona Corporation Commission,
the Secretary of State of the state of incorporation, or other appropriate
authority of other states in which the entity is required by law to be qualified
to do business; (iv) a copy of the Board of Directors resolution authorizing the
execution, delivery, and performance of, as applicable, this Loan Agreement, the
related loan documents, guaranty, and all acts and transactions required or
contemplated thereunder or thereby, certified by the secretary of the
corporation; (v) a Certificate of Incumbency of the corporation's officers,
certified by the secretary of the corporation; and (vi) a certificate of the
chief executive and the chief financial officer(s) of the corporation, to the
effect that all representations contained in this Agreement are true and correct
and that no default exists hereunder.
g. Borrower must provide to Bank copies of, and an executed assignment
of, all of Borrower's rights, title, and interest in all plans, specifications,
and engineering studies for the Projects, together with all change orders, all
of which shall be submitted to Bank and subject to the prior approval of Bank.
All change orders involving additional costs in excess of Ten Thousand and
No/100 Dollars ($10,000.00), or Ten Thousand and No/100 Dollars ($10,000.00) in
the aggregate, shall require that Borrower immediately provide evidence to Bank
that Borrower possesses sufficient funds for the completion of such extras or
changes.
h. Borrower must prepare and must provide to Bank schedules of Project
Costs indicating the gross costs of the Projects and including, as applicable,
unit costs for each model type, and certified to be correct to the best
knowledge and belief of Borrower. At its discretion, Bank may require that
Borrower submit to Bank (i) the names and addresses of persons providing labor
or materials in connection with the Projects; and, (ii) for its review and
approval, all subcontracts with scheduled values in excess of Twenty-five
Thousand and No/100 Dollars ($25,000.00), and assign to Bank Borrower's rights
thereunder.
i. Borrower must provide to Bank copies of all building permits issued
in connection with, and evidence satisfactory to Bank of proper zoning of the
Property for, the construction of the Projects contemplated herein. Borrower
shall assign to Bank all of Borrower's rights and interests under all other
agreements, leases, licenses, and permits relating to the Property and its
development
j. Borrower shall provide to Bank (i) a true copy of Borrower's
Arizona State Contractor's License, verifying that the Borrower is currently
licensed and authorized by the State of Arizona to operate as a general
contractor, and, (ii) evidence of Borrower's workers' compensation employer's
liability and comprehensive general liability insurance satisfactory to Bank.
The financial stability of Borrower must be satisfactory to Bank. Borrower shall
provide Bank with financial statements for the two (2) most recent fiscal years.
k. Borrower shall, at its expense, provide to Bank a current survey, by
a licensed surveyor acceptable to Bank, of the Property containing an accurate,
detailed legal description of the Property showing the location of the proposed
Projects, describing the Property boundaries, showing all easements and other
items affecting the site, and showing that any existing improvements and the
Projects, when completed, lie within the boundaries of the Property and do not
and will not violate any use or other restriction relating to the Property, and
such other items as Bank may request, including without limitation appropriate
access to dedicated public streets.
l. Borrower must provide to Bank evidence satisfactory to Bank that
water, sewer, gas, electric, telephone, and other public utilities are available
and will be provided to the Projects in amounts which are adequate to service
the intended use of the Projects.
m. Borrower must reimburse Bank, for expenses incurred by the Bank in
ordering and obtaining a current appraisal from an accredited appraiser
acceptable to Bank certifying the values for each structural model and model
type to be constructed as an improvement in connection with the Vintage Project.
Page 7 of 25
<PAGE> 8
n. Borrower must provide to Bank evidence of written approval of the
final certification and/or acceptance of each type of off-site improvement for
the Property by any municipality, utility, county, or other governmental entity
whose certification or acceptance thereof is required.
o. Borrower must provide to Bank the Guarantees, the current financial
statements acceptable in form to Bank, and the two (2) most recent annual income
tax returns of each Guarantor, and the Bank must have determined the financial
position of each Guarantor to be satisfactory to Bank.
p. If construction commences prior to recording of the Modification of
Deed of Trust, Borrower must provide to Bank lien waivers by all persons who
have performed work on or delivered materials to the Property prior to the
recording of the Modification of Deed of Trust, and shall assure that any
necessary indemnification or other agreements are made, in form satisfactory to
the Title Company, in order to obtain the Title Policy, without exception for
mechanics' or materialmen's liens.
q. Borrower must provide to Bank, at Borrower's expense, evidence
satisfactory to Bank that (i) the Property is in all respects in compliance with
all Federal, State of Arizona, and local laws, ordinances, and regulations
relating to environmental protection, occupational health and safety, public
health and safety, or public nuisance or menace including without limitation the
Resource Conservation and Recovery Act, 42 U.S.C. Sec 6901, et seq., the
Comprehensive Environmental Response Compensation and Liability Act of 1980, 42
U.S.C. Sec. 9600, et seq., the Toxic Substances Control Act, .15 U.S.C. Sec.
2601, et seq., the Clean Air Act, 42 U.S.C. Sec. 7401, et seq., and the Clean
Water Act, 33 U.S.C. Sec. 1251, et seq., and (ii) the Property is not now being
used to manufacture, store, or dispose of toxic or hazardous substances,
materials, or wastes covered by the Resource Conservation and Recovery Act or
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, or their respective successors, and all applicable federal, state, and
local laws, ordinances, and regulations. The Phase I environmental reports
previously submitted shall be acceptable for this purpose.
r. Borrower must provide to Bank a copy of a soil report for the
Property, prepared by a registered engineer acceptable to Bank, evidencing that
the Property is free from soil or other geological conditions that would
preclude its use or development as contemplated herein without extra expense for
precautionary, corrective, or remedial measures. The soil reports previously
submitted shall be acceptable for this purpose.
s. Borrower must satisfy Bank that any person who is required, pursuant
to any instrument, contract, commitment, or other agreement of any kind, or
pursuant to any law or regulation, to assent to or in any manner approve of any
of the acts or transactions contemplated by this Agreement (or any of the other
related loan documents), or the means of affecting any of the same, shall have
given such assent or approval, and shall have been duly authorized to do so.
t. Borrower must satisfy Bank that there have been no material adverse
changes in Property, and that no other event has occurred which would adversely
and materially affect the ability of Borrower to construct the Projects, and
that Borrower is not in default of any provision of this Agreement or any of the
other loan documents.
4. Disbursement Provisions. Subject to the provisions of this Paragraph
4, and provided all of the conditions set forth in Paragraph 3 of this Agreement
shall have been fully met to Bank's satisfaction, and provided all warranties
and representations are true and correct on the date of disbursement, and
provided no default on the part of Borrower then shall exist under the terms,
conditions, or provisions of this Agreement, the Promissory Note, the Change in
Terms Agreement, the Modification of Deed of Trust, Deed of Trust, or any other
document or instrument made, executed, and delivered by Borrower or others in
connection with the Loan, Bank agrees, at Borrower's request, to disburse the
proceeds of the Loan as set forth on "Exhibit F" attached hereto and
incorporated herein by this reference.
Page 8 of 25
<PAGE> 9
a. The proceeds of the Loan shall not pass into the possession of or
under the control of Borrower but, upon recording of the Modification of Deed of
Trust and perfection of any other security interest required hereunder, will be
held by Bank to be disbursed in accordance with the provisions hereof. Bank
shall not be required to segregate the proceeds of the Loan or to earmark such
funds in any manner. The sole obligation of Bank shall be to disburse the funds
as set forth herein. Borrower acknowledges that it has no right to said proceeds
other than to have the same disbursed by Bank in accordance with the provisions
of this Agreement. Such proceeds shall not accrue interest in favor of Borrower.
After disbursement, interest accruing in favor of Bank shall be computed on the
daily outstanding principal balance as set forth in the Note.
b. Bank may, at its election and at Borrower's cost, disburse the
proceeds of the Loan by wire transfer, in whole or in part, (i) into Borrower's
account with Bank; (ii) through a title insurance company, mortgage company, or
other third party; (iii) to the Borrower, or, (iv) directly to any
subcontractors, materialmen, or laborers who would otherwise have any rights to
or a lien against the Property. Any such election shall not prevent Bank from
making subsequent disbursements in a different manner and through a different
party.
c. No advance of any Loan proceeds hereunder shall constitute a waiver
of any condition precedent to the obligation of Bank to make any further advance
or preclude Bank from thereafter declaring the failure to satisfy such condition
precedent to be an event of default. The making of any advance shall not be
deemed an approval or acceptance by Bank of any work or material theretofore
completed, installed, or delivered. All conditions precedent to the obligation
of Bank to make any advance are imposed hereby solely for the benefit of Bank,
and no other party may require satisfaction of any such condition precedent or
be entitled to assume that Bank will refuse to make any advance in the absence
of strict compliance with such conditions precedent. All requirements of this
Agreement may be waived by Bank in whole or in part at any time but no such
waiver shall be deemed to constitute a waiver of any other condition or
procedure. Unless Bank in writing specifically and expressly agrees otherwise
at the time such waiver is given, any waiver of any condition or procedure shall
be deemed to be only temporary and revocable, and Bank, at its option and upon
reasonable notice, may later require that such condition be satisfied or
procedure observed. Bank may withhold further disbursements of the Loan until
such condition is satisfied or procedure observed.
d. In addition to the remedies provided in Paragraph 9 hereof, Bank may,
at its option, refuse to make a disbursement pursuant to any application for
advance if any of the following events occur and until such condition has been
remedied to Bank's satisfaction: (i) if a mechanics' lien is filed against the
Property; or (ii) if Bank determines that the nature, quality, or quantity of
the work performed or materials furnished do not justify the advance requested,
or if Bank determines that the work performed at that particular stage of
construction has not been performed in a good and workmanlike manner and in
accordance with the Plans, or that, at such stage of construction, the
materials, supplies, chattels, and fixtures furnished and installed have not
been so furnished and installed or are not of the quality and quantity
contemplated by the Plans.
e. If Bank consents to any extra work or change in plans and
specifications that causes total Project Costs to exceed one hundred and five
percent (105%) of the cost of the base, Borrower shall immediately provide
evidence to Bank that Borrower possesses sufficient funds for the completion of
such extras or changes.
f. If at any time during the course of construction Bank shall determine
that the undisbursed proceeds of the Loan will be insufficient to fully pay all
Project Costs incurred or to be incurred for the Projects, Borrower shall
immediately deposit with Bank, to be disbursed by Bank to pay Project Costs,
cash in an amount equal to the deficiency or an irrevocable, unconditional, and
nondocumentary Letter of Credit in the amount of such deficiency, in form and
substance and from an issuer satisfactory to Bank.
Page 9 of 25
<PAGE> 10
g. Borrower hereby authorizes Bank to hold, use, disburse, and apply
Borrower's deposit and the Loan proceeds for payment of costs of construction of
the Projects, costs and expenses incident to the Loan and the Property, and the
payment or performance of any obligation of Borrower hereunder. Borrower hereby
assigns, pledges, and grants a security interest in the proceeds of the Loan and
the Borrower's deposit to Bank for such purposes.
h. Bank may advance all or a portion of Borrower's deposit or the Loan
proceeds in such order as Bank shall determine. Borrower shall promptly notify
Bank in writing if and when the remaining unpaid costs of the development of the
Projects exceed, or appear likely to exceed, the amount of the nonadvanced
portion of any Borrower's deposit made pursuant hereto. Bank may advance and
incur such expenses as Bank deems necessary for the completion of construction
of the Projects and to preserve the Property and any other security for the
Loan, and such expenses, even though in excess of the amount of the Loan or any
Borrower's deposit, shall be payable to Bank upon demand, and until repaid shall
bear interest from the date advanced at the rate provided in the Note. In the
event that any advances or payments made by Bank pursuant to this Agreement,
together with the disbursements made by Bank of the proceeds of the Loan, exceed
the face amount of the Note, such additional advances shall constitute
additional indebtedness secured by the Modification of Deed of Trust, Deed of
Trust, and any other security agreements.
5. Representations and Warranties of Borrower and Guarantors. Borrower
and Guarantors hereby represent and warrant as follows (each request by Borrower
for an advance constituting an affirmation on the part of Borrower that the
representations and warranties contained herein are true and correct as of the
time of such request):
a. Borrower is duly organized, validly existing, and in good standing
under the applicable laws of the State of Arizona, and is qualified to do
business and is in good standing in the State of Arizona, with full power and
authority to enter into this Agreement.
b. The execution and delivery of this Agreement and all related loan
documents and instruments pursuant hereto (including but not limited to the
Guaranties) and the consummation of the transactions contemplated hereby (i)
have been duly authorized by all actions required under the terms and provisions
of the governing instruments of the parties executing the same, the laws of the
State of Arizona, and any applicable requirement of any governmental authority;
(ii) create legal, valid, and binding obligations of Borrower and Guarantors,
respectively; (iii) do not require the approval or consent of any governmental
authority having jurisdiction over Borrower, Guarantors, or the Property; (iv)
do not and will not constitute a violation of, or default under, the governing
instruments of Borrower or Guarantors, any requirement of any governmental
authority applicable to Borrower or Guarantors, or any mortgage, indenture,
agreement, commitment, or instrument to which Borrower or either Guarantor is a
party or by which any of their assets are bound, nor create or cause to be
created any mortgage, lien, encumbrance, or charge against the assets of
Borrower or either Guarantor other than those provided by the instruments
executed in connection herewith; and (v) do not conflict with or result in the
breach of any valid regulation, order, writ, injunction, or decree of any court
or governmental or municipal office, agency, department, or instrumentality.
c. Borrower's and Guarantors' financial statements delivered to Bank
were prepared, except as disclosed by Borrower and accepted by Bank, in
accordance with generally accepted accounting principles applied on a consistent
basis, and are true, complete and correct in all material respects, and fairly
present the respective financial conditions of the subjects thereof as of the
respective dates thereof. No materially adverse change has occurred since the
respective dates thereof and no borrowings have been made by Borrower or
Guarantors since the date thereof other than the borrowing contemplated hereby
or as in the normal course of business or described in detail in a statement in
writing delivered to Bank contemporaneously with but prior to execution of this
Agreement by Bank. There have been no material adverse changes in the condition,
affairs, or prospects, financial or other, of any person whose financial
condition is reflected in any of the aforesaid financial statements since the
date of such financial statement,
Page 1O of 25
<PAGE> 11
and Borrower and Guarantors are unaware of any facts or circumstances which
might give rise to any such material adverse change. In the event Borrower or
Guarantors become aware of any such facts or circumstances, Bank shall be
promptly advised.
d. The Loan is solely for business or commercial purposes other than
agricultural purposes. Borrower has not employed or retained any broker or
finder, or incurred liability for any brokerage fees, commissions, or finder's
fees in connection with the Loan.
e. The anticipated use of the Property, the Projects, and the Plans
therefor comply with all applicable zoning ordinances and regulations affecting
the Property and the Projects and all other requirements of governmental
authorities having jurisdiction thereof, and all requirements for such use will
have been satisfied prior to commencement of construction of the Projects.
f. Borrower will not commence operation of the Projects for their
anticipated use unless all liens, permits, authorizations, consents, and
approvals therefor have been obtained and are in full force and effect.
g. Borrower is not in default under this Agreement or any of the related
loan documents and security instruments, and no event has occurred which by
notice, the passage of time, or otherwise would constitute an event of default
thereunder. Borrower is not in default in the payment of any indebtedness for
borrowed money or under the terms and provisions of any agreement or instrument
evidencing any such indebtedness. Borrower is not in default with respect to any
order, writ, injunction, decree, or demand of any court or of any other
requirement of a governmental authority.
h. Except as previously disclosed to Bank with respect to the DMB Option
and the SCCRCLP Option, Borrower has not made any contract or arrangement of any
kind which has given rise to (or the performance of which by the other party
thereto would give rise to) a lien or claim of lien on the Property or
Collateral, except for the collateral documents executed in connection with this
Loan, and except for arrangements with Borrower's engineer, contractors, and
subcontractors who have executed (or will execute upon completion of the work
being performed by them) lien waivers satisfactory to Bank and the Title Company
insuring Bank's liens. Borrower is not engaged principally or as one of its
important activities in the business of extending credit for the purpose of
purchasing or carrying any margin stock (as deemed within Regulations G, T, and
U of the Board of Governors of the Federal Reserve System). Borrower will not
use any of the proceeds of the Loan made hereunder for the purchase or carrying
of registered equity security within the purview and operation of Regulation G
issued by the Board of Governors of the Federal Reserve System.
i. Borrower and Guarantors have filed all federal, state, and other tax
returns and reports required to be filed, and has paid all taxes due from it and
as shown on said returns and reports and all assessments received by it to the
extent that such taxes and assessments have become due. Neither Borrower nor any
Guarantors is presently involved in any dispute concerning taxes with any taxing
authority, and neither Borrower nor any Guarantor has received any unpaid
assessment for federal or state income taxes. The charges, accruals, and
reserves on the books of Borrower and Guarantors in respect of any taxes or
other governmental charges are adequate. Neither Borrower nor any Guarantor has
executed or is bound by the execution of another Person of any presently
effective waiver extending the period of the applicable statute of limitations
for the payment of federal income taxes.
j. There are no outstanding or unpaid judgments or arbitration awards
against Borrower, Guarantors, or the Property, and there are no actions, suits,
or proceedings pending or, to Borrower's or Guarantors' knowledge, threatened in
any court or before or by any governmental authority, at law or in equity,
against or affecting Borrower, Guarantors, or the Property, or involving the
validity, enforceability, or priority of this Agreement or any of the documents
or instruments to be executed and delivered by Borrower or Guarantors pursuant
hereto. The consummation of the transactions contemplated hereby, and the
performance of any of the terms and conditions hereof and of the documents or
instruments
Page 11 of 25
<PAGE> 12
contemplated to be executed and delivered pursuant hereto, will not result in a
breach of, or constitute a default in, any mortgage, deed of trust, lease,
promissory note, change in terms agreement, loan agreement, credit agreement,
partnership agreement, or other agreement to which Borrower or Guarantors are a
party or by which Borrower or Guarantors may be bound.
k. Borrower is not subject to any statute, regulation, or agreement
restricting its ability to incur indebtedness or to encumber its properties.
Borrower is not an investment company" as defined in the Investment Company Act
of 1940, as amended. Neither Borrower nor any subsidiary thereof is a "holding
company," or a "subsidiary company" of a "holding company," or an "affiliate" of
a holding company," or an "affiliate" of a "subsidiary company" of a "holding
company" within the meaning of the Public Utility Holding Company Act of 1935,
as amended.
l. To the best of Borrower's knowledge, the Property has never been
used, and shall not be used, to manufacture, store, or dispose of toxic or
hazardous substances, materials, or wastes regulated by any applicable
Environmental Law. To the best of Borrower's knowledge, there has been no prior
use of the Property by either Borrower or any other prior owner that violates
any applicable Environmental Law, To the best of Borrower's knowledge the
Property is in all respects in compliance with all applicable Environmental
Laws. Borrower and Guarantors will not cause or permit any person to violate any
applicable Environmental Law. None of them has received a notice from any
governmental agency of any violation of any applicable Environmental Law.
m. Borrower is -not operating the Property, or any portion thereof,
under any exemption or exception from, or extension of time to comply with, any
applicable law or governmental regulation (including laws and regulations
concerning occupational health and safety, environmental protection, and zoning)
which will or could expire or be revoked within five (5) years of the date
hereof.
n. There exists no defined benefit pension plan subject to the
requirements of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), for the unfunded liabilities of which upon the termination of such
plan Borrower could be held wholly or partially liable to the Pension Benefit
Guaranty Corporation or, if such plan exists, with respect to each such plan (i)
no "accumulated funding deficiency" (as defined in Section 302 of ERISA) exists;
(ii) no other event has occurred or condition exists which could result in the
liability of Borrower to the Pension Benefit Guaranty Corporation; and, (iii)
such plan complies with all applicable requirements of ERISA and of the Internal
Revenue Code of 1954, as amended (the "Code"), and with all applicable rulings
and regulations issued under the provisions of ERISA and the Code setting forth
such requirements. For the purposes of this Agreement, "unfunded liabilities"
means with regard to any plan, the excess of the current value of the plan's
benefits guaranteed under ERISA over the current value of the plan's assets
allocable to such benefits.
o. No representation or warranty of Borrower or Guarantors contained in
the Agreement or related documents given to Bank in connection with the Loan,
and no statement contained in any certificate, schedule, list, financial
statement, or other instrument or document furnished to Bank by or on behalf of
Borrower or Guarantors contains, or will contain, any untrue statement or
material fact, or omits, or will omit, to state a material fact necessary to
make the statements contained herein or therein not misleading.
6. Covenants of Borrower and Guarantors. During the term of this
Agreement, and until all obligations of Borrower to Bank hereunder are paid,
satisfied, and performed, Borrower and Guarantors, as applicable, covenant and
agree:
a. Borrower shall expend the funds advanced pursuant to the Agreement
only to pay Project costs.
b. Borrower shall not transfer or enter into any agreement to transfer,
assign, mortgage, or give a security interest in or allow to exist any
mortgage, lien or encumbrance, or security interest in the
Page 12 of 25
<PAGE> 13
Property, the Projects, or any other Collateral except as may be approved in
writing in advance by Bank, and shall not permit any secondary financing of the
Property, including so-called wraparound" financing.
c. Borrower shall diligently prosecute to substantial completion of the
Projects, including the models, by August 1, 1997, in an acceptable, workmanlike
manner, and in accordance with the Plans, submitted to and approved by Bank. No
material additions, deletions, or other changes shall be made in the Plans or
the construction contracts without the prior written approval of Bank.
d. Except as previously disclosed to Bank, Borrower shall not permit any
labor to be performed or any materials, machinery, fixtures, or tools to be
furnished which would give rise to a lien under A.R.S. Sec. 33-981, et seq.,
until after the Modification of Deed of Trust securing the Note evidencing the
Loan made hereunder has been recorded, and Borrower warrants that no such labor
has been performed and no such materials, machinery, fixtures, or tools have
been furnished as of the date of this Agreement.
e. Except as previously disclosed to Bank, no materials, equipment or
fixtures shall be supplied, purchased, or installed for the construction of the
Projects pursuant to security agreements or other arrangements or
understandings whereby a security interest or title is retained by any party or
the right is reserved or accrues to any party to remove or repossess any
materials, equipment, or fixtures intended to be utilized in the construction of
the Projects, without the prior written approval of Bank,.
f. Borrower shall execute and deliver to Bank, upon demand, such
estoppel certificates, instruments, and documents as Bank shall require
including, without limitation, those required to obtain and maintain a first
lien in favor of Bank on all fixtures and equipment existing or to be placed
in or upon the Property or improvements now thereon or to be constructed
thereon.
g. Borrower shall construct and complete the Projects free of all
security interests, liens, and encumbrances in accordance with all applicable
laws and ordinances, including zoning laws, and all covenants and restrictions
running with or affecting the Property and regulations of any other governmental
or municipal office, department, or agency having jurisdiction. Borrower shall
strictly comply with the provisions of A.R.S. Sec. 33-1003 et seq., for the
purpose of preventing the imposition of any mechanics' and materialmen's liens
upon the Property.
h. Borrower shall not, without the prior written consent of Bank, impose
any restrictive covenants or encumbrances upon the Property or take any action
to change in any manner the zoning thereof.
i. Borrower and Guarantors agree (i) not to permit any environmental
lien to be placed against the Property; (ii) to promptly, within 48 hours,
notify Bank of any notice received by Borrower or Guarantors from a governmental
agency concerning a violation of any applicable Environmental Law; (iii) to
provide Bank with copies of all communications received by Borrower or
Guarantors with governmental agencies enforcing Environmental Laws concerning
the Property; (iv) that Bank may, from time to time with cause and at Borrower's
and Guarantors' expense, conduct such inspections, audits, and tests concerning
the Property's compliance with applicable Environmental Laws as Bank shall deem
appropriate; and, (v) not to change the operation or use of the Property in any
manner without written notice to Bank and if Bank considers that such change may
increase its potential liability under applicable Environmental Laws.
"Applicable Environmental Laws as used herein with respect to the Property shall
include all Federal, State of Arizona, and local laws, ordinances, and
regulations relating to environmental protection, occupational health and
safety, public health and safety, or public nuisance or menace including,
without limitation, the Resource Conservation and Recovery Act, 42 U.S.C. Sec.
6901, et seq., the Comprehensive Environmental Response Compensation and
Liability Act of 1980, 42 U.S.C. Sec. 9600, et seq., the Toxic Substance Control
Act, 15 U.S.C. Sec. 2601, et seq., the Clear Air Act, 42 U.S.C. Sec. 740 1, et
seq., and The Clean Water Act, 33 U.S.C. Sec. 125 1, et seq. If an Environmental
lien is placed against the Property or Hazardous Substances are located on,
under or about the Property, and such
Page 13 of 25
<PAGE> 14
environmental lien or Hazardous Substances are not removed within ninety (90)
days of discovery, or such earlier time as required by a Governmental Agency,
then Bank shall have the right, but not the obligation, to do so or to declare a
default hereunder.
j. Borrower shall cause the construction of Projects to comply with all
restrictions, conditions, ordinances, codes, regulations, and laws of
governmental departments, agencies, and offices having direction or jurisdiction
over an interest in the Property and Projects.
k. Borrower will not allow the Property to suffer any material loss or
depreciation in value other than depreciation resulting from reasonable ordinary
wear and use and losses fully covered by insurance, the proceeds of which are
paid to Bank.
l. Borrower shall cause all material supplied for, or intended to be
utilized in, the construction of the Projects to be stored on the Property or at
such other location as may be approved by Bank in writing, with adequate
safeguards, as are reasonably required by Bank, to prevent loss, theft, damage,
or commingling with other materials or projects.
m. Provided there is no conflict with the Property CC&R's, Borrower
shall allow Bank at Bank's expense to erect a sign on the Property upon
commencement of construction indicating Bank as the source of the construction
financing. Said sign shall be of sufficient size as to be easily recognizable
from a distance of 150 feet, provided that such signage is consistent with
applicable municipal and governmental ordinances and does not materially inhibit
Borrower's ability to erect signage upon the Property. Bank shall have the sole
responsibility for maintaining the sip until completion of Projects.
n. Borrower shall maintain, at its expense, and furnish to Bank (i) a
policy or policies of comprehensive general liability insurance with coverage in
an amount not less than One Million and No/100 Dollars ($1,000,000.00) (and
during any period of construction or work upon the Property, contractor's and
independent contractor's liability and workers' compensation insurance in an
amount not less than One Million and No/100 Dollars ($1,000,000.00) to protect
Bank and Borrower against liability for personal injury and property damage,
including coverage for contractual liability, employees (to the extent not
covered by workers' compensation insurance), explosion, collapse and underground
property damage, and completed operations; (ii) a so-called Builder's Risk
Completed Value nonreporting form of policy, with an ISO All Risk form attached
and endorsements to cover demolition expenses and increased costs of
construction for one hundred percent (100%) of the insurable replacement value
of the Projects without reduction for depreciation; (iii) flood insurance
acceptable to Bank, unless Bank shall have received satisfactory evidence, which
may be in the form of a letter from the appropriate agent of the National Flood
Insurance Association or an appropriate governmental authority that no portion
of the Property is located in an area designated by the Secretary of Housing and
Urban Development as having special flood hazards; (iv) workers' compensation
insurance as required by law; and, (v) such other insurance as Bank shall
reasonably require. Each such insurance policy shall have premiums prepaid
through one year from the date hereof (and thereafter Borrower shall prepay one
year's premium annually), be with companies satisfactory to Bank with such other
coverage and in such amounts as Bank may request, contain the New York Standard
Non-Contributory Mortgagee clause or an equivalent mortgagee's loss payable
clause appropriate for the type of policy and satisfactory to Bank, and be
endorsed in favor of Bank and provide that it may not be canceled or amended by
any party for any reason whatsoever without first giving Bank at least thirty
(30) days prior written notice of any proposed cancellation or amendment.
o. If the Property or the Projects are partially or wholly damaged or
destroyed by fire or any other cause, Borrower shall promptly, upon Bank's
request, restore it to its condition immediately preceding such casualty;
provided, however, that if Bank determines that the insurance proceeds paid to
Bank are insufficient to complete such restoration to its state prior to damage
and Borrower shall fail within ten (10) days after notice from Bank to deposit
with Bank an amount equal to such deficiency as determined by Bank (it being
understood that Bank shall not be obligated to advance Loan proceeds for such
purpose or otherwise until restoration to its state prior to damage is
complete), then Bank may apply
Page 14 of 25
<PAGE> 15
the insurance proceeds and any undisbursed Loan proceeds toward satisfaction of
the Loan. If Bank requires restoration, Borrower shall immediately proceed
therewith and shall diligently prosecute the same to completion, and Bank shall
disburse to Borrower as such restoration satisfactorily progresses in same
manner as is provided for the disbursement of the Loan proceeds, the proceeds
from any fire or casualty insurance actually paid to Bank in respect of such
damage or destruction and any additional funds deposited by Borrower with Bank
as hereinabove provided, which funds will be held by Bank as additional security
for the Loan.
p. Borrower shall promptly give notice in writing to Bank within ten
(10) days after the occurrence of any of the following matters about which
notice must be given: (i) a default or an event which, with the passage of time,
may constitute a default; (ii) any event causing material loss or depreciation
in the value of the Property and the amount and nature of such loss or
depreciation; or (iii) other developments, financial or other matters, which
might materially adversely affect Borrower's business, properties, condition
(financial or other) or affairs, or the ability of Borrower to perform the
obligations of Borrower under this Agreement.
q. Borrower shall timely comply with, and promptly furnish to, Bank true
and complete copies of any notice or claim by any governmental authority
relating to the Property or Projects, promptly notify Bank of any casualty with
respect to the Property, Projects, or other Collateral, and of any notice of
taking or eminent domain action or proceeding affecting the Property or
Projects.
r. Upon request by Bank, Borrower shall deliver to Bank from time to
time a report on the progress of the Projects, the costs of the Projects
compared to the construction contracts for the Projects, and such other data and
information concerning the Property and the Projects and the other security for
the Loan as reasonably may be required by Bank. Such reports shall be rendered
on a monthly basis unless circumstances dictate more frequent reports.
s. Borrower shall not permit cessation of work for a period in excess of
fourteen (14) days without the prior written consent of Bank unless due to
unusually prolonged periods of inclement weather, strikes or other labor
troubles, unavailability of materials, national emergency, or any rule, order,
or regulation of any government authority, or similar cause not within
Borrower's control, and Borrower gives prompt written notice of said cause or
delay to Bank, such cessation of work does not in any event continue for more
than sixty (60) days and promptly recommences work immediately upon termination
of such cause or delay and diligently prosecutes the same to completion.
t. Borrower shall maintain a standard and modern system of accounting
and furnish to Bank, at no cost to Bank, within thirty (30) days after the end
of each fiscal quarterly period, and within ninety (90) days after the fiscal
year-end of Borrower, an income statement, profit and loss and surplus
reconciliation statement, a statement of cash flows, and a balance sheet for
such periods. Each such statement must evidence cash balances owned by and
immediately available to Borrower which balances must exceed $500,000.00. Each
such statement must be signed by an authorized financial officer, prepared in
accordance with generally acceptable accounting principles consistently applied
(and, in the case of the year-end financial statements, audited by a certified
public accountant satisfactory to Bank), together with such other financial
statements, reports, and tax returns as from time to time shall reasonably be
requested by Bank. Guarantors shall furnish to Bank, at no cost to Bank, within
thirty (30) days after the end of each calendar year, an income statement and a
balance sheet for that year, in form acceptable to Bank, together with such
other financial statements, reports, and tax returns as from time to time shall
reasonably be requested by Bank. Borrower shall not incur or suffer to exist any
indebtedness other than (i) indebtedness of Borrower to Bank under this
Agreement; (ii) Accounts Payable in the ordinary course of business representing
obligations for the purchase of goods, services, or transportation which are not
more than ninety (90) days old or which are being contested in good faith; (ii)
other indebtedness existing on the date hereof and described on financial
statement or other written representation made by Borrower to Bank; and (iii)
other indebtedness arising from the normal course of Borrower's business.
Page 15 of 25
<PAGE> 16
u. Borrower shall not permit the ratio of its Total Debt to Equity to
exceed 3.0 to 1.0, measured quarterly. In calculating the ratio, subordinated
indebtedness shall be subtracted from Total Debt and added to Equity.
v. Borrower shall maintain a Fixed Coverage Ratio of not less than 1.25
to 1.0, measured annually. The ratio shall be calculated by dividing Gross
Profits, in dollars, by the sum of S,G&A, in dollars.
7. Bank's Rights and Responsibilities
a. Bank shall have no liability, obligation, or responsibility
whatsoever with respect to the construction of the Projects except to disburse
the Loan proceeds pursuant to this Agreement and subject to its terms. Bank
shall not be obligated to inspect the Property or the construction of the
Projects or be liable for the performance or default of Borrower, any architect,
engineer, contractor, or other party, or for any failure to construct, complete,
protect, or insure the Projects, or for the payment of costs of labor,
materials, services supplied for the construction of the Projects, or for the
performance of any obligation of Borrower whatsoever. Bank shall have no
obligation to require or obtain lien waivers or receipts, and even if it
requires presentation to it of lien waivers or receipts, it shall have no
responsibility for the validity thereof nor for the correctness of the amounts
thereof. Bank shall have no obligation to see that the advance payments made by
it are actually used to pay for labor and materials furnished and used in the
construction of the Projects. Nothing, including without limitation any advance
or acceptance of any document or instrument, shall be construed as a
representation or warranty, express or implied, to any party by Bank.
b. Bank shall have the right at all times during construction to inspect
the progress of the work performed and to determine whether the work is being
completed in a manner satisfactory to Bank. Bank shall not, by inspecting the
work in progress, or by approving advances and making disbursements hereunder,
assume or have any responsibility for defective material or workmanship, breach
of any construction contract or of any subcontractor, or failure of the
improvements to conform to the Plans. All inspections and other services
rendered by Bank or its agent, whether or not paid for by Borrower or its
successors in title, shall be rendered solely for the protection and the benefit
of Bank, and Borrower shall not be entitled to claim any loss or damage against
Bank or its agent or employees for failure to properly discharge their duties to
Bank. Bank, or its agents, at all reasonable times and upon reasonable notice,
shall have unrestricted access to the records, account books, contracts,
subcontracts, bills, and statements of Borrower, including any supporting or
related vouchers or other instruments, and shall have the right to make copies
of the same. If Bank so requires, the records, books, vouchers, or other
instruments shall be made available to an accountant of Bank's choice for audit,
examination, inspection, and photocopying or other type of duplication, such
audit to be undertaken at Borrower's office.
c. If there is a dispute between Borrower and its subcontractors,
architect, or engineer arising from Borrower's default in its obligations to its
subcontractors, architect, or engineer, or if for any reason Borrower fails,
neglects, or refuses to proceed with construction of the Projects with
reasonable diligence and to complete same within the period provided in the
subcontracts, or if no time is specified therein, then within a reasonable time
in the circumstances, Bank may, in its sole discretion, make disbursements
directly to any subcontractors, or to any other contractor, without liability
therefor and may cause construction of the Projects to be continued, resumed, or
completed. Any such payment shall be deemed a payment to Borrower or for
Borrower's benefit and Bank is, under such circumstances, specifically appointed
Borrower's agent to proceed with completion of the Projects. Any provisions
herein or in any construction contracts to the contrary notwithstanding, Bank
shall have the right to make its own independent determination as to whether or
not the provisions of the construction contracts have been complied with,
including the right to determine independently whether the Projects is being or
has been completed in accordance with the Plans approved by Bank.
d. Bank may offset and apply any and all deposits (general or special,
time or demand, provisional or final) at any time held and other indebtedness at
any time owing by Bank to or for the credit
Page 16 of 25
<PAGE> 17
or the account of Borrower against any and all of the obligations of Borrower
now or hereafter existing under this Agreement, irrespective of whether or not
Bank shall have made any demand under this Agreement and although such deposits,
indebtedness, or obligations may be matured or contingent.
e. Bank may (but shall not be obligated to) commence, appear in, or
defend an action or proceeding purporting to affect the Loan, the Property or
Projects, or the respective rights and obligations of Bank and Borrower pursuant
to this Agreement and the documents created in connection therewith. Bank may
(but shall not be obligated to) pay all necessary expenses, including reasonable
attorneys' fees and expenses incurred in connection with such proceedings or
actions, which Borrower agrees to pay to Bank upon demand, together with
interest thereon from the date advanced at the rate provided in the Note.
8. Events of Default. In addition to the Events of Default listed in the
other Loan Documents, the occurrence of any one or more of the following
conditions or events (whether or not within the control of Borrower) shall
constitute a default:
a. The discontinuance of construction work for a period of fourteen
(14) days, which discontinuance is, in the sole determination of Bank, without
cause, or the failure to pursue the construction of the Projects with reasonable
diligence and in accordance with the Plans approved by Bank, is an event of
default hereunder.
b. The failure to timely commence and complete the Projects in
accordance with the Plans by the substantial completion date herein specified,
unless said date is extended in writing by Bank, is an event of default
hereunder. A failure in the construction, completion, or operation of the
Projects to comply with the Plans (in all material respects) and any
governmental requirements, if applicable, is an event of default hereunder. Any
failure by Borrower to strictly enforce the subcontractors contract to the end
that the subcontractor performs all of the obligations on its part to be
performed thereunder, is an event of default hereunder. The failure to complete
restoration or replacement of the Projects with due diligence when required to
restore or replace the same pursuant to the provision hereof, is an event of
default hereunder.
c. The execution or existence of a security agreement or other device
creating a lien upon (or wherein the right is reserved or accrues to anyone
other than Bank to remove, repossess, or to consider as personal property), any
materials, furnishings and equipment, fixtures, or any other tangible property
constituting a part of or to be installed in or used in connection with the
Property, or the improvements thereon or to be made thereon, or the business
conducted or to be conducted therein; and if any such lien is not corrected
within thirty (30) days after Bank notified Borrower in writing of such lien, or
if such lien cannot be corrected within thirty (30) days and Borrower has
immediately upon said notice commenced efforts to correct the same within such
period and diligently and continuously pursues correction of the same, and such
lien is not corrected within sixty (60) days after such notice, such lien or
failure to conform shall constitute a default of Borrower under this Agreement,
but shall be subject to no additional Grace Period.
d. If, in Bank's opinion, the work has not been, or is not being,
performed in good and workmanlike manner and in accordance with the Plans, Bank
shall have the right to require compliance with the Plans and the remedying of
all defects, and if any such defect or failure to comply is not corrected within
thirty (30) days after Bank notified Borrower in writing of such defect or
failure, or if such defect or failure cannot be corrected within thirty (30)
days and Borrower has immediately upon said notice commenced efforts to correct
the same within such period, and diligently and continuously pursues correction
of the same, and such defect or failure is not corrected within sixty (60) days
after such notice, such defect or failure to conform shall constitute a default
of Borrower under this Agreement, but shall be subject to no additional Grace
Period.
Page 17 of 25
<PAGE> 18
e. The violation of any applicable law or ordinance, or any of the
rules, regulations, or orders of any zoning commission or real estate or health
department, or any other office, agency, or department of the State of Arizona,
or any of its political subdivisions, is an event of default hereunder.
f. The neglect, failure, or refusal of Borrower to keep in full force
and effect any permit or approval with respect to the construction or use of the
Projects as required herein, is an event of default hereunder.
g. Any governmental action which, in the opinion of Bank, will adversely
affect Borrower's condition, operations, or ability to repay the Loan is an
event of default hereunder.
h. The entry of any order or decree in any court of competent
jurisdiction enjoining or prohibiting this Agreement, or any material provision
thereof, is an event of default hereunder.
i. Any suit which Bank reasonably determines not to be frivolous or
spurious that shall be filed against Borrower and which, if adversely
determined, could in the opinion of Bank substantially impair the ability of
Borrower to perform any of its obligations under and by virtue of the Loan
Documents, is an event of default hereunder.
j. The existence of any condition or situation which Bank, in its sole
discretion, determines to constitute a danger or impairment to the security for
the Loan, is an event of default hereunder.
k. The occurrence of any event or condition which results in, or with
notice or lapse of time could result in, a default in the payment of any present
or future indebtedness or a default in the performance of any present or future
obligation of Borrower or Guarantors to Bank regardless of the manner in which
the indebtedness or obligation may have arisen, is an event of default
hereunder.
9. Remedies Upon Default. Subject to such limitations as may be imposed
by applicable federal bankruptcy and reorganization law, upon the occurrence of
a default that continues to exist after the expiration of the Grace Period
applicable to the type of default involved, and in addition to all rights and
remedies provided for under this Agreement and the other Loan documents, Bank
shall have all rights and remedies provided to it by law or described in this
Paragraph 9 or in any other document under which Borrower shall be obligated to
Bank. Grace Period means the number of calendar days after Bank gives notice in
accordance with Paragraph 12. If a default involves Borrower's obligation to pay
money or discharge an indebtedness, the applicable Grace Period shall be ten
(10) days. If a default involves the performance or non-performance of an act,
or the occurrence or non-occurrence of an event or circumstance, and no other
period is specified, the Grace Period shall be thirty (30) days. Notwithstanding
the foregoing, there shall be no Grace Period applicable to a default based upon
a failure to keep the Property and Projects adequately insured, or a default or
breach of representation or warranty, or a false statement in or material
omission from any document forming part of the transaction in respect of which
this Agreement was made. If it is not possible within said thirty (30) day
period to fully cure a default not involving the payment of monies, Borrower
shall be entitled to such additional time as Bank shall determine is reasonable
in the circumstances, provided that Borrower commences to cure such default
within the notice period and thereafter diligently and continuously prosecutes
the cure of such default Notwithstanding the foregoing, if, in Bank's reasonable
opinion the delay resulting from the granting of any Grace Period to Borrower
would result in the imposition of any lien, claim, or encumbrance on the
Property or Projects which would have priority over the Modification of Deed of
Trust, Deed of Trust or any security agreement securing the Loan, or otherwise
impair the priority, substantially diminish the value, or cause the loss of any
of Bank's security, then Bank may immediately enforce any and all of the
foregoing remedies with or without notice, and with or without awaiting the
termination of any cure period.
a. Bank may withhold further disbursement of the proceeds of the Loan,
it being understood that Bank shall have the absolute right to refuse to
disburse the balance of the proceeds of the Loan, and that no contractor,
subcontractor, materialman, laborer, supplier, or bonding company or surety
Page 18 of 25
<PAGE> 19
shall have any interest in or right to any Loan proceeds, either applied by or
withheld by Bank pursuant hereto or any right to garnish or otherwise require or
compel payment of any Loan proceeds upon any claim or lien which any of them
have or may have for work performed upon or materials furnished to the Property.
b. Bank may institute appropriate proceedings to specifically enforce
performance of the terms and conditions of all or any of the Loan Documents.
c. Bank may declare the Note to be due and payable forthwith and avail
itself of the remedies afforded hereby, or by the Change in Terms Agreement,
Modification of Deed of Trust, Deed of Trust or other documents executed and
delivered hereunder.
d. Bank may declare this Agreement to be terminated, it being understood
that such termination shall not relieve Borrower of any liability for a breach
occurring prior to such termination.
e. Bank may take possession of the Property and the Projects, materials,
furniture, fixtures, and equipment thereon and complete the construction of the
Projects and do anything which it, in its sole discretion, deems necessary to
fulfill the obligations of Borrower hereunder, including either the right to
avail itself of, and procure performance of, a general contractor and/or other
existing contracts and subcontracts, or let any contracts with the same
contractor and others, and to employ watchmen to protect the Property and the
Improvements, materials, furniture, fixtures, and equipment thereon from injury.
Without restricting the generality of the foregoing and for the purposes
aforesaid, Borrower hereby irrevocably appoints and constitutes Bank its lawful
attorney-in-fact with full power of substitution in the premises to (i) complete
the Projects in the name of Borrower; (ii) use non-advanced funds remaining
under this Agreement or which may remain in escrow and those funds which have
been deposited with Bank by Borrower pursuant to this Agreement; (iii) draw
under any Letter of Credit issued in favor of Bank for any purposes hereunder at
any time to complete the Projects, purchase furniture, fixtures, and equipment;
(iv) make changes in the Plans which shall be necessary or desirable in the
opinion of Bank to complete the Projects in substantially the manner
contemplated by the Plans; (v) retain or employ new general contractors,
subcontractors, architects, and inspectors as shall be required for said
purposes; (vi) pay, settle, or compromise all existing bills and claims becoming
liens against the Property, the Projects, or any other improvements thereon, or
as may be necessary or desirable for the completion of the Projects or for the
clearance of title, any additional sums so advanced by Bank to be secured by the
lien of the Modification of Deed of Trust, Deed of Trust and to be considered a
part of the Loan with like effect as if initially included therein; (vii)
execute all applications and certificates in the name of Borrower which may be
required by the general contract or otherwise; (viii) prosecute and defend all
suits, actions, or proceedings in connection with the Property or the
Improvements, or in connection with the construction of the Projects; (ix) take
action and require such performance as it deems necessary under any of the bonds
to be furnished hereunder and, for this purpose, said bonds are assigned to
Bank; (x) make settlements and compromises with the surety or sureties
thereunder, (xi) execute instruments of release and satisfaction; and (xii) do
any and every act which Borrower might do on its own behalf. It is understood
and agreed that this power of attorney shall be a power coupled with an
interest and cannot be revoked.
f. In the event any liens or claims are filed against the Property or
the Projects, and pursuant to paragraph 8.c. Borrower has failed to remedy or
extinguish said liens Bank, after ten (10) days' written notice to Borrower of
its intention to do so, may pay any or all of such liens or claims, or Bank may
contest the validity of any of them, paying all costs and expenses of contesting
the same, including reasonable attorneys' fees, out of the Loan Proceeds. Should
such payments, in the aggregate, exceed the then non-advanced portion of the
Loan Proceeds, then such additional amounts shall be repaid by Borrower to Bank
on demand, and shall be secured as advances under the terms and provisions of
the Modification of Deed of Trust, Deed of Trust and other security instruments,
and shall bear interest thereon from the date advanced at the rate provided in
the Note. The foregoing notwithstanding, Bank may without notice or consent
from Borrower, at any time advance to any person any sum which Bank, in its sole
discretion, deems necessary to protect or preserve the Property, Projects, and
other Collateral, or Bank's assignment of
Page 19 of 25
<PAGE> 20
or security interest in the Property, Projects, or other Collateral (or the
priority thereof), or to cure any event of default which shall then exist
hereunder. Each such advance shall be secured by the Property, Projects, and
other Collateral and, at Bank's election, shall either be reimbursed to it by
Borrower immediately upon demand, or added to the Loan balance and bear interest
at the rate applicable upon default under the Note. It is understood and agreed
that nothing herein contained shall obligate Bank to make any such advance, nor
shall the making of one or more such advances constitute an agreement by Bank to
make any further advance, or be deemed a waiver of any default by Borrower under
the terms hereof or of any other loan documents.
g. Bank may, at its discretion, waive any default and extend the time
for performance or remedy of the same. However, any waiver by Bank of any
default shall only be in writing, and shall not be construed as constituting a
waiver by Bank of any other default. In the event of any such default, Borrower
shall pay, in addition to the principal and interest due on the Note, an
additional reasonable sum as and for Bank's attorneys' fees. The said remedies
and rights of Bank shall be cumulative and not exclusive.
h. Bank may exercise any other right, privilege, or remedy available to
it under any of the Loan Documents, under any other agreement or instrument, or
as may be provided by applicable law or in equity. Bank shall have the right to
enforce any one or more of the remedies provided hereunder or by law or in
equity either successively or concurrently. Any such action by Bank shall not be
deemed an election of remedies, or otherwise prevent Bank from pursuing any
further remedy it may have hereunder or at law or in equity.
10. Condemnation. Borrower, for itself and its heirs, executors,
administrators, successors, and assigns, hereby assigns to Bank, its successors,
and assigns, any and all awards heretofore made and hereafter to be made by any
federal, state, municipal, or other authorities having the power of
condemnation, including any award(s) for any change or changes of grade or
route of streets affecting said Property or any improvements thereof. Bank,
for itself, its successors, and assigns (at its or their option) is hereby
authorized, directed, and empowered to collect and receive the proceeds of any
such award(s) from the authorities making the same, and entitled to make any
compromise or settlement in connection with the amount of such award(s) and to
give proper receipts and acquittances therefor, and to apply the same toward
the payment of the amount owing on account of the Promissory Note, Modification
of Deed of Trust, Deed of Trust, and other security agreements, notwithstanding
the fact that the amount owing on account of the Promissory Note, Modification
of Deed of Trust, Deed of Trust, or other documents may not then be due and
payable. Borrower, for itself and its heirs, executors, administrators,
successors, and assigns hereby covenants and agrees to and with Bank,
its successors, and assigns, upon request to make, execute, and deliver any and
all assignments and other instruments sufficient for the purpose of assigning
the aforesaid award(s) to the then holder of the Promissory Note and
Modification of Deed of Trust, Deed of Trust, free, clear, and discharged of
any and all security agreements, liens, and encumbrances of any kind or nature
whatsoever. The balance, if any, of any such award(s) in excess of the amount
applied to the balance owing on the Promissory Note or under the terms of the
Modification of Deed of Trust, Deed of Trust, this Agreement, and any other
security agreements, shall be promptly paid to Borrower.
11. Casualties. If the Projects or any equipment, fixtures, furniture,
or materials therein shall be damaged or destroyed by fire, flood, earthquake,
wind, or any other casualty or means, including acts of God or acts of the
Borrower, Borrower promptly shall commence, and thereafter prosecute with due
diligence, the restoration or reacquisition of the same to the condition they
were in immediately prior to such damage or destruction, using funds other than
Loan proceeds. Bank shall not be obligated to make any further advances of Loan
proceeds until such restoration to its state prior to damage has been completed
to Bank's satisfaction.
12. Notices. All notices and other communications provided for
hereunder shall be in writing (including telegraphic, telecopy, or other
facsimile communication) and mailed, telegraphed, telexed, cabled, telecopied
(or communicated by other means of far-simile transmission) or delivered (by
hand or by courier service), to the parties at their respective addresses set
forth below or at such other address as shall
Page 20 of 25
<PAGE> 21
be designated by such party in a written notice to the other parties. All such
notices and communications shall, when mailed by certified mail, telegraphed,
telexed, cabled, or telecopied, be effective upon the earlier to occur of actual
receipt or three (3) business days after, as applicable, (i) deposit in the
mail, postage prepaid; (ii) delivery to the telegraph company; (iii)
confirmation by telex answerback; (iv) delivery to the cable company; or (v)
confirmation at the established confirmation number.
To BORROWER as follows:
ATTEN: David A. Walls
6613 North Scottsdale Road - Suite #200
Scottsdale, Arizona 85250
To GUARANTOR as follows:
William W. Cleverly; Steven J. and Benee Hilton
6613 North Scottsdale Road - Suite #200 6613 North Scottsdale Road - Suite #200
Scottsdale, Arizona 85250 Scottsdale, Arizona 85250
To BANK as follows:
Norwest Bank Arizona
Attention: Kevin Kosan
3300 North Central Avenue
Third Floor, MS #9008
Phoenix, Arizona 85012
13. Exclusive Benefits of Agreement: Assignment. This Agreement is made
for the sole protection of Borrower, Guarantors, and Bank, its successors and
assigns, and no other person shall have any claim hereunder or right of action
hereon or by virtue of the provisions hereof. Neither Borrower nor Guarantors
may assign this Agreement or any part of any advance to be made hereunder. The
rights of Bank under this Agreement are assignable in part or in whole, and any
assignee of Bank shall succeed to and he possessed of the rights of Bank
hereunder to the extent of the assignment made including the right to make
advances to Borrower or any approved assignee of Borrower in accordance with
this Agreement.
14. No Agency Relationship. Borrower and Guarantors understand and
agree that Bank is not the agent or representative of Borrower or Guarantors,
and this Agreement shall not be construed to make Bank liable to materialmen,
contractors, suppliers, subcontractors, craftsmen, laborers, or others for goods
or services delivered or performed by them in connection with the Property, or
for debts or claims accruing to the said parties against Borrower or Guarantors.
It is distinctly understood and agreed that there is no contractual
relationship, either expressed or implied, between Bank and any materialmen,
contractors, subcontractors, suppliers, craftsmen, laborers, or any other person
supplying any work, labor, or materials in the improvement of the Property.
15. Interest. Should any fees, charges, goods, things in action, or
other sums or things of value, or any compensating balance requirements paid by
Borrower to Bank with respect to the Loan or indebtedness evidenced by the
Promissory Note, or with respect to any of the instruments executed in
connection herewith, also be deemed to be interest with respect to such Loan or
indebtedness, the agreed upon and contracted rate of interest with respect to
the Loan shall be deemed to be increased by said additional sums.
16. Prior Credit Agreements. Borrower and Guarantors acknowledge, with
respect to the amounts owing to Bank under any prior credit agreement,
including, but not limited to, those Loan Agreements, dated December 27, 1993,
July 20, 1994 and August 10, 1994, and those Amendments to Loan Agreement, dated
June 15, 1994, July 15, 1994, June 7, 1995 and June 21, 1995 that neither
Borrower nor Guarantors have any offset, defense, or counterclaim with respect
thereto, no claim or defense in abatement or reduction thereof, nor any other
claim against Bank or with respect to any
Page 21 of 25
<PAGE> 22
document forming part of the transaction in respect of which such prior credit
agreement was made or forming part of any other transaction under which Borrower
or Guarantors is indebted to Bank. Borrower and Guarantors acknowledge that all
interest imposed under any prior credit agreement through the date hereof, and
all fees and other charges that have been collected from or imposed upon
Borrower and Guarantors with respect to the loan evidenced by such prior credit
agreement were and are agreed to and were properly computed and collected, and
that Bank has fully performed all obligations that it may have had or now has to
Borrower and Guarantors, and that Bank has no obligation to make any additional
loan or extension of credit to or for the benefit of Borrower and/or Guarantors
under any prior credit agreement.
17. Indemnification. Borrower and Guarantors each agree, at their own
expense, to pay and to indemnify, and to hold Bank (to include its employees,
agents, and officers) harmless of and from, and against any and all claims,
demands, expenses, and liabilities which may be asserted or alleged in
connection with or arising out of the Loan, the administration or enforcement of
the Agreement and related documents, or the exercise of any right under the Loan
Documents (including, without limitation, in connection with or as a result of
any sale, use, operation, lease, disposition, or consumption of any of the
Collateral, as long as such is done in a commercially reasonable manner),
whenever asserted, and for all reasonable expenses (including attorneys' fees)
and all costs of compromise or settlement which may be incurred by Bank on
account of, arising out of, or in connection with any such claim, demand, or
obligation. In the event the Property or any condition existing thereon is ever
determined by any court or governmental agency to be in violation of any law,
ordinance, or regulation which requires correction or clean-up under any
applicable Environmental Law, Borrower and Guarantors shall also indemnify and
hold Bank harmless from all expenses, damages, and penalties incurred or arising
by virtue of such condition or violation. Bank, at its option but without
obligation to do so, may correct such condition or violation and, in doing so,
shall conclusively be deemed to be acting reasonably and for the purpose of
protecting the value of its collateral. All costs of correcting such condition
or violation shall be payable to Bank by Borrower and Guarantors upon demand,
shall be secured hereby, and shall bear interest from the date expended by Bank
until paid at the highest rate from time to time applicable under the Promissory
Note and this Agreement. The foregoing indemnities shall extend to claims,
demands or obligations, and expenses relating thereto, and costs of compromise
or settlement thereof, resulting from the negligence or misconduct of any
indemnitee except claims, demands, or obligations resulting from intentional
misconduct or gross negligence. In the event that any action or proceeding is
brought against Bank arising out of the Loan, the administration or enforcement
of the Loan Documents, or the exercise of any right under the Loan Documents,
Borrower shall, upon notice from Bank, resist and defend such action or
proceeding on behalf of Bank; provided that failure of such party to give such
notice shall not relieve Borrower from any of its obligations under this
Paragraph 17 unless such failure prejudices the defense of such action or
proceeding by Borrower. At its own expense, an indemnified party may employ
separate counsel and participate in the defense. If employment of separate
counsel is required because of a conflict of interest between Borrower and the
indemnified party, or between the indemnified parties, or the failure of
Borrower after receipt of notice to assume the defense, then the indemnified
parties may employ separate counsel at Borrower's expense. Borrower shall not be
liable for any settlement without its consent unless Borrower shall have failed
to perform any of its obligations under this Paragraph 17.
18. Taxes and Expenses. Any taxes (excluding income taxes) payable,
ruled payable, or assessed by any governmental authority in respect of the Loan
or the making thereof, the Loan documents, the Projects, or the construction,
completion, use, or sale thereof or any portion thereof shall be paid by
Borrower, together with interest and penalties, if any. If any taxes or fees
which Borrower is obligated to pay are imposed or assessed against Bank,
Borrower shall pay, or reimburse and indemnify Bank for such taxes and fees, and
any interest and penalties thereon, upon demand. At the time of release of any
lien upon the Property or any portion thereof by Bank, in addition to any other
amount payable on or with respect to such release by Borrower, Bank may require
as a condition to such release that Borrower pay into a non-interest bearing
escrow account at Bank, or with any third party escrow agent designated by Bank,
such amount as Bank, in good faith, believes is adequate to pay when due any
transaction, privilege, sales, use, or similar tax imposed or expected to be
imposed by any governmental authority upon the construction, completion, use, or
sale of the Projects or the portion of the Projects located upon the portion
Page 22 of 25
<PAGE> 23
of the Property being released. Any underestimate by Bank in the amount of the
actual tax due shall not relieve Borrower of its obligation to pay the full
amount of such tax, and all interest and penalties thereon, or give or allow
Borrower any right or remedy against Bank.
19. Miscellaneous Provisions.
a. All covenants, agreements, representations, and warranties made
herein and in documents delivered in support of the application for the Loan and
the recitals set forth at the beginning of this Agreement shall be deemed to
have been material and relied on by Bank and shall survive the execution and
delivery to Bank of the Promissory Note and disbursements of the proceeds
thereof. The recitals set forth at the beginning of this instrument are adopted,
approved, and incorporated herein as agreements of the parties.
b. All sections and descriptive headings contained herein are inserted
for convenience only, and shall not affect the construction or interpretation
thereof. The use of the singular number herein shall include the plural number,
the use of the plural number shall include the singular number, and the use of
any gender shall include all genders.
c. This Agreement, the Promissory Note, the Modification of Deed of
Trust, Deed of Trust, and other documents provided herein are executed and
delivered in the State of Arizona, and the laws of the State shall govern the
interpretation, enforcement, and all other aspects of the obligations and duties
created hereunder. Time is of the essence hereof.
d. This Agreement may be executed in any number of counterparts, each of
which, when executed and delivered, shall be an original, but such counterparts
shall together constitute one and the same instrument.
e. No provisions of this Agreement shall be amended, waived, or modified
except by an instrument in writing signed by the parties hereto.
f. Unenforceability for any reason of any provision of this Agreement
shall not limit or impair the operation or validity of any other provision of
this Agreement.
g. In the event of any conflict between the terms of this Agreement and
the terms of any other document executed in connection with the Loan made by
Bank, the terms of this Agreement shall govern in resolving any dispute between
Bank and Borrower.
h. This Agreement and the other Loan documents are intended to express
the mutual intent of the parties hereto and thereto, and irrespective of the
party preparing any such document, the parties hereto intend that no rule of
strict construction shall be applied against any party.
i. Any default under this Agreement, the Promissory Note, the
Modification of Deed of Trust, Deed of Trust, and other agreements provided for
herein shall constitute a default of any other loan or deed of trust/mortgage,
loan agreement, or note between Borrower or Guarantors, individually or
collectively, and Bank.
j. The provisions of the Promissory Note concerning payments shall apply
to all payments of principal, interest, and other amounts payable under this
Agreement Whenever any payment to be made hereunder shall be stated to be due on
a day which is not a business day, such payment shall be made on the next
succeeding business day and such extension of time shall be included in
computing interest, if any, in connection with such payment.
k. Borrower and Guarantors shall reimburse Bank, upon demand, for all
attorneys' fees incurred by Bank in connection with the preparation of this
Agreement and the other Loan documents and
Page 23 of 25
<PAGE> 24
for advice tendered in connection therewith, pay all out-of-pocket expenses of
Bank and Bank's counsel in connection with the preparation, execution, delivery,
recording, administration and arbitration of this Agreement, the Promissory
Note, and all other instruments or documents provided for herein or delivered or
to be delivered hereunder or in connection herewith. In addition, Borrower
agrees to pay and save Bank harmless from any and all liability for taxes,
except Bank's income taxes, which may be payable in connection with the
execution or delivery of this Agreement, the borrowings hereunder, the issuance
of the Promissory Note, or any other instruments or documents provided for
herein, or delivered or to be delivered hereunder, or in connection herewith.
All obligations provided for in this subparagraph shall survive any termination
of this Agreement.
l. Borrower and Guarantors each authorize Bank to furnish any
information in its possession, however acquired, concerning Borrower and
Guarantors to any person or entity for any purpose which Bank, in good faith and
in its sole discretion, believes to be proper including, without limitation, the
disclosure of information to any actual or prospective lender to Borrower or
Guarantors, any actual or prospective participant in a loan between Borrower and
Bank, any prospective purchaser of securities issued or to be issued by Bank, to
the extent permitted by law, any governmental body or regulatory agency, or in
connection with the actual or prospective transfer of all or a portion of the
Promissory Note to another financial institution.
m. Borrower and Guarantors agree (i) to provide Bank with all other
documents reasonably required by Bank to give effect to this Agreement; and,
(ii) in any instance hereunder where Bank's approval or consent is required or
the exercise of Bank's judgment is required, the granting or denial of such
approval or consent and the exercise of such judgment shall be within the sole
discretion of Bank, and Bank shall not, for any reason or to any extent, be
required to grant such approval or consent or exercise such judgment in any
particular manner regardless of the reasonableness of either the request or
Bank's judgment.
n. Anything contained in this Agreement to the contrary notwithstanding,
Bank shall not be obligated to extend credit to Borrower in any amount in
violation of any limitation or prohibition provide by any applicable statute or
regulation.
o. Borrower consents to Bank sale or transfer, whether now or later, of
any interest in the Loan to any purchaser. Bank may deliver information about
the Loan to the purchaser. Any sale or transfer of any interest shall be without
recourse to Bank and Bank shall have no obligation to give notice to Borrower or
to obtain Borrower's consent Borrower agrees that any purchaser shall be the
absolute owner of the Loan and that it may enforce its rights without regard to
any personal claims or defenses of Borrower against Bank. Borrower waives all
right of offset or counterclaim which it may have now or later against Bank or
purchaser.
20. ARBITRATION. Subject to the provisions of the next paragraph below,
the Bank and the Borrower agree to submit to binding arbitration any and all
claims, disputes and controversies between or among them, whether in tort,
contract or otherwise (and their respective employees, officers, directors,
attorneys and other agents) arising out of or relating to in any way (i) the
line and related loan and security documents which are the subject of this
Agreement and its negotiation, execution, collateralization, administration,
repayment, modification, extension, substitution, formation, inducement,
enforcement, default or termination; or (ii) requests for additional credit.
However, "Core Proceedings" under the United States Bankruptcy Code shall be
exempted from arbitration. Such arbitration shall proceed in Phoenix, Arizona,
shall be governed by the Federal Arbitration Act (Title 9 of the United States
Code), and shall be conducted in accordance with the Commercial Arbitration
Rules of the American Arbitration Association ("AAA"). The arbitrator shall give
effect to statutes of limitation in determining any claim. Any controversy
concerning whether an issue is arbitrable shall be determined by the arbitrator.
Judgment upon the award rendered by the arbitrator may be entered in any court
having jurisdiction. Expenses of arbitration shall be assessed in the same
manner as other expenses provided for in paragraph 19.k. of this Agreement
Page 24 of 25
<PAGE> 25
Nothing in the preceding paragraph, nor the exercise of any right to
arbitrate, shall limit the right of any party hereto (1) to foreclose against
real or personal property collateral by the exercise of the power of sale, under
a deed of trust, mortgage, or other pledge, security agreement, or instrument,
or applicable law; (2) to exercise self-help remedies relating to collateral or
proceeds of collateral such as setoff or repossession; or (3) to obtain
provisional or ancillary remedies such as replevin, injunctive relief,
attachment, or appointment of a receiver from a court having jurisdiction,
before, during or after the pendency of any arbitration proceeding. The
institution and maintenance of any action for such judicial relief, or pursuit
of provisional or ancillary remedies, or exercise of self-help remedies shall
not constitute a waiver of the right or obligation of any party to submit any
claim or dispute to arbitration, including those claims or disputes arising from
exercise of any such judicial relief, or provisional or ancillary remedies, or
exercise of self-help remedies.
Arbitration under this Agreement shall be before a single arbitrator,
who shall be a neutral attorney who has practiced in the area of commercial law
for at least 10 years, selected in the manner established by the Commercial
Arbitration Rules of the AAA.
IN WITNESS WHEREOF, the parties hereto have executed this instrument as of the
date first herein above set forth.
NORWEST BANK ARIZONA,
NATIONAL ASSOCIATION
By: /s/ Kevin Kosan
_________________________________
Kevin Kosan, Vice President
MONTEREY MANAGEMENT, INC. MONTEREY HOMES CORPORATION, INC.
Borrower Borrower
By: /s/ David A. Walls By: /s/ David A. Walls
_________________________________ ______________________________
David A. Walls, Vice President David A. Walls, Vice President
/s/ William W. Claverly /s/ Steven J. Hilton
____________________________________ _________________________________
William W. Claverly, Guarantor Steven J. Hilton, Guarantor
/s/ Benee Hilton
____________________________________
Benee Hilton, Guarantor
Page 25 of 25
<PAGE> 26
EXHIBIT A
LEGAL DESCRIPTION
Lots 3, 5, 15, 16, 17, 23, 27, 28, 31, 32, 33, 34, 35, 36, 37, 50, 52, 57, and
62, of COSTA VERDE, according to the plat of record in the office of the County
Recorder of Maricopa County, Arizona, recorded in Book 366 of Maps, Page 23.
AND,
Lots 2, 16, 19, 22, 25, 53, 88, 118, 127, 128, 132, 135, 156, 158, 159, 162, 198
and 199 of SCOTTSDALE COUNTRY CLUB-EAST NINE, according to the plat of record in
the office of the County Recorder of Maricopa County, Arizona, recorded in Book
287 of Maps, Page 18;
AND,
Lots 1 through 4, 6, 7, 9, 12, 15, 18, 29, 30, 32 through 35, 37 through 46, 50
though 53, 55 though 57 and 61 and Tracts A through I, of CANADA RIDGE,
according to the plat of record in the office of the County Recorder of Maricopa
County, Arizona, recorded in Book 376 of Maps, Page 45;
AND,
Units 1001 through 1014, 1018 through 1029, 1031 through 1045 and 1048 through
1096, of THE VINTAGE, a condominium as created by that certain Declaration
recorded April 26, 1995, in 95-232842 of Official Records and as shown on the
plat of said condominium recorded in Book 394 of Maps, Page 32 in the office of
the County Recorder of Maricopa County, Arizona, and Affidavit of Correction
recorded May 25, 1995, in 95-298154 of Official Records.
<PAGE> 27
EXHIBIT B
04-OCT-93
MONTEREY HOMES
PROJECT COST BUDGET
CANADA RIDGE
<TABLE>
<CAPTION>
PLAN
------------------------------------------------------------------------
Account 9321 9322 9323 9324 9325
Number Description (1858 SF) (2052 SF) (2288 SF) (2553 SF) (2810 SF)
- ------ --------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
0100 PLOT PLANS 35 35 35 35 35
0110 PLANS/BLUEPRINTS 50 50 50 50 50
0750 PORTABLE TOILET 50 50 50 50 50
0770 TRASH OUT 450 450 450 450 450
0800 PERMITS 2,835 3,073 3,181 3,314 3,444
1040 FINAL GRADE 200 200 200 200 200
1080 TERMITE PRETREAT 539 595 664 525 539
1610 CONCRETE SLAB 5,388 5,951 6,635 3,932 4,396
2100 CONCRETE DRIVE 900 900 900 900 900
2600 STUCCO 3,344 3,694 4,118 4,595 5,058
2650 STUCCO WALL 190 190 190 190 190
3000 FRAMING 13,805 15,246 17,000 18,969 20,878
3700 WINDOWS 2,025 2,237 2,494 2,783 3,063
3900 FIREBOX 680 680 680 680 680
4300 ROOFING 3,456 3,817 4,256 4,749 5,227
4500 PLUMBING 2,936 3,242 3,615 4,034 4,440
4700 ELECTRICAL 1,449 1,601 1,785 1,991 2,192
4720 UNDERGROUND ELECTRIC 115 115 115 115 115
4910 FIXTURES--LIGHT 400 400 400 400 400
5000 HVAC 2,378 2,800 2,929 3,268 3,597
5200 INSULATION 557 616 686 766 843
5400 DRYWALL 3,289 3,632 4,050 4,519 4,974
5700 CARPENTRY TRIM 2,508 2,770 3,089 3,447 3,794
5760 RAILINGS 0 0 0 400 400
5800 CABINETS 3,196 3,529 3,935 4,391 4,833
5900 COUNTERTOPS 600 700 600 600 600
6000 CULTURED MARBLE 1,654 1,826 2,036 2,272 2,501
6200 GARAGE DOOR 1,100 1,100 1,100 1,100 1,100
6300 PAINTING 1,542 1,703 1,899 2,119 2,332
6430 HOUSE NUMBERS 50 50 50 50 50
6600 CERAMIC FLOOR TILE 799 882 984 1,098 1,208
6700 CARPETING 1,319 1,457 1,624 1,813 1,995
6800 APPLIANCES 1,250 1,250 1,250 1,250 1,250
7020 MASONRY FENCE 1,100 1,100 1,100 1,100 1,100
7150 GATES 150 150 150 150 150
7400 ROUGH/FINAL CLEAN 223 246 275 306 337
7620 BATH ACCESSORIES 650 718 801 894 984
7910 FIRE SPRINKLERS-1ST DRAW 985 1,088 1,213 1,353 1,489
------ ------ ------ ------ ------
TOTAL VERTICAL COST 62,198 68,143 74,588 78,857 85,844
====== ====== ====== ====== ======
LOT RELEASE 26,434 26,434 26,434 26,434 26,434
====== ====== ====== ====== ======
</TABLE>
<PAGE> 28
EXHIBIT C
SCOTTSDALE CC
MONTEREY HOMES
PROJECT COST-PATIO HOME LOTS
TYPICAL LOST 68 X 110
22-Jun-94
<TABLE>
<CAPTION>
PLAN 11 PLAN 21 PLAN 31
Account LAGUNA NEWPORT BALBOA
Number Description 2535 SF 2777 SF TBD
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
0100 PLOT PLANS 50 50 TBD
0110 PLANS/BLUEPRINTS 22 22 TBD
0750 PORTABLE TOILET 100 100 TBD
0770 TRASH OUT 635 635 TBD
0800 PERMITS 4,141 4,241 TBD
1040 FINAL GRADE 650 650 TBD
1080 TERMITE PRETREAT 937 1,018 TBD
1610 CONCRETE 11,676 12,095 TBD
2300 GLASS BLOCK 1,550 1,700 TBD
2600 STUCCO 9,740 9,213 TBD
3000 FRAMING 30,750 32,814 TBD
3700 WINDOWS 4,200 4,191 TBD
3900 FIREBOX 550 550 TBD
4300 ROOFING 6,365 7,385 TBD
4500 PLUMBING 6,084 6,665 TBD
4700 ELECTRICAL 2,675 2,801 TBD
4720 UNDERGROUND ELECTRIC 165 165 TBD
4910 LIGHT FIXTURES 1,350 1,350 TBD
5000 HVAC 3,662 4,375 TBD
5200 INSULATION 1,690 1,740 TBD
5400 DRYWALL 6,595 7,229 TBD
5700 CARPENTRY TRIM 4,077 5,412 TBD
5800 CABINETS 5,852 5,970 TBD
5900 COUNTERTOPS 2,304 1,925 TBD
6200 GARAGE DOOR 625 625 TBD
6300 PAINTING 2,750 2,750 TBD
6430 CERAMIC TILE-HOUSE NUMBERS 35 35 TBD
6500 CULTURED MARBLE 2,663 3,052 TBD
6600 FLOORING 4,246 4,346 TBD
6800 APPLIANCES 1,587 1,587 TBD
7020 FENCE 1,675 1,675 TBD
7200 LANDSCAPING FRONT 2,150 2,150 TBD
7400 FINAL CLEAN 380 417 TBD
7620 BATH ACCESSORIES 661 646 TBD
7910 FIRE SPRINKLERS 1,430 1,520 TBD
-------- -------- ---
124,022 131,349 0
======== ======== ===
</TABLE>
LOT LEASE PRICE $93,500.00
<PAGE> 29
EXHIBIT C (cont'd)
SCOTTSDALE CC
MONTEREY HOMES
PROJECT COST-TOWNHOME LOTS
TYPICAL LOT 47 x 120
22-Jun-94
<TABLE>
<CAPTION>
PLAN 1 PLAN 2 PLAN 3 PLAN 4
PEBBLE
Account LA JOLLA DEL MAR BEACH CARMEL
Number Description 1826 SF 2044 SF 2183 SF 2439 SF
- ------- -------------------------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
0100 PLOT PLANS 22 22 22 22
0110 PLANS/BLUEPRINTS 50 50 50 50
0750 PORTABLE TOILET 100 100 100 100
0770 TRASH OUT 635 635 635 635
0800 PERMITS 3,825 3,914 3,955 4,026
1040 FINAL GRADE 650 650 650 650
1080 TERMITE PRETREAT 665 736 759 794
1610 CONCRETE 9,711 10,273 10,858 10,412
2300 GLASS BLOCK 0 0 1,200 0
2600 STUCCO 6,583 7,740 7,196 6,290
3000 FRAMING 22,825 25,550 25,869 28,658
3700 WINDOWS 3,900 3,783 2,856 3,900
3900 FIREBOX 550 550 550 550
4300 ROOFING 4,440 5,750 5,245 6,355
4500 PLUMBING 4,565 5,110 5,348 5,976
4700 ELECTRICAL 2,269 2,230 2,614 2,555
4720 UNDERGROUND ELECTRIC 165 165 165 165
4910 LIGHT FIXTURES 1,150 1,150 1,150 1,150
5000 HVAC 2,465 2,652 2,748 2,794
5200 INSULATION 1,170 1,130 1,390 1,470
5400 DRYWALL 4,790 5,626 5,852 6,475
5700 CARPENTRY TRIM 3,559 3,725 3,941 4,397
5800 CABINETS 4,348 5,312 4,852 4,673
5900 COUNTERTOPS 1,848 1,955 2,840 1,876
6200 GARAGE DOOR 625 625 625 625
6300 PAINTING 1,975 2,200 2,350 2,650
6430 CERAMIC TILE-HOUSE NUMBERS 35 35 35 35
6500 CULTURED MARBLE 2,007 2,721 2,615 2,771
6600 FLOORING 2,965 2,936 3,021 3,601
6800 APPLIANCES 1,587 1,587 1,587 1,587
7020 FENCE 1,675 1,675 1,675 1,675
7200 LANDSCAPING FRONT 2,150 2,150 2,150 2,150
7400 FINAL CLEAN 274 307 327 366
7620 BATH ACCESSORIES 834 808 793 947
7910 FIRE SPRINKLERS 1,050 1,150 1,200 1,380
-------- ------- ------- -------
95,462 105,002 107,223 111,760
======== ======= ======= =======
LOT RELEASE PRICE $60,500.00
</TABLE>
<PAGE> 30
EXHIBIT C (cont'd)
Scottsdale CC
Monterey Homes
Project Cost-Custom Lots
Typical Lot 135 x 110
22-Jun-94
<TABLE>
<CAPTION>
9401 9402 9403
Account Santa Fe Taos Ventana
Number Description 3089 SF 3672 SF 4279 SF
- -------- ---------------------------------- ------- ------- -------
<S> <C> <C> <C> <C>
0100 Plot Plans $ 22 $ 22 $ 22
0110 Plans/Blueprints 100 100 100
0210 Sitework 11,500 11,500 11,500
0750 Portable Toilet 50 50 50
0770 Trash Out 920 920 920
0800 Permits 4,458 4,585 4,962
1040 Final Grade 285 285 285
1080 Termite Pretreat 2,309 1,403 1,647
1610 Concrete 11,000 12,000 13,350
2600 Stucco 7,875 8,550 8,400
3000 Framing 38,805 43,657 48,426
3700 Windows 8,454 8,948 9,378
3900 Firebox 492 525 483
4300 Roofing 6,928 7,700 8,650
4500 Plumbing 8,505 9,635 11,165
4700 Electrical 3,785 4,472 5,004
4720 Underground Electric 700 700 700
4910 Light Fixtures 1,650 1,650 1,650
5000 HVAC 4,190 4,584 5,369
5200 Insulation 1,655 1,940 2,290
5400 Drywall 7,500 8,900 10,125
5700 Carpentry Trim 5,448 7,170 6,591
5800 Cabinets 5,291 9,139 7,664
5900 Countertops 2,373 3,145 3,919
6200 Garage Door 1,225 1,225 1,225
6300 Painting 3,250 3,700 4,200
6430 Ceramic Tile-House Numbers 75 75 75
6500 Cultured Marble 3,996 5,756 6,299
6600 Flooring 4,944 5,826 7,002
6800 Appliances 1,587 1,587 1,587
7020 Fence 400 400 400
7400 Final Clean 370 440 513
7620 Bath Accessories 1,175 1,293 1,452
7910 Fire Sprinklers 2,075 2,395 3,923
-------- -------- --------
153,392 174,277 189,326
======== ======== ========
Lot Release Price $115,500.00
</TABLE>
<PAGE> 31
EXHIBIT D
Monterey Homes 04-Oct-93
Project Cost Budget
Costa Verde
<TABLE>
<CAPTION>
PLAN
-------------------------------------------------------------------------
Account 9321 9322 9323 9324 9325
Number Description (1858 SF) (2052 SF) (2288 SF) (2553 SF) (2810 SF)
- -------- ------------------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
0100 Plot Plans 35 35 35 35 35
0110 Plans/Blueprints 50 50 50 50 50
0750 Portable Toilet 50 50 50 50 50
0770 Trash Out 450 450 450 450 450
0800 Permits 2,835 3,073 3,181 3,314 3,444
1040 Final Grade 200 200 200 200 200
1080 Termite Pretreat 539 595 664 525 539
1610 Concrete Slab 5,388 5,951 6,635 3,932 4,396
2100 Concrete Drive 900 900 900 900 900
2600 Stucco 3,344 3,694 4,118 4,595 5,058
2650 Stucco Wall 190 190 190 190 190
3000 Framing 13,805 15,246 17,000 18,969 20,878
3700 Windows 2,025 2,237 2,494 2,783 3,063
3900 Firebox 680 680 680 680 680
4300 Roofing 3,456 3,817 4,256 4,749 5,227
4500 Plumbing 2,936 3,242 3,615 4,034 4,440
4700 Electrical 1,449 1,601 1,785 1,991 2,192
4720 Underground Electric 115 115 115 115 115
4910 Fixtures -- Light 400 400 400 400 400
5000 HVAC 2,378 2,800 2,929 3,268 3,597
5200 Insulation 557 616 686 766 843
5400 Drywall 3,289 3,632 4,050 4,519 4,974
5700 Carpentry Trim 2,508 2,770 3,089 3,447 3,794
5760 Railings 0 0 0 400 400
5800 Cabinets 3,196 3,529 3,935 4,391 4,833
5900 Countertops 600 700 600 600 600
6000 Cultured Marble 1,654 1,826 2,036 2,272 2,501
6200 Garage Door 1,100 1,100 1,100 1,100 1,100
6300 Painting 1,542 1,703 1,899 2,119 2,332
6430 House Numbers 50 50 50 50 50
6600 Ceramic Floor Tile 799 882 984 1,098 1,208
6700 Carpeting 1,319 1,457 1,624 1,813 1,995
6800 Appliances 1,250 1,250 1,250 1,250 1,250
7020 Masonry Fence 1,100 1,100 1,100 1,100 1,100
7150 Gates 150 150 150 150 150
7400 Rough/Final Clean 223 246 275 306 337
7620 Bath Accessories 650 718 801 894 984
7910 Fire Sprinklers--1st Draw 985 1,088 1,213 1,353 1,489
------- ------- ------- ------- -------
Total Vertical Cost 62,198 68,143 74,588 78,857 85,844
======= ======= ======= ======= =======
Lot Release 43,479 43,479 43,479 43,479 43,479
======= ======= ======= ======= =======
</TABLE>
<PAGE> 32
EXIBIT E
MONTEREY HOMES
VINTAGE CONDOMINIUMS
BUILDING CONSTRUCTION BUDGET
<TABLE>
<CAPTION>
ACCOUNT ACCOUNT 4 PLEX DUPLEX
NUMBER DESCRIPTION 5945 SF 3260 SF
- --------------------------- ------- -------
<S> <C> <C> <C>
0700 Trash clean/haul 700 700
0800 Building permits 10,795 5,580
1040 Rough grade 350 350
1050 Remove dirt 500 500
1080 Termite pretreat 1,040 1,030
1610 Concrete 14,837 11,509
2200 Foam popouts 787 365
2500 Gypcrete 2,450 0
2600 Stucco 16,446 10,386
3000 Framing 66,775 29,993
3700 Windows 6,531 3,583
3900 Firebox 2,816 1,384
4300 Roofing 7,750 7,750
4480 Roof deck coating 825 0
4500 Plumbing 16,960 9,855
4600 Acrylic tubs 1,512 756
4700 Electrical 11,910 6,880
4910 Light fixtures 998 525
5000 HVAC 8,914 4,794
5200 Insulation 3,737 1,959
5400 Drywall 18,626 9,571
5700 Carpentry trim 10,239 5,359
5760 Railings (interior) 1,483 0
5770 Railings (exterior) 3,854 250
5800 Cabinets 9,227 5,920
5900 Countertops 1,880 976
6200 Garage door 1,970 1,090
6300 Painting 7,175 3,950
6500 Cultured marble 5,095 2,509
6600 Flooring 5,832 2,976
6800 Appliances 3,264 1,632
7020 Masonry fence 1,541 2,914
7150 Fence gates 550 550
7400 Rough/final clean 654 359
7620 Bath accessories 1,694 1,183
7910 Fire sprinklers 4,257 2,218
------- -------
253,974 139,356
======= =======
Building Pad 111,248 55,624
</TABLE>
<PAGE> 33
[NORWEST LOGO]
EXHIBIT F
CONSTRUCTION LOAN AGREEMENT
20 DRAW DISBURSEMENT SYSTEM
Co-Borrowers: Monterey Management, Inc. and Monterey Homes Corporation
Account: # ___________________________________
Legal: See Exhibit A attached hereto for legal descriptions of Costa Verde,
Canada Hills, Scottsdale CC and Vintage projects.
The following information is intended to outline the requirements and procedures
to be used by Norwest Bank Arizona, National Association ("Bank") in the
disbursement of the construction funds. Borrower understands and acknowledges
that the disbursement system set forth below has been selected by the Bank for
its sole protection in disbursing the loan proceeds and Borrower equity funds,
if any, and that the Bank neither acts as an agent or fiduciary for the Borrower
nor warrants the legal validity or correctness of any lien waivers or other
documents required by the provision hereof, which lien waivers and other
documents are for the sole benefit of the Bank.
Attention Builder:
All lien waivers, if required, must meet Arizona Statutory requirements. Prior
to any loan advance an inspection is required to be performed by a Bank approved
inspector. The inspection must be acceptable to the Bank and is for the sole
benefit of the Bank. The Borrower shall pay for such inspections.
The Bank reserves the right to audit, investigate or review the book, records or
any other documentation maintained by the Borrower as to lienwaivers, invoices,
contracts, change orders and any other documentation pertaining to the
construction of houses financed by the Bank.
Disbursements:
The amounts established for the completion of the construction units to be built
are as detailed on Exhibits B, C, D and E aka the Project Costs. The amount
available for funding the construction is the residual amount after first
deducting the lot release, the loan fee, the interest reserve and the inspection
fee, see "The Vintage Loan Amounts" schedule attached to this exhibit and made a
part hereof.
Builder will request inspection by writing to Bank, Attention: Commercial Real
Estate Department MS 9008 at 3300 N. Central Ave., Phoenix, Arizona 85012-2501
or by fax at 602/248-3661 no more frequently than once a month. Disbursements
shall be made in five (5%) percent increments according to the schedule on page
two of this exhibit.
____ Borrower agrees that interest will be paid monthly from an interest
reserve as billed by Bank on advances outstanding.
____ Interest is to be charged to the Borrower's note monthly on advances
outstanding.
The following individuals are authorized to approve draws and change
orders on behalf of the Borrower until otherwise notified by Borrower in
writing:
Specimen signatures:
/s/ William W. Cleverly /s/ Steven J. Hilton /s/ David A. Walls
_________________________ _________________________ ____________________
William W. Cleverly Steven J. Hilton David A. Walls
<PAGE> 34
AMENDMENT TO AMENDED AND RESTATED LOAN AGREEMENT
THIS AMENDMENT TO AMENDED AND RESTATED LOAN AGREEMENT (the "Amendment") is
entered into as of the 10th day of October, 1995, by and between MONTEREY
MANAGEMENT, INC. and MONTEREY HOMES CORPORATION, INC., jointly and severally
(referred to herein as "Co-Borrower," "Borrower" or "Borrowers," as appropriate
in the context), and NORWEST BANK ARIZONA, NATIONAL ASSOCIATION, a national
banking association ("Bank").
RECITALS:
A. Bank and Co-Borrowers entered into an Amended and Restated Loan
Agreement (the "Agreement"), dated August 8, 1995, pursuant to which
the Bank consolidated then existing credit lines made available by
Bank to Co-Borrowers and increased the amount thereof to TWELVE
MILLION FIVE HUNDRED THOUSAND AND N0/100 DOLLARS ($12,500,000.00) (the
"Master Credit Line").
B. The purpose of the Master Credit Line was to fund certain projects
described in the Agreement.
C. Co-Borrowers now desire to fund an additional project with borrowings
under the Master Credit Line.
D. The Bank is willing to permit such funding under the terms and
conditions stated in this Amendment.
NOW, THEREFORE, in consideration of the promises and agreements contained herein
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the Bank and the Co-Borrowers agree as follows:
1. The RECITALS in the Agreement are hereby amended by deleting paragraph
D. in its entirety and replacing it with the following:
D. Monterey Management Inc, has acquired certain real property
located on Shea Road, east of Hayden Road in North Scottsdale,
Arizona. Monterey Management proposes to construct upon the real
estate, 96 single family residential condominiums (individually
and collectively referred to as the "Vintage Project") in
accordance with the plans, specifications, and engineering
studies prepared by Linderoth Associates Architects and Planners
(the "Vintage Plans").
2. The RECITALS in the Agreement art hereby amended by redesignating
paragraphs E., F., G., H., I. and J., thereof as F., G., H., I. J., and
K, respectively, and by adding a now paragraph E. as follows:
E. Monterey Management Inc., has acquired certain real property
located on Scottsdale Road, at the western entrance to Rose
Garden Lane North Scottsdale, Arizona. Monterey Management
proposes to construct upon the real estate 50 single family
residential bomes (individually and collectively referred to as
the "Grayhawk Project") (the Canada Hills Project, the SCC
Project, the Costa Verde Project, the Vintage Project and the
Grayhawk Project are referred to collectively herein as the
"Projects") in accordance with the plans, specifications, and
engineering studies prepared by Linderoth Associates Architects
and Planners (the "Grayhawk Plans") (the Canada Hills Plans, the
SCC Plans, the Costa Verde Plans, the Vintage Plans and the
Grayhawk Plans at referred to collectively herein as the
"Plans").
<PAGE> 35
3. The new paragraph G. (old paragraph F.) of the Agreement is deleted in
its entirety and replaced with the following:
G. Monterey Homes Corporation, Inc., shall be acquiring from
Monterey Management Inc.: (i) the completed single family
residences in the Canada Hills Project, under an option
agreement dated May 5, 1994 (the "Canada Hills Option"), (ii)
the completed single family residences in the SCC Project,
under an option agreement dated June 14, 1994 (the "SCC
Option"), (iii) the completed single family residences in the
Costa Verde Project, under an option agreement dated October
27, 1993 (the "Costa Verde Option"), (iv) the completed single
family condominium units in the Vintage Project, under an
option agreement dated April 7, 1995 (the "Vintage Option"),
and (y) the completed single family residences in the Grayhawk
Project, under an option agreement dated June 1, 1995 (the
"Grayhawk Option") (the Canada Hills Option, the SCCRCLP
Option, the Costa Verde Option, the Vintage Option and the
Grayhawk Option shall be referred to herein collectively as
the "Option Agreements"). References to "Property" with
respect to Monterey Homes Corporation shall only include those
residences which have been acquired under the Option
Agreements.
4. There is hereby added to paragraph 1. of the Agreement hereby a new
subparagraph e., as follows:
e. GRAYHAWK
i. The Grayhawk Construction Advances. Subject to the terms and
conditions of this Agreement, Borrower agrees to borrow from Bank
and, so long as any default described in Paragraph 8 hereof has
not occurred, Bank agrees to advance and disburse to or for the
benefit of Borrower for the payment of costs set forth in the
project budget attached as "Exhibit G" (the "Grayhawk
Construction Project Costs"), in accordance with the terms of
this Agreement a sum not to exceed the lesser of 80% of value or
100% of cost for any presold unit or spec unit and the lesser of
90% of cost or 75% of value for any model unit. Anything
contained in this Agreement to the contrary notwithstanding,
Bank shall not be obligated to extend credit to Borrower in an
amount in violation of any limitation or prohibition provided by
any applicable statute or regulation. At any one time, Borrower
shall be allowed to have under construction or completed no more
than two (2) spec units and no more than four (4) model units.
The balance of this commitment shall be restricted to qualified
presold units defined as having received a two percent (2%)
non-refundable downpayment plus a contingency free contract and
a permanent mortgage pre-qualification letter.
ii. Grayhawk Construction Advance Fees. Borrower shall pay a
non-refundable fee equal to one-half of one percent (1/2%) of the
committed amount attributable to each pre-sold unit started and
one percent (1%) per each spec or model unit started under this
commitment, payable at the time Borrower requests the first
disbursement for the construction of each such residence. All
residences to be constructed are to be completed and Bank to be
paid in full for the loan amount committed for the construction
of such residence no later than six (6) months from the date of
initial disbursement. Borrower will be required to notify Bank at
least fifteen (15) days in advance of the end of any six-month
construction period for any residence if such residence will not
be completed and sold in accordance with the six-month schedule
and an extension is required. Bank upon payment of an extension
fee equal to one-half of one percent (1/2%) of the committed
amount attributable to such unit will provide an additional four
(4) month period for any pre-sold or spec unit and an additional
six (6) month period for any model unit to complete construction
and repay the associated
<PAGE> 36
indebtedness for such unit during this fifteen (15) day period,
provided, further, that for any extension granted on a spec unit,
Borrower shall pay to Bank, at the time of request for the
extension, an amount sufficient to effect a ten percent (10%)
reduction of the outstanding principal balance attributable to
such spec unit.
5. Exhibit A to the Agreement is amended by adding the following:
Grayhawk Parcel:
Lots 98 through 147 inclusive, of GRAYHAWK PARCEL 1C. according to the
plat of record in the office of the County Recorder of Maricopa County,
Arizona, recorded in Book 397 of Maps, Page 30.
Excepting all oil, gas, metals and mineral rights and rights to other
materials, as provided by ARS 37-231, together with all Geothermal
Resources as provided by ARS 37-231 as reserved in Patent from the
State of Arizona, recorded May 26, 1995, in 95-300513 of Official
Records and in 95-300514 of Official Records; re-recorded June 2,
1995, in 95-317215 of Official Records and in 93-317217 of Official
Records, respectively.
6. Co-Borrowers shall execute and deliver to Bank such additional
documents as the Bank deems necessary for the inclusion of the Grayhawk
Project under the terms of the Agreement and the Collateral documents
relating thereto, including, but not limited to a Modification of Deed
of Trust, Security Agreement and UCC financing statements.
7. Except as expressly amended hereby, the Agreement shall remain in full
force and effect.
S. This Amendment shall be governed by and interpreted in accordance with
the laws of the State of Arizona.
IN WITNESS WHEREOF, the parties hereto have executed this instrument as of the
date first herein above set forth.
NORWEST BANK ARIZONA,
NATIONAL ASSOCIATION
By: /s/ KEVIN KOSAN
---------------------------------
Kevin Kosan, Vice President
MONTEREY MANAGEMENT, INC. MONTEREY HOMES CORPORATION, INC.
By: /s/ DAVID A. WALLS By: /s/ DAVID A. WALLS
--------------------------------- ------------------------------
David A. Walls, Vice President David A. Walls, Vice President
/s/ WILLIAM W. CLAVERLY /s/ STEVEN J. HILTON
- ------------------------------------ ---------------------------------
William W. Claverly, Guarantor Steven J. Hilton, Guarantor
/s/ BENEE HILTON
- ------------------------------------
Benee Hilton, Guarantor
<PAGE> 37
SECOND AMENDMENT TO AMENDED AND RESTATED LOAN AGREEMENT
This Second Amendment to Amended and Restated Loan Agreement (the
"Amendment") is entered into as of the 13th day of November, 1995, by and
between Monterey Management, Inc. and Monterey Homes Corporation, Inc., jointly
and severally (referred to herein as "Co-Borrower," "Borrower" or "Borrowers,"
as appropriate in the context), and Norwest Bank Arizona, National Association,
a national banking association ("Bank").
RECITALS
A. Bank and Co-Borrowers entered into an Amended and Restated Loan
Agreement (the "Agreement"), dated August 8, 1995, pursuant to which
the Bank consolidated then existing credit lines made available by
Bank to Co-Borrowers and increased the amount thereof to Twelve
Million Five Hundred Thousand and No/100 Dollars ($12,500,000.00)
(the "Master Credit Line"), further Bank and Co-Borrowers entered into
an Amendment to Amended and Restated Loan Agreement (the "First
Amendment"), dated October 10, 1995, pursuant to which the Bank agreed
to extend credit, under the Master Credit Line, to the Co-Borrower for
purposes of financing residential units at the Grayhawk subdivision.
B. The purpose of the Master Credit Line was to fund certain projects
described in the Agreement.
C. Co-Borrowers now desire to fund an additional project with borrowings
under the Master Credit Line.
D. The Bank is willing to permit such funding under the terms and
conditions stated in this Amendment.
Now, therefore, in consideration of the promises and agreements contained
herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Bank and the Co-Borrowers
agree as follows:
1. The Recitals in the Agreement are hereby amended by adding a new
paragraph F. as follows:
F. Monterey Management Inc., has acquired certain real property
located on Pima Road and Paraiso Drive in North Scottsdale,
Arizona. Monterey Management proposes to construct upon the
real estate, 41 single family residential homes (individually
and collectively referred to as the "Canada Vista Project")
(the Grayhawk Project, the Canada Hills Project, the SCC
Project, the Costa Verde Project, the Vintage Project and the
Canada Vista Project are referred to collectively herein as
the "Projects") in accordance with the plans, specifications,
and engineering studies prepared by Linderoth Associates
Architects and Planners (the "Canada Vista Plans") (the
Grayhawk Plans, the Canada Hills Plans, the SCC Plans, the
Costa Verde Plans, the Vintage Plans and the Canada Vista
Plans are referred to collectively herein as the "Plans").
2. The new paragraph G. (old Paragraph F.) of the Agreement is amended by
adding the following:
G. Monterey Homes Corporation, Inc., shall be acquiring from
Monterey Management Inc.: (vi) the completed single family
residences in the Canada Vista Project, under an option
agreement dated may 24, 1995 (the "Canada Vista Option"), (the
Grayhawk Option, the Canada Hills Option, the SCC Option, the
Costa Verde Option, the Vintage Option and the Canada Vista
Option shall be referred to herein collectively as the "Option
Agreements"). References to "Property" with respect to Monterey
Homes Corporation
<PAGE> 38
shall only include those residences which have been
acquired under the Option Agreements.
3. There is hereby added to paragraph I. of the Agreement hereby a
new paragraph f., as follows:
f. CANADA VISTA
i. THE CANADA VISTA CONSTRUCTION ADVANCES. Subject to the
terms and conditions of this Agreement, Borrower agrees to
borrow from Bank and, so long as any default described in
Paragraph 8 hereof has not occurred, Bank agrees to advance and
disburse to or for the benefit of Borrower for the payment of
costs set forth in the project budget attached as "Exhibit H"
(the "Canada Vista Construction Project Costs"), in accordance
with the terms of this Agreement a sum not to exceed the lesser
of 80% of value or 100% of cost for any presold unit and the
lesser of 80% of cost or 75% of value for any unsold unit and
the lesser of 90% of cost or 75% of value for any model unit.
Anything contained in this Agreement to the contrary
notwithstanding, Bank shall not be obligated to extend credit to
Borrower in an amount in violation of any limitation or
prohibition provided by any applicable statute or regulation. At
any one time, Borrower shall be allowed to have under
construction or completed no more than two (2) spec units and no
more than two (2) model units. The balance of this commitment
shall be restricted to qualified presold units defined as having
received a ten percent (10%) non-refundable downpayment plus a
contingency free contract and a permanent mortgage
pre-qualification letter.
ii. CANADA VISTA CONSTRUCTION ADVANCE FEES. Borrower shall
pay a non-refundable fee equal to one-half of one percent
(1/2%) of the committed amount attributable to each pre-sold
unit started and one percent (1%) per each spec or model unit
started under this commitment, payable at the time Borrower
requests the first disbursement for the construction of each
such residence. Pre-sold and spec residences to be constructed
are to be completed and Bank to be paid in full for the loan
amount committed for the construction of such residence no
later than nine (9) months from the date of initial
disbursement. Model residences to be constructed are to be
completed and Bank to be paid in full for the loan amount
committed for the construction of such residence no later
than twelve (12) months from the date of initial disbursement.
Borrower will be required to notify Bank at least fifteen (15)
days in advance of the end of any nine-month or 12-month
construction period, as applicable, for any residence if such
residence will not be completed and sold in accordance with
the nine-month or 12-month schedule and an extension is
required. Bank upon payment of an extension fee equal to
one-half of one percent (1/2%) of the committed amount
attributable to such unit will provide an additional four (4)
month period for any pre-sold or spec unit and an additional
six (6) month period for any model unit to complete
construction and repay the associated indebtedness for such
unit during this fifteen (15) day period, provided, further,
that for any extension granted on a spec unit, Borrower shall
pay to Bank, at the time of request for the extension, an
amount sufficient to effect a ten percent (10%) reduction of
the outstanding principal attributable to such spec unit.
4. Exhibit A to the Agreement is amended by adding the following:
CANADA VISTA PARCEL:
Lots 1 through 41 inclusive, of Canada Vista, according to the plat
of record in the office of the County Recorder of Maricopa County,
Arizona, recorded in Book 397 of Maps, Page 18.
<PAGE> 39
Excepting all oil, gas, metals and mineral rights and rights to other
materials, as provided by ARS 37-231, together with all Geothermal
Resources as provided by ARS 37-231 as reserved in Patent from the
State of Arizona, recorded ________, 1995, in 95-_______ of Official
Records and in 95-_______ of Official Records; re-recorded __________,
1995, in 95-_______ of Official Records and in 93-_______ of Official
Records, respectively.
5. Co-Borrowers shall execute and deliver to Bank such additional documents
as the Bank deems necessary for the inclusion of the Canada Vista
Project under the terms of the Agreement and the Collateral documents
relating thereto, including, but not limited to a Modification of Deed
of Trust, Security Agreement and UCC financing statements.
6. Except as expressly amended hereby, the Agreement shall remain in full
force and effect.
7. This Amendment shall be governed by and interpreted in accordance with
the laws of the State of Arizona.
IN WITNESS WHEREOF, the parties hereto have executed this instrument as of the
date first herein above set forth.
NORWEST BANK ARIZONA, NATIONAL ASSOCIATION
By: /s/ Kevin Kosan
______________________________
Kevin Kosan, Vice President
MONTEREY MANAGEMENT, INC. MONTEREY HOMES CORPORATION, INC.
By: /s/ David A. Walls By: /s/ David A. Walls
______________________________ ______________________________
David A. Walls, Vice President David A. Walls, Vice President
/s/ William W. Cleverly /s/ Steven J. Hilton
______________________________ ______________________________
William W. Cleverly, Guarantor Steven J. Hilton, Guarantor
/s/ Benee Hilton
______________________________
Benee Hilton, Guarantor
<PAGE> 40
_______________________________________________________________________________
THIRD AMENDMENT TO AMENDED AND RESTATED LOAN AGREEMENT
_______________________________________________________________________________
THIRD AMENDMENT TO AMENDED AND RESTATED LOAN AGREEMENT (the "Amendment") is
entered into as of the 19th day of February, 1996, by and between MONTEREY
MANAGEMENT, INC. and MONTEREY HOMES CORPORATION, INC., jointly and severally
(referred to herein as "Co-Borrower," "Borrower" or "Borrowers," as appropriate
in the context), and NORWEST BANK ARIZONA, NATIONAL ASSOCIATION, a national
banking association ("Bank").
RECITALS:
A. Bank and Co-Borrowers entered into an Amended and Restated Loan
Agreement (the "Agreement") dated August 8, 1995, pursuant to which the
Bank consolidated then existing credit lines made available by Bank to
Co-Borrowers and increased the amount thereof to TWELVE MILLION FIVE
HUNDRED THOUSAND AND N0/100 DOLLARS ($l2,500,000.00) (the "Master
Credit Line") further Bank and Co-Borrowers entered into an Amendment
to Amended and Restated Loan Agreement (the "First Amendment"), dated
October 10, 1995, pursuant to which the Bank agreed to extend credit,
under the Master Credit Line, to the Co-Borrower for purposes of
financing residential units at the Grayhawk subdivision, further Bank
and Co-Borrowers entered into an Amendment to Amended and Restated Loan
Agreement (the "Second Amendment"), dated November 13, 1995, pursuant
to which the Bank agreed to extend credit, under the Master Credit
Line, to the Co-Borrower for purposes of financing residential units at
the Canada Vista subdivision,
B. The purpose of the Master Credit Line was to fund certain projects
described in the Agreement.
C. Co-Borrowers now desire to amend the pricing structure of borrowings
under the Master Credit Line.
D. The Bank is willing to permit pricing structure changes under the terms
and conditions stated in this Amendment.
NOW, THEREFORE, in consideration of the promises and agreements contained herein
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the Bank and the Co-Borrowers agree as follows:
I. The paragraph 2. of the Agreement is amended by deleting paragraph 2.
in its entirety and replacing it with the following:
2. Interest Rate: Repayment, Prepayment. Interest on the loan
shall be calculated at an annual rate equal to three quarters
of one percent (3/4%) in excess of the Base Rate on the basis
of actual days elapsed in a year of 360 days. "Base Rate"
means the rate of interest established by the Bank from time
to time as its "base" or "prime" rate of interest. The rate is
subject to change as often as daily with each change in the
Base Rate. Interest shall be payable monthly with any unpaid
principal and interest immediately due and payable at the
maturity of each unit's construction term. Borrower may prepay
the Loan at any time in whole or in part without premium or
penalty upon written or telephonic notice to the Bank, which
notice must be received by Bank before 12:00 p.m. local time
in Arizona on any business day.
<PAGE> 41
2. Except as expressly amended hereby, the Agreement shall remain in full
force and effect.
3. This Amendment shall be governed by and interpreted in accordance with
the laws of the State of Arizona.
IN WITNESS WHEREOF, the parties hereto have executed this instrument as of the
date first herein above set forth.
NORWEST BANK ARIZONA, NATIONAL ASSOCIATION
By: /s/ Kevin Kosan
----------------------------
Kevin Kosan, Vice President
MONTEREY MANAGEMENT, INC. MONTEREY HOMES CORPORATION, INC.
By: /s/ Steven J. Hilton By: /s Steven J. Hilton
---------------------------- -----------------------------
Steven J. Hilton, Secretary Steven J. Hilton, Secretary
/s/ William W. Cleverly /s/ Steven J. Hilton
---------------------------- -----------------------------
William W. Cleverly, Guarantor Steven J. Hilton, Guarantor
/s/ Benee Hilton
-----------------------------
Benee Hilton, Guarantor
<PAGE> 1
EXHIBIT 23(b)
Consent of Independent Auditors
The Board of Directors
Homeplex Mortgage Investments Corporation
We consent to the reference to our firm under the caption "Experts" in
this Registration Statement (Form S-4) and the related Proxy
Statement/Prospectus of Homeplex Mortgage Investments Corporation.
Ernst & Young, LLP
Phoenix, Arizona
November 6, 1996
<PAGE> 1
EXHIBIT 23(c)
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Monterey Homes Corporation
Monterey Management, Inc.
Monterey Homes - Tucson Corporation and
Monterey Management - Tucson, Inc.
We consent to the use of our report on the combined financial
statements of Monterey Homes Corporation, Monterey Management, Inc., Monterey
Homes - Tucson Corporation and Monterey Management Tucson, Inc. as of December
31, 1994 and 1995 and for each of the years in the three-year period ended
December 31, 1995, included in the Homeplex Mortgage Investments Corporation
Registration Statement (Form S-4) and the related proxy statement/prospectus
and to the reference to our firm under the heading "Experts" in the Homeplex
Mortgage Investments Corporation Registration Statement (Form S-4) and the
related proxy statement/prospectus.
KPMG PEAT MARWICK, LLP
Phoenix, Arizona
November 8, 1996
<PAGE> 1
EXHIBIT 23(d)
CONSENT OF RAUSCHER PIERCE REFSNES, INC.
We hereby consent to (i) the inclusion of our opinion letter, dated
November 6, 1996, to the Board of Directors of Homeplex Mortgage Investments
Corporation (the "Company") as Appendix E to the Proxy Statement/Prospectus of
the Company and (ii) all references to Rauscher Pierce Refsnes, Inc. ("PRR") in
the sections captioned "Background of the Merger", "Board of Directors'
Recommendation for the Merger" and "Opinion of Financial Advisors of Homeplex"
which forms a part of this Registration Statement on Form S-4. In giving such
consent, we do not admit that we come within the category of persons whose
consent is required under, and we do not admit and we disclaim that we are
"experts" for purposes of the Securities Act of 1933, as amended, and the rules
and regulations promulgated thereunder.
RAUSCHER PIERCE REFSNES, INC.
By: /s/ Richard L. Davis
----------------------------
Managing Director
Dallas, Texas
November 6, 1996
<PAGE> 1
EXHIBIT 99
FRONT OF PROXY CARD
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
BOARD OF DIRECTORS PROXY FOR THE
ANNUAL MEETING
OF STOCKHOLDERS AT 8:00 A.M. WEDNESDAY, DECEMBER 18, 1996
THE WIGWAM RESORT HOTEL LITCHFIELD PARK, ARIZONA 85340
The undersigned stockholder of Homeplex Mortgage Investments
Corporation (the "Company") hereby appoints Alan D. Hamberlin and Jay R.
Hoffman or either of them, as proxies, each with full powers of substitution,
to vote the shares of the undersigned at the above-stated Annual Meeting and at
any adjournment(s) thereof on the following proposals:
-----------------------------------------------------------------------
(1) The Merger and related transactions, including the issuance of
up to approximately 4,700,000 shares of Homeplex's common
stock
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(2) The Charter Amendment to amend the Articles of Incorporation
of Homeplex
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(3) Election of William W. Cleverly, Steven J. Hilton and Alan D.
Hamberlin as Class I Post Merger Directors and Robert G.
Sarver and C. Timothy White as Class II Post Merger Directors
FOR all nominees (except as WITHHOLD AUTHORITY
provided to the contrary below) [ ] to vote for all
nominees [ ]
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY
INDIVIDUAL NOMINEE, WRITE THAT NOMINEE'S NAME HERE):
-----------------------------------------------------------------------
(4) Election of Alan D. Hamberlin, Jay R. Hoffman, Larry E. Cox,
Mark A. McKinley and Gregory K. Norris as Pre Merger Directors
FOR all nominees (except as WITHHOLD AUTHORITY
provided to the contrary below) [ ] to vote for all
nominees [ ]
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY
INDIVIDUAL NOMINEE, WRITE THAT NOMINEE'S NAME HERE):
-----------------------------------------------------------------------
(5) Issuance of Hamberlin Stock Options to Alan D. Hamberlin in
lieu of Hamberlin PSRs
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(6) The Stock Option Extension to amend the Stock Option Plan and
related stock option agreements
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(7) In their discretion, the proxies are authorized to vote upon
such other business or matters as may properly come before the
meeting or any adjournments thereof.
(CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE)
<PAGE> 2
BACK OF PROXY CARD
(CONTINUED FROM REVERSE SIDE)
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS AND WILL
BE VOTED IN ACCORDANCE WITH THE SPECIFICATIONS MADE ON THE REVERSE SIDE. IF A
CHOICE IS NOT INDICATED WITH RESPECT TO ITEMS (1) AND (2) THIS PROXY WILL BE
VOTED "AGAINST" SUCH ITEM. IF A CHOICE IS NOT INDICATED WITH RESPECT TO ITEMS
(3), (4), (5) OR (6) THIS PROXY WILL BE VOTED NEITHER "FOR" NOR "AGAINST" SUCH
ITEM. THE PROXIES WILL USE THEIR DISCRETION WITH RESPECT TO ANY MATTER
REFERRED TO IN ITEM (7). THIS PROXY IS REVOCABLE AT ANY TIME BEFORE IT IS
EXERCISED AS SET FORTH IN THE PROXY STATEMENT/PROSPECTUS.
Receipt herewith of the Notice of Annual Meeting and Proxy Statement,
dated November 12, 1996, is hereby acknowledged.
PLEASE SIGN, DATE AND MAIL TODAY.
Signature(s) ____________________________________________ (Date) ______________
NOTE: Please sign as name appears hereon. Joint owners should each sign.
When signing as attorney, executor, administrator, trustee or guardian, please
give full title as such.
