As filed with the Securities and Exchange Commission on June 20, 1997
Registration No. 333-_________
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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MONTEREY HOMES CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 86-0611231
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1531
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(Primary Standard Industrial
Classification Code Number)
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6613 North Scottsdale Road, Suite 200
Scottsdale, Arizona 85250
(602) 998-8700
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
----------------
Larry W. Seay
Vice President-Finance and Chief Financial Officer
Monterey Homes Corporation
6613 North Scottsdale Road, Suite 200
Scottsdale, Arizona 85250
(602) 998-8700
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
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Copies to:
Steven D. Pidgeon
Snell & Wilmer L.L.P.
One Arizona Center
400 E. Van Buren
Phoenix, Arizona 85004-0001
(602) 382-6000
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Approximate date of commencement of proposed sale to public: From time to time
after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
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CALCULATION OF REGISTRATION FEE
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Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Amount to be Offering Price Aggregate Registration
Securities to be Registered Registered(1) Per Unit(1) Offering Price(1)(2) Fee
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Warrants to Purchase 212,398 $4.0634 $863,058 $262
Common Shares Warrants
(1) The number of shares into which the Warrants are exercisable and the exercise price thereof are
subject to adjustment under certain antidilution provisions. Any increase in the Warrants
deemed to result from the operation of such provisions are registered hereunder pursuant to
Rule 416(a) under the Securities Act of 1933.
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(g)
based on the exercise price of the Warrants.
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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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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 20, 1997
PROSPECTUS
MONTEREY HOMES CORPORATION
212,398 WARRANTS TO PURCHASE AN AGGREGATE OF 256,345 SHARES OF COMMON STOCK
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This Prospectus relates to the offering from time to time by certain
holders (the "Selling Security Holders") of 212,398 warrants (the "Warrants") to
purchase an aggregate of 256,345 shares, subject to adjustment under certain
antidilution provisions (the "Warrant Shares"), of common stock, par value $.01
per share (the "Common Stock"), of Monterey Homes Corporation, a Maryland
corporation (the "Company"). The Warrants were acquired by the Selling Security
Holders in connection with the merger (the "Merger"), effective December 31,
1996, of Monterey Homes Construction II, Inc., an Arizona corporation ("MHC
II"), and Monterey Homes Arizona II, Inc., an Arizona corporation ("MHA II" and
collectively with MHC II, the "Monterey Entities" or "Monterey"), with and into
Homeplex Mortgage Investments Corporation, a Maryland corporation ("Homeplex"),
with Homeplex surviving and changing its name to Monterey Homes Corporation. See
"Prospectus Summary -- The Merger" and "The Merger." The Warrant Shares
obtainable upon exercise of the Warrants and covered by this Prospectus are
subject to adjustment under certain antidilution provisions and may be increased
or decreased in accordance with such provisions. The Warrants became exercisable
on the effective date of the Merger and will continue to be exercisable at any
time on or prior to October 15, 2001 or such earlier date that the Warrants
terminate in accordance with their terms. Each Warrant may be exercised for the
purchase of 1.2069 shares of Common Stock at an exercise price of $4.0634 per
Warrant. The exercise price of the Warrants will be reduced to $3.4634 per
Warrant, if during the eighteen months following the Merger the closing price of
the Common Stock on the New York Stock Exchange (the "NYSE") does not exceed
$9.00 per share for five consecutive trading days. See "Prospectus Summary,"
"The Merger - The Merger Consideration," and "Description of the Warrants."
The Warrants may be offered by the Selling Security Holders in
transactions in the over-the-counter market at prices obtainable at the time of
sale or in privately negotiated transactions at prices determined by
negotiation. The Selling Security Holders may effect such transactions by
selling the Warrants to or through securities broker-dealers, and such
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the Selling Security Holders and/or the purchasers of the
Warrants for whom such broker-dealers may act as agent or to whom they sell as
principal, or both (which compensation as to a particular broker-dealer might be
in excess of customary commissions). Additionally,
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agents or dealers may acquire Warrants or interests therein as a pledgee and
may, from time to time, effect distributions of the Warrants or interests
therein in such capacity. See "Selling Security Holders" and "Plan of
Distribution." The Selling Security Holders, the brokers and dealers through
whom sales of the Warrants are made and any agent or dealer who distributes
Warrants acquired as pledgee may be deemed "underwriters" within the meaning of
the Securities Act of 1933, as amended (the "Securities Act"), and any profits
realized by them on the sale of the Warrants may be considered to be
underwriting compensation.
The Company is not selling any of the Warrants and will not receive any
of the proceeds from the sale of the Warrants being offered by the Selling
Security Holders nor from the exercise of the Warrants. William W. Cleverly and
Steven J. Hilton (the "Monterey Stockholders") will receive proceeds of
$863,058, subject to adjustment pursuant to the antidilution provisions of the
Warrants, if all of the Warrants are exercised. See "Prospectus Summary" and
"The Merger - The Merger Consideration." The cost of registering the Warrants is
being borne by the Company.
The Company's Common Stock is traded on the NYSE under the symbol
"MTH." On June 13, 1997, the last sale price for the Common Stock as reported by
the NYSE was $7 3/4 per share. See "Price of Common Stock and Dividend Policy."
There is no market for the Warrants and no assurance can be given that a market
will develop. See "Risk Factors -- Absence of Public Trading Market."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
No dealer, salesman or any other person has been authorized to give any
information or to make any representation other than those contained in this
Prospectus, and, if given or made, such information or representation must not
be relied upon as having been authorized by the Company. Neither the delivery of
this Prospectus nor any sale made hereunder shall under any circumstances create
any implication that there has been no change in the affairs of the Company
since the date hereof.
This Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy any securities offered hereby in any jurisdiction in which
such offer or solicitation is not authorized or in which the person making such
offer or solicitation is not qualified to do so or to anyone to whom it is
unlawful to make such offer or solicitation.
THESE SECURITIES HAVE NOT 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 PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is ____________________, 1997.
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TABLE OF CONTENTS
Page
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Available Information..........................................................4
Forward-looking Statements.....................................................4
Prospectus Summary.............................................................5
Risk Factors...................................................................7
Current Events................................................................13
Use of Proceeds...............................................................13
Selling Security Holders......................................................14
Plan of Distribution..........................................................15
The Merger....................................................................16
Description of the Warrants...................................................22
Description of Common Stock...................................................24
Maryland Law and Certain Charter Provisions...................................26
Transfer Agent and Registrar..................................................28
Price of Common Stock and Dividend Policy.....................................28
Selected Financial and Operating Data.........................................29
Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................30
Business of the Company.......................................................40
Properties....................................................................53
Legal Proceedings.............................................................54
Management of the Company.....................................................54
Committees of the Board of Directors..........................................57
Director Compensation.........................................................57
Executive Compensation........................................................58
Security Ownership of Principal Stockholders
and Management...........................................................60
Certain Transactions and Relationships........................................61
Legal Matters.................................................................62
Experts.......................................................................62
Index to Consolidated Financial Statements...................................F-1
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AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (herein, together with all
amendments and exhibits thereto, referred to as the "Registration Statement")
under the Securities Act with respect to the securities offered hereby. This
Prospectus, which forms a part of the Registration Statement, does not contain
all of the information set forth in the Registration Statement and the exhibits
and schedules thereto, certain parts of which are omitted in accordance with the
rules and regulations of the Commission. For further information with respect to
the Company and securities offered hereby, reference is made to the Registration
Statement.
The Company 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, information statements,
and other information with the Commission. The Registration Statement and the
exhibits thereto, and the reports, proxy statements, information statements, and
other information, filed by the Company with the Commission pursuant to the
Exchange Act may be inspected and copied at the public reference facilities of
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street N.W., Washington,
D.C. 20549 and at the Commission's regional offices at Seven World Trade Center,
13th Floor, New York, New York 10048, and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates, and can also be
obtained electronically through the Commission's Electronic Data Gathering,
Analysis and Retrieval system at the Commission's Web Site (http://www.sec.gov).
The Company's Common Stock is listed on the NYSE and copies of the Registration
Statement and the exhibits thereto, and of such reports, proxy statements,
information statements, and other information, can also be inspected at the
offices of the NYSE at 20 Broad Street, 17th Floor, New York, New York 10005.
FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements. Additional written
or oral forward-looking statements may be made by the Company from time to time
in filings with the Commission or otherwise. The words "believe," "expect,"
"anticipate," and "project," and similar expressions identify forward-looking
statements, which speak only as of the date the statement was made. Such
forward-looking statements are within the meaning of that term in Section 27A of
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, home
sales, housing permits, backlog, inventory, capital expenditures, plans for
future operations, financing needs or plans, the impact of inflation, and plans
relating to products or services of the Company, as well as assumptions relating
to the foregoing. The Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events, or otherwise.
Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Potential risks
and uncertainties include such factors as the strength and competitive pricing
environment of the single-family housing market, changes in the availability and
pricing of residential mortgages, changes in the availability and pricing of
real estate in the markets in which the Company operates, demand for and
acceptance of the Company's products, the success of planned marketing and
promotional campaigns, and the ability of the Company and acquisition candidates
to successfully integrate their operations. Future events and actual results
could differ materially from those set forth in, contemplated by, or underlying
the forward-looking statements. Statements in this Prospectus, including under
the headings "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" below, describe additional
factors, among others, that could contribute to or cause such differences.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be
read in conjunction with, the more detailed information appearing elsewhere in
this Prospectus.
The Merger
Upon effectuation of the Merger on December 31, 1996, the Monterey
Entities merged with and into Homeplex, with Homeplex surviving and changing its
name to Monterey Homes Corporation. The Company also effected a one-for-three
reverse stock split concurrent with the Merger.
As consideration for the Merger, the Monterey Stockholders, who
together owned 100% of the outstanding capital stock of the Monterey Entities,
received 1,288,726 shares of Common Stock of the Company (the "Exchange
Shares"). Although all of the Exchange Shares were issued in the name of the
Monterey Stockholders, the Company will hold approximately 16.5% of the Exchange
Shares for release to holders of the Warrants upon exercise of the Warrants, and
the Company will remit the exercise price paid upon such exercise to the
Monterey Stockholders. Upon expiration of unexercised Warrants, the Company will
distribute the Exchange Shares allocable to such unexercised Warrants to the
Monterey Stockholders. The Monterey Stockholders are entitled to vote the
Exchange Shares issued in their names but allocated to the Warrants, prior to
the time the Warrants are exercised.
In addition to the Exchange Shares, the Company has reserved for
issuance 266,667 shares of Common Stock, subject to certain contingencies (the
"Contingent Stock"). Approximately 16.5% or 43,947 shares of the Contingent
Stock are allocable to the Warrants upon their exercise. When a Warrant is
exercised, a portion of the Contingent Stock will be distributed to the
exercising holder without additional consideration being paid therefor. For more
detailed information concerning the Merger and the Merger consideration, see
"The Merger."
Business of the Company
Prior to the Merger, the Company was engaged in the business of making
short-term and intermediate-term mortgage loans on improved and unimproved real
property ("Real Estate Loans") and owned mortgage assets. In 1993, the Company
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
the Company's Mortgage Instruments and the Mortgage Instruments underlying the
Company's Mortgage Interests currently secure or underlie
mortgage-collateralized bonds, mortgage pass-through certificates, or other
mortgage securities issued by various institutions.
Prior to the Merger, the Company had elected to be taxed as a real
estate investment trust (a "REIT") pursuant to Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended (the "Code"). Accordingly, the Company
generally was not subject to tax on its income to the extent that it distributed
at least 95% of its taxable earnings to stockholders and maintained its
qualification as a REIT. As part of the Merger, however, the Company
discontinued its status as a REIT because it would no longer be able to meet
certain tests with respect to the nature of its assets, share ownership and the
amount of
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distributions, among other things, which are required to be met in order to
qualify as a REIT. As a result, any future distributions to the Company's
stockholders will not be deductible by the Company in computing its taxable
income. In that regard, the Company's Board of Directors intends to retain
earnings to finance the growth of the Company's business. The future payment of
cash dividends, if any, will depend upon the financial condition, results of
operations, and capital requirements of the Company, as well as other factors
deemed relevant by the Board.
The Company's business has changed substantially as a result of the
Merger. The Company is no longer engaged primarily in the business of making
Real Estate Loans, but instead is engaged primarily in the homebuilding business
- -- the business engaged in by Monterey prior to the Merger.
Monterey designs, builds, and sells single-family, move-up and
semi-custom, luxury homes in the Phoenix and Tucson, Arizona metropolitan areas.
Monterey achieved revenue growth from $20.4 million in 1991 to $86.8 million in
1996 and achieved pre-tax income of $6 million in 1996. Monterey attributes this
growth principally to the market knowledge and experience of its management team
and strong economic conditions in the Phoenix metropolitan area. For the year
ended December 31, 1996, Monterey closed 307 homes generating revenues of $86.8
million and as of that date had a backlog of 120 homes under contract.
The Company is a Maryland corporation headquartered in Scottsdale,
Arizona. The Company's principal executive offices are located at 6613 North
Scottsdale Road, Suite 200, Scottsdale, Arizona 85250, and its telephone number
is (602) 998-8700.
For additional information concerning the Company, see "Business of the
Company" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The Offering
Securities Offered..................... 212,398 Warrants, which, when exercised,
would entitle the holders thereof to
purchase, in the aggregate, 256,345
shares of Common Stock including the
Contingent Stock issuable upon exercise
of the Warrants (equal to approximately
5.6% of the outstanding Common Stock of
the Company, after giving effect to the
exercise of the Warrants but not to the
exercise or conversion of any other
stock options, convertible securities,
or warrants), subject to adjustment
under certain antidilution provisions.
Transfer Restrictions................. Certain transfer restrictions apply to
the ownership of Common Stock of the
Company and will also apply to the
ownership of the Warrants. See "The
Merger - Amendment to the Articles of
Incorporation" and "The Merger - NOL
Carryforward" for a description of such
restrictions.
Warrants Outstanding.................. 212,398 Warrants are outstanding.
Common Stock Outstanding.............. As of June 13, 1997, 4,580,611 shares of
Common Stock were outstanding.
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Use of Proceeds....................... There will be no proceeds to the Company
from the sale of the Warrants by the
Selling Security Holders or from the
exercise of the Warrants by the Selling
Security Holders. Upon the exercise of
the Warrants, the Company will remit the
exercise price of $4.0634 per Warrant
(subject to adjustment), or aggregate
gross proceeds of approximately $863,058
if all of the Warrants are exercised, to
the Monterey Stockholders. See "Use of
Proceeds" and "The Merger."
Description of Warrants:
Expiration of Warrants................ October 15, 2001 or such earlier date
that the Warrants terminate in
accordance with their terms (the
"Expiration Date").
Exercise.............................. Each Warrant entitles the holder thereof
to purchase 1.2069 shares of Common
Stock (including the Contingent Stock
issuable upon exercise of a Warrant) for
$4.0634 (subject to adjustment as
described herein). The Warrants may be
exercised at any time on or prior to the
Expiration Date.
Adjustments........................... The number of shares of Common Stock for
which a Warrant is exercisable and the
purchase price thereof are subject to
adjustment from time to time upon the
occurrence of certain events, including,
among other things, certain issuances of
stock, options, or other securities,
certain dividends and distributions, and
certain subdivisions, combinations, and
reclassifications of Common Stock. A
Warrant does not entitle the holder
thereof to receive any dividends paid on
Common Stock.
For additional information concerning the Warrants, see "The Merger - The Merger
Consideration" and "Description of the Warrants." For additional information
concerning the Warrant Shares, see "Description of Common Stock."
RISK FACTORS
The Company's future operating results and financial condition are
dependent on the Company's ability to successfully design, develop, construct
and sell homes that satisfy dynamic customer demand patterns. Inherent in this
process are a number of factors that the Company must successfully manage in
order to achieve favorable future operating results and financial condition. In
addition, the price of the Company's Common Stock and the Warrants could be
affected not only by such operating and financial conditions, but also by other
factors. Potential risks and uncertainties that could affect the Company's
future operating results and financial condition and the performance of its
Common Stock and the Warrants include, without limitation, the factors discussed
below.
Restrictions on Transfer; Influence by Principal Stockholders. In order
to preserve maximum utility of certain net operating loss carryforwards, the
Company's charter, among other transfer limitations, precludes (i) any person
from transferring such shares if the effect thereof would be to make any person
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or group an owner of 4.9% or more of the outstanding shares of 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 the Company
for the foreseeable future. One or more of the foregoing factors could delay or
prevent a future change of control of the Company, which could depress the price
of the Common Stock. In addition, such restrictions will also apply to the
Warrants. Ownership of the Warrants will be aggregated with ownership of shares
of Common Stock otherwise held by a holder of Warrants to determine if the
allowable ownership percentage is exceeded. See "The Merger - Amendment to
Articles of Incorporation" and "The Merger - NOL Carryforward."
Possible Volatility of Stock Price. The market price of the Company's
Common Stock could be subject to significant fluctuations in response to certain
factors, such as, among others, variations in anticipated or actual results of
operations of the Company or other companies in the homebuilding industry,
changes in conditions affecting the economy generally, analysts' reports, and
general trends in the industry, as well as other factors unrelated to the
Company's operating results.
Absence of Public Trading Market for Warrants. The Company has not and
does not intend to apply for the listing of the Warrants on any national
securities exchange or to seek the admission thereof to trading in the NASDAQ
Stock Market, and there can be no assurance as to the liquidity of any market
for the Warrants.
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 the Company 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 Company's performance. 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, 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 the Company.
Customer demand for new housing also impacts the homebuilding industry.
Real estate analysts predict that new home sales in the Phoenix metropolitan
area may slow significantly during 1997 and 1998 and that such sales in the
Tucson metropolitan area will remain relatively flat in 1997. Any such slowing
in new home sales would have a material adverse affect on the Company's business
and operating results.
The homebuilding industry further is 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 the
Company believes that its projects are currently reflected on its balance sheet
at appropriate values, no assurance can be given that write-downs of some or all
of the Company'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 the Company expects to continue to experience,
variability in home sales and net earnings on a quarterly basis.
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Factors expected to contribute to this variability include, among others (i) the
timing of home closings and land sales, (ii) the Company'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 the Company 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
the Company's future results.
Expansion into Tucson Market. The Company began operations in the
Tucson, Arizona area in April 1996. Such operations are in the early stage and,
accordingly, there can be no assurance that the Company's Tucson operations will
be successful.
Interest Rates and Mortgage Financing. The Company believes that its
customers (particularly purchasers of luxury homes) have been somewhat less
sensitive to interest rates than many homebuyers. However, many purchasers of
the Company's 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,
the Company's home sales, gross margins, and net income may be adversely
impacted and such adverse impact may be material. In any event, the Company'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 the
Company. Any limitations or restrictions on the availability of such financing
could adversely affect the Company'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 the Company'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. The Company competes for residential home sales
with other developers and individual resales of existing homes. The Company's
competitors include large homebuilding companies, some of which have greater
financial resources than the Company, and smaller homebuilders, who may have
lower costs than the Company. Competition is expected to continue and become
more intense and there may be new entrants in the markets in which the Company
currently operates. Further, the Company will face a variety of competitors in
other new markets it may enter in the future.
Lack of Geographic Diversification; Limited Product Diversification.
The Company's operations are presently localized in the metropolitan Phoenix,
Arizona area, particularly in the City of Scottsdale. The Company began
operations in Tucson, Arizona in April 1996. The Company 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 the Company if
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the homebuilding market in Arizona should 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 1996, real estate analysts
predict that new home sales will slow significantly during 1997 and 1998.
Housing permits in the City of Scottsdale decreased moderately from 1995 to
1996. Housing permits in the Tucson metropolitan area have remained relatively
flat from 1995 to 1996, and are expected to remain flat in 1997. In addition,
the Company's limited product line could have an adverse impact on the Company
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. The Company is currently considering an acquisition that will expand
its geographic markets. See "Current Events."
Additional Financing; Limitations. The homebuilding industry is capital
intensive and requires significant up-front expenditures to acquire land and
begin development. Accordingly, the Company incurs substantial indebtedness to
finance its homebuilding activities. At December 31, 1996 and March 31, 1997,
the Company's liabilities totaled approximately $45,876,000 and $43,023,000,
respectively. The Company 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 the Company 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 the Company's operating results. There
can be no assurance that additional debt or equity financing will be available
in the future or on terms acceptable to the Company.
In addition, the amount and types of indebtedness that the Company can
incur is limited by the terms and conditions of its current indebtedness. The
Company must comply with numerous operating and financial maintenance covenants
and there can be no assurance that the Company will be able to maintain
compliance with such financial and other covenants. Failure to comply with such
covenants would result in a default and resulting cross defaults under the
Company's other indebtedness, and could result in acceleration of all such
indebtedness. Any such acceleration would have a material adverse affect on the
Company.
Government Regulations; Environmental Considerations. The Company is
subject to local, state, and federal statutes and rules regulating certain
developmental matters, as well as building and site design. In addition, the
Company is subject to various fees and charges of governmental authorities
designed to defray the cost of providing certain governmental services and
improvements. The Company 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. The Company
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 the Company's control.
The Company 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 the Company to incur
substantial compliance and other costs, and may also prohibit or severely
restrict development in certain
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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. The Company is currently considering expansion into
other areas of the Southwestern and Western United States. To date, the Company
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, the Company 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 the Company can expand into new markets on a profitable basis or
that it can successfully manage its expansion in such new markets, if any. For a
description of a significant acquisition currently being considered by the
Company, see "Current Events."
Future Acquisitions. The Company may acquire other homebuilding
companies to expand its operations. There is no assurance that the Company will
identify acquisition candidates that would result in successful 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, the Company's financial capabilities, and general economic and
business conditions. Any future acquisitions by the Company may result in
potentially dilutive issuances of equity securities, the incurrence of
additional debt and/or amortization of expenses related to goodwill and
intangible assets that could adversely affect the Company'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 the Company has had no or only limited direct experience and the
potential loss of key employees of the acquired company. For a description of a
significant acquisition currently being considered by the Company, see "Current
Events."
Dependence on Key Personnel. The Company's success is largely dependent
on the continuing services of certain key persons, including William W. Cleverly
and Steven J. Hilton, and the ability of the Company to attract new personnel
required to continue the development of the Company. The Company has entered
into five-year employment agreements with each of Messrs. Cleverly and Hilton. A
loss by the Company of the services of Messrs. Cleverly or Hilton, or certain
other key persons, could have a material adverse effect on the Company.
Dependence on Subcontractors. The Company 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 the Company. As a consequence, the Company 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 the Company, and the lack of availability of subcontractors
could have a material adverse affect on the Company.
Mortgage Asset Considerations. As of December 31, 1996 and March 31,
1997, the Company's portfolio of residual interests had a net balance of
approximately $3,909,000 and $3,817,000, respectively. The results of the
Company's operations will depend, in part, on the level of net cash flows
generated by the Company's mortgage assets. 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
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<PAGE>
depend upon the nature and terms of the mortgage assets, the 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 the Company 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 Risk. Mortgage prepayment rates vary from time to time and
may cause declines in the amount and duration of the Company'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.
No assurance can be given as to the actual prepayment rate of mortgage
loans included in or underlying the mortgage instruments in which the Company
has an interest.
Interest Rate Fluctuation Risks. Changes in interest rates affect the
performance of the Company's mortgage assets. A portion of the mortgage
securities secured by the Company's mortgage instruments and a portion of the
mortgage securities with respect to which the Company holds mortgage interests
bear variable interest or pass-through rates based on short-term interest rates
(primarily LIBOR). Consequently, changes in short-term interest rates
significantly influence the Company's net cash flows.
Increases in short-term interest rates increase the interest cost on
variable rate mortgage securities and, thus, tend to decrease the Company's net
cash flows from its mortgage assets. Conversely, decreases in short-term
interest rates decrease the interest cost on the variable rate mortgage
securities and, thus, tend to increase such net cash flows. As stated above,
increases in mortgage interest rates generally tend to increase the Company's
net cash flows by reducing mortgage prepayments, and decreases in mortgage
interest rates generally tend to decrease the Company's net cash flows by
increasing mortgage prepayments. Therefore, the negative impact on the Company'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 vice
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 from the Company's mortgage assets.
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<PAGE>
No assurances can be given as to the amount or timing of changes in
interest rates or their effect on the Company'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, expenses and
borrowing costs, are susceptible to accurate projection, the net cash flows
generated by the Company's mortgage assets cannot be predicted.
CURRENT EVENTS
On May 29, 1997, the Company signed a definitive agreement with Legacy
Homes, Ltd., Legacy Enterprises, Inc., and John and Eleanor Landon (together,
the "Legacy Entities"), to acquire the homebuilding and related mortgage service
business of Legacy Homes, Ltd. and its affiliates. Legacy Homes is a builder of
entry-level and move-up homes headquartered in the Dallas/Fort Worth
metropolitan area and was founded in 1988 by its current President, John Landon.
In 1996 Legacy Homes had pre-tax income of $8.8 million on sales of $84 million,
compared to pre-tax income of $5.7 million on sales of $62 million in 1995.
Legacy Homes closed escrow on 623 homes in 1996, a 32% increase over 1995, a
year in which Legacy was recognized as one of the top ten homebuilders in the
Dallas/Fort Worth area.
At Closing, the Company will pay an amount equal to the book value of
the acquired assets, plus $623,000 in cash and will issue approximately $4
million of Company common stock. The Company will also assume substantially all
the liabilities of the Legacy Entities, including indebtedness that will be
incurred prior to Closing to fund distributions to the current shareholders of
Legacy Homes that are expected to reduce its book value to $5 million. The
transactions are subject to normal closing conditions, including certain third
party consents. The transactions are expected to be consummated on or about June
30, 1997.
Additionally, the purchase price will include deferred contingent
payments for the four years following the closing of the transactions. The
deferred contingent payments will be equal to 12% of the pre-tax income of the
Company and 20% of the pre-tax income of the Texas division of the Company. In
no event will the total of the deferred contingent payments exceed $15 million.
In connection with the transactions, John Landon will enter into a
four-year employment agreement with the Company. He will be appointed Chief
Operating Officer and Co-Chief Executive Officer of the Company and President
and Chief Executive Officer of the Company's Texas division. Mr. Landon will
also be granted an option to purchase 166,667 shares of the Company's common
stock. In addition, the Company has agreed to use reasonable best efforts to
cause Mr. Landon to be elected to its Board of Directors.
USE OF PROCEEDS
There will be no proceeds to the Company from the sale of the Warrants
by the Selling Security Holders or from the exercise of the Warrants. Upon the
exercise of the Warrants and the issuance of the Warrant Shares, the Company
will remit the exercise price of $4.0634 per Warrant, or aggregate gross
proceeds of approximately $863,058 if all of the Warrants are exercised, to the
Monterey Stockholders. See "The Merger - The Merger Consideration."
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<PAGE>
SELLING SECURITY HOLDERS
Certain Selling Security Holders may sell their Warrants on a delayed
or continuous basis. The Registration Statement has been filed pursuant to Rule
415 under the Securities Act to afford holders of the Warrants the opportunity
to sell such securities in public transactions rather than pursuant to
exemptions from the registration and prospectus delivery requirements of the
Securities Act.
The following table sets forth certain information as of June 13, 1997,
with respect to the number of Warrants held by each Selling Security Holder.
None of the Selling Security Holders has had a material relationship with the
Company within the past three years other than as a result of the ownership of
the Warrants except as noted herein. The Selling Security Holders may offer all
or some of the Warrants that they hold pursuant to the offering contemplated by
this Prospectus at various times. Therefore, no estimate can be given as to the
amount of Warrants that will be held by the Selling Security Holders upon
completion of such offering. The Warrants may be offered from time to time by
the Selling Security Holders named below:
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK INTO WHICH
THE WARRANTS ARE EXERCISABLE
WARRANTS PERCENT OF COMMON
OWNER PRIOR TO THIS OFFERING OFFERED FOR SALE NUMBER STOCK OUTSTANDING(1)
<S> <C> <C> <C>
AC Leadbetter & Sons Inc. Profit-
Sharing Plan U/A DTD 6-1-84 2,655 3,204 .07%
Thomas Baer & Michelle Baer Jt. Ten 26,550 32,043 .70%
Bear Stearns Securities Corp. Maverick
Capital LP 13,275 16,021 .35%
Boston Provident Partners LP 21,240 25,634 .56%
Capital Investments Inc 26,550 32,043 .70%
DDM Associates 5,310 6,409 .14%
Kindy French 7,965 9,613 .21%
Meslrow Alternative Strategies Fund LP 5,310 6,409 .14%
Max Palevsky 2,655 3,204 .07%
Perry Partners 53,100 64,086 1.40%
Rath Foundation Inc 26,550 32,043 .70%
Value Partners Ltd 21,240 25,634 .56%
(1) As of June 13, 1997, 4,580,611 shares of Common Stock of the Company were outstanding.
</TABLE>
Information concerning the Selling Security Holders may change from
time to time and may be set forth in supplements to this Prospectus if required.
The number of Warrant Shares underlying the
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<PAGE>
Warrants is subject to adjustment in certain events (See "Description of the
Warrants" below). Accordingly, the number of Warrants offered hereby may
increase or decrease.
PLAN OF DISTRIBUTION
The Selling Security Holders or their nominees or pledgees may sell or
distribute some or all of the Warrants from time to time through dealers,
brokers, or other agents or directly to one or more purchasers, including
pledgees in brokerage transactions, in a combination of such transactions or by
any other legally available means. Such transactions may be effected by the
Selling Security Holders at market prices prevailing at the time of sale, at
prices related to such prevailing market prices, at negotiated prices, or at
fixed prices, which may be changed. Brokers, dealers, or agents participating in
such transactions as agent may receive compensation in the form of discounts,
concessions, or commissions from the Selling Security Holders (and, if they act
as agent for the purchaser of such shares, from such purchaser). Such discounts,
concessions, or commissions as to a particular broker, dealer, or agent might be
in excess of those customary in the type of transaction involved. This
Prospectus also may be used, with the Company's consent, by donees of the
Selling Security Holders, or by other persons acquiring Warrants and who wish to
offer and sell such Warrants under circumstances requiring or making desirable
its use. To the extent required, the Company will file, during any period in
which offers or sales are being made, one or more supplements to this Prospectus
to set forth the names of donees of the Selling Security Holders and any other
material information with respect to the plan of distribution not previously
disclosed. In addition, Warrants which qualify for sale pursuant to Section 4
of, or Rules 144 or 144A under, the Securities Act may be sold under such
provisions rather than pursuant to this Prospectus.
The Selling Security Holders and any such brokers, dealers, or agents
that participate in such distribution may be deemed to be "underwriters" within
the meaning of the Securities Act, and any discounts, commissions, or
concessions received by any such underwriters, brokers, dealers, or agents might
be deemed to be underwriting discounts and commissions under the Securities Act.
Neither the Company nor the Selling Security Holders can presently estimate the
amount of such compensation. The Company knows of no existing arrangements
between any Selling Security Holder and any other Selling Security Holder,
underwriter, broker, dealer, or other agent relating to the sale or distribution
of the shares of Common Stock.
The Selling Security Holder will be subject to applicable provisions of
the Exchange Act and the rules and regulations thereunder, including without
limitation Regulation M, which provisions may limit the timing of purchases and
sales of any of the shares of Common Stock by the Selling Security Holders.
All of the foregoing may affect the marketability of the Common Stock.
The Company will pay substantially all of the expenses incident to this
offering of the Warrants by the Selling Security Holders to the public other
than commissions and discounts of brokers, dealers, or agents. Each Selling
Security Holder may indemnify any broker, dealer, or agent that participates in
transactions involving sales of the Warrants against certain liabilities,
including liabilities arising under the Securities Act. The Company has agreed
to indemnify the Selling Security Holders against certain liabilities including
certain liabilities under the Securities Act. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers, or persons controlling the Company, the Company 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.
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<PAGE>
THE MERGER
The Merger was effected on December 31, 1996, and was completed
pursuant to the terms of an Agreement and Plan of Reorganization, dated
September 13, 1996, by and among Homeplex, the Monterey Entities, and the
Monterey Stockholders (the "Merger Agreement"). Upon consummation of the Merger,
the Company's name was changed to Monterey Homes Corporation and the Company's
NYSE ticker symbol was changed to MTH. In addition, a one-for-three reverse
stock split of the Company's issued and outstanding Common Stock was effected.
Except as otherwise indicated, the share information contained herein reflects
the one-for-three reverse stock split.
The Merger Consideration
Prior to the Merger, all of the outstanding common stock of Monterey
was owned by the Monterey Stockholders, William W. Cleverly and Steven J.
Hilton. As consideration for the Merger, the Monterey Stockholders received
1,288,726 shares of Common Stock of the Company (the Exchange Shares), such
number being equal to (i) the book value of the Monterey Entities on the
effective date of the Merger ($2.5 million after the effectuation of certain
distributions) determined in accordance with generally accepted accounting
principles ("GAAP") consistent with the historical combined financial statements
of the Monterey Entities, 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 of the Merger, determined in accordance with GAAP consistent
with the historical consolidated financial statements of Homeplex.
Prior to the Merger, the Monterey Entities had issued and had
outstanding warrants to purchase 400,000 shares of common stock of such
companies (the "Monterey Warrants") at an exercise price of $6.25 per share. The
Monterey Warrants represented approximately 16.5% of the fully diluted
capitalization of the Monterey Entities (2,427,776 shares). On the effective
date of the Merger, the Monterey Warrants were converted into the Warrants based
on a formula that would allow the Warrants to purchase a number of shares of
Common Stock of the Company determined by multiplying 400,000 by the ratio of
(i) the total number of Exchange Shares issued in the Merger (as calculated
above but without giving effect to the one-for-three reverse stock split)
divided by (ii) 2,427,776 (the "Warrant Conversion Ratio"). The exercise price
of the Warrants was adjusted by dividing the exercise price of the Monterey
Warrants immediately prior to the Merger by the Warrant Conversion Ratio. In
addition, the exercise price of the Warrants was adjusted by a factor designed
to compensate for certain distributions made to the Monterey Stockholders in
connection with the Merger. This adjustment resulted in a reduction in the
exercise price per share of the Warrants in an amount determined by dividing
such distributions by the number of outstanding common shares of the Monterey
Entities (2,027,776). There was also an additional $0.15 per share reduction
(pre-split) in the exercise price of the Warrants beyond the other reductions
described above. The number of Warrants into which the Monterey Warrants were
converted and the exercise price thereof was finally determined following
completion of audited financials for the year ended December 31, 1996. The
exercise price of the Warrants will be further reduced by $0.60 per share if
during the eighteen (18) month period following the Merger the closing price of
the Monterey Homes Common Stock on the NYSE does not exceed $9.00 per share for
five (5) consecutive trading days.
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<PAGE>
Although all of the Exchange Shares were issued in the name of the
Monterey Stockholders, the Company will hold approximately 16.5% of the Exchange
Shares issued in the names of the Monterey Stockholders for release to holders
of the Warrants upon exercise of the Warrants, and the Company will remit the
exercise price paid upon such exercises to the Monterey Stockholders. Upon
expiration of unexercised Warrants, the Company will distribute the appropriate
amount of Exchange Shares to the Monterey Stockholders. The Monterey
Stockholders are entitled to vote the Exchange Shares issued in their names but
allocated to the Warrants, prior to the time the Warrants are exercised.
Including the Exchange Shares allocated to the Warrants, Mr. Cleverly owns
647,696 shares or 14.3% of the outstanding Common Stock of the Company and Mr.
Hilton owns 644,363 shares or 14.2%. If all of the Warrants were exercised, Mr.
Cleverly would own 541,497 shares or 12% of the outstanding Common Stock of the
Company and Mr. Hilton would own 538,164 shares or 11.9% of the outstanding
Common Stock of the Company. These numbers exclude the Employment Options and
the Contingent Stock described below.
In addition to the Exchange Shares, the Company has reserved for
issuance 266,667 shares (post-split) of common stock, subject to certain
contingencies (the "Contingent Stock"). Of such stock, approximately 16.5% (the
"Contingent Warrant Stock") or approximately 43,947 shares are being reserved
pending exercise of the Warrants. When a Warrant is exercised, the holder will
receive not only the Exchange Shares into which the Warrant is exercisable, but
also his proportionate share of the Contingent Warrant Stock. The remaining
approximately 83.5% of the original 266,667 shares of Contingent Stock will be
issued to the Monterey Stockholders only if certain Common Stock average trading
price thresholds are reached at any time during the five years following the
effective date of the Merger as described below, provided that at the time of
any such issuance to a Monterey Stockholder, such Monterey Stockholder is still
employed with the Company. The average trading price thresholds and employment
restrictions will not apply to the Contingent Warrant Stock. The Contingent
Stock will be issued to the Monterey Stockholders as follows:
(i) if the closing price of the Common Stock on the NYSE (the "Stock
Price") averages $5.25 or more for twenty consecutive trading days at
any time during the five year period following the effective date of
the Merger, then 44,943 shares of the Contingent Stock will be issued
but only after the first anniversary of such effective date;
(ii) if the Stock Price averages $7.50 or more for twenty consecutive
trading days at any time during the five year period following the
effective date of the Merger, then an additional 88,888 shares of the
Contingent Stock will be issued but only after the second anniversary
of such effective date; and
(iii) if the Stock Price averages $10.50 or more for twenty consecutive
trading days at any time during the five year period following the
effective date of the Merger, then the remaining 88,889 shares of the
Contingent Stock will be issued but only after the third anniversary of
such effective date.
To illustrate the above, if the Stock Price averages $5.25 or more for
twenty consecutive trading days during the second quarter of 1997, 44,943 shares
of the Contingent Stock will be issued to the Monterey Stockholders on January
1, 1998. If, instead, the Stock Price first averages $5.25 or more for twenty
consecutive trading days in June of 1999, 44,943 shares of the Contingent Stock
will be issued on that date or as soon thereafter as is practicable. If the
Stock Price averages $10.50 or more for twenty consecutive trading days in the
second quarter of 1997, then 44,943 shares of the Contingent Stock will
17
<PAGE>
be issued on January 1, 1998, 88,888 shares will be issued on January 1, 1999,
and the remaining 88,889 shares will be issued on January 1, 2000.
The Indemnification Fund
The Company also retained from the Merger consideration 70,176 of the
Exchange Shares issued in the names of the Monterey Stockholders, equal to
$500,000 divided by the average closing price for the last five trading days
ending with the effective date of the Merger, such shares to be utilized as
security for the indemnification obligations in favor of the Company provided
under the Merger Agreement with respect to any breach of a representation or
covenant therein by the Monterey Entities or the Monterey Stockholders (the
"Indemnification Fund"). See "The Merger- Indemnification Rights." 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
the Company at any time by the Monterey Stockholders to replace all or any
portion of the Common Stock 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 of the Merger; provided, that if the
Monterey Stockholders are notified prior to the second anniversary of the
effective date of the Merger of a loss or claim, the amount of which is
uncertain or contingent, the Company will be entitled to retain an amount of
cash or a number of Exchange Shares that would be adequate to indemnify and hold
harmless the Company for each such loss or claim. The Monterey Stockholders will
be entitled to vote the shares of Common Stock held in the Indemnification Fund.
Holders of the Warrants will not bear a pro rata portion of any reduction in
Exchange Shares resulting from an indemnification claim.
Monterey Stockholder Employment Agreements and Employment Options
In connection with the Merger, the Company and the Monterey
Stockholders executed 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 the Company 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 of the Company,
provided that in no event will the bonus payable in any year exceed $200,000 for
each Monterey Stockholder. Under the Employment Agreements, the Monterey
Stockholders will serve as co-Chief Executive Officers and will also serve as
Chairman and President. If a Monterey Stockholder voluntarily terminates his
employment or is discharged for "Cause," the Company 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, the Company 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 the
Company.
The Employment Agreements contain non-compete provisions that restrict
the Monterey Stockholders until December 31, 2001, from, except in connection
with the 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 the
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<PAGE>
Company, (iii) soliciting any customer or supplier to discontinue its
relationship with the Company, 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
the Company 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 the Company without Cause.
The Employment Agreements also provide for the grant to each Monterey
Stockholder of options to purchase an aggregate of 166,667 shares of Common
Stock per Monterey Stockholder at an exercise price of $5.25 per share (the
"Employment Options"). 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 of the Merger; provided, however, the
Employment Options will vest in full and will be exercisable upon a change of
control of the Company prior to the third anniversary of the effective date of
the Merger. If a Monterey Stockholder voluntarily terminates his employment with
the Company, the Employment Options will be exercisable for a period of six
months following such termination. If a Monterey Stockholder is terminated
without Cause, the Employment Options will be immediately vested in full and
will be exercisable until December 31, 2002. If a Monterey Stockholders'
employment with the Company is terminated as a result of death or disability,
the Employment Options will be exercisable for a period of one year following
such termination. If the Company terminates a Monterey Stockholders' employment
for Cause, the Employment Options will terminate immediately.
Registration Rights
The Company has entered into a Registration Rights Agreement dated
December 31, 1996 with each of the Monterey Stockholders (the "Registration
Rights Agreements") pursuant to which it granted registration rights to the
Monterey Stockholders with respect to the Exchange Shares, the Contingent Stock,
and the Common Stock underlying the Employment Options. Pursuant to such rights,
subject to certain conditions and limitations, at any time after the first
anniversary of the effective date of the Merger, the Monterey Stockholders may
require the Company to register such shares under the Securities Act for resale
by the Monterey Stockholders. The Company has also agreed to take any action
required to be taken under applicable state securities or "blue sky" laws in
connection with such registration. The Company will pay all expenses relating to
the registration of shares pursuant to the Registration Rights Agreements. Each
Monterey Stockholder will 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 Monterey Stockholder's Common Stock.
Board of Directors
The board of directors of the Company currently consists of William W.
Cleverly, Steven J. Hilton, Alan Hamberlin, Robert G. Sarver, and C. Timothy
White. In connection with the Merger, the Articles of Incorporation of the
Company were amended to, among other things, provide for two classes of its
directors, designated as Class I and Class II. Each Class will consist of
one-half of the directors or as close an approximation thereto as possible. The
Class I directors were elected in December of 1996 for a two-year term. The
Class II directors were elected in December of 1996 for a one-year term. Messrs.
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Cleverly, Hilton, and Hamberlin are Class I directors and Messrs. Sarver and
White are Class II directors. At each annual meeting of stockholders, commencing
with the annual meeting to be held during the 1997 fiscal year of the Company,
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.
Pursuant to the Merger Agreement, if any of the current board members
of the Company cease to serve as a director of the Company at any time prior to
the first anniversary of the effective date of the Merger, the vacancy will be
filled by the remaining board members then serving as directors of the Company.
However, if either of the Monterey Stockholders ceases to serve as a director,
the vacancy will be filled by a person selected by the remaining Monterey
Stockholder. Prior to the Merger, the Company also amended its Bylaws to provide
that the Company will have five directors and that any change in the number of
directors must be approved by the shareholders of the Company.
Hamberlin Stock Options
Pursuant to an employment agreement entered into on December 21, 1995,
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 an option to Mr. Hamberlin
to purchase 750,000 shares (pre-split) 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"). Following the one-for-three reverse stock split
effected in connection with the Merger, the Hamberlin Stock Options reflect
options to purchase 250,000 shares of the Company common stock at $4.50 per
share. The Hamberlin Stock Options vest as follows: (i) 66,666 on December 21,
1995, (ii) 91,667 on December 21, 1996 and (iii) 91,667 on December 21, 1997;
provided, however, all options will vest in full if a change in control occurs
on or before December 20, 1998 that has not been unanimously agreed to by the
board of directors or upon a termination of Mr. Hamberlin's employment (without
his consent) by the Company for any reason other than death, disability, or
"Cause." "Cause" means 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 the Company. In
addition, the Hamberlin Stock Options will vest in their entirety prior to any
merger or consolidation in which the Company is not the surviving entity or any
reverse merger in which the Company is the surviving entity. An amendment to the
Hamberlin Stock Option Agreement was executed in connection with the Merger to
eliminate the acceleration of vesting of the Hamberlin Stock Options that may
otherwise have resulted upon consummation of the Merger. The Hamberlin Stock
Options are exercisable until December 21, 2000. In addition, Mr. Hamberlin has
also been granted other options to purchase 103,101 shares (post-split) of
Common Stock of the Company.
Amendment to Articles of Incorporation
In connection with the Merger, the Articles of Incorporation of the
Company were amended to, 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 Common Stock,
(iii) amend and make more restrictive the limitations on the transfer of Common
Stock to preserve maximum utility of the Company's net operating loss
carryforward (the "NOL Carryforward") (see "NOL Carryforward" below), and (iv)
provide for the Class I and Class II Directors (see "Board of Directors" above).
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With respect to the restrictions on transfer of the Common Stock, the
Articles of Incorporation of the Company generally prohibit concentrated
ownership of the Company which might jeopardize its NOL Carryforward. The
amended transfer restrictions generally preclude for a period of up to five
years any person from transferring shares of Common Stock (or any other
subsequently issued voting or participating stock) or rights to acquire Common
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. Direct and indirect ownership of
Common Stock and rights to acquire Common Stock are taken into consideration for
purposes of the transfer restrictions. These transfer restrictions will not
apply to (i) the exercise of any stock option issued by the Company that was
outstanding on the effective date of and immediately following the Merger, (ii)
exercise of the Hamberlin Stock Options, (iii) issuance of the Contingent
Shares, or (iv) exercise of the Employment Options. The board of directors of
the Company has the authority to waive the transfer restrictions under certain
conditions. The board of directors may also accelerate or extend the period of
time during which such transfer restrictions are in effect or modify the
applicable ownership percentage that will trigger the transfer restrictions if
there is a change in law making such action necessary or desirable. The board of
directors also has the power to make such other changes not in violation of law
as may be necessary or appropriate to preserve the Company's tax benefits. The
transfer restrictions discussed herein will apply to the transfer and exercise
of the Warrants. Ownership of Warrants will be aggregated with shares of Common
Stock otherwise owned by a holder to determine if the applicable ownership
percentage has been exceeded. The transfer restrictions described herein may
impede a change of control of the Company.
NOL Carryforward
The Company has a federal income tax net operating loss carryforward of
approximately $53 million, which expires at various times beginning in 2007 and
ending in 2009. It is anticipated that future income taxes paid by the Company
will be minimized and will consist primarily of state income taxes (since
utilization of the Company's state net operating loss may be significantly
limited) and the federal alternative minimum tax.
The ability of the Company 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 the Company before expiration of the NOL
Carryforward. The Company believes that (i) there has not been an "ownership
change" of the Company prior to the effective date of the Merger and (ii) the
Merger did not cause an "ownership change" to occur on the effective date. The
amendments to the Articles of Incorporation of the Company, which became
effective on the effective date of the Merger, include restrictions on the
transfer of Common Stock designed to prevent an "ownership change" with respect
to the Company after the Merger. See "Amendment to Articles of Incorporation"
above. Pursuant to Section 384 of the Code, the Company may not be permitted to
use the NOL Carryforward to offset taxable income resulting from sales of assets
owned by the Monterey Entities 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 Company will have sufficient earnings
after the Merger to fully utilize the NOL Carryforward.
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Indemnification Rights
The Company and its officers, directors, and agents are entitled to
indemnification for 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 the Monterey Entities'
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 of the Merger. The Monterey
Stockholders are entitled to indemnification for 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 the
Company'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 of the Merger.
A committee to be comprised of the independent directors of the Company
serving after the effective date of the Merger (the "Committee") was appointed
irrevocably pursuant to the Merger Agreement to exercise the Company's
indemnification rights and was authorized to act, as the Committee may deem
appropriate, as the Company'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 maximum aggregate amount of indemnification that may be required of
the Monterey Stockholders, on the one hand, and the Company, on the other,
pursuant to the Merger Agreement is $500,000 each. The Indemnification Fund is
the sole and exclusive source of reimbursement and indemnification for the
amount of any Loss or claim of the Company.
DESCRIPTION OF THE WARRANTS
The Warrants were issued in October 1994 and are governed by the
Warrant Agreement effective as of October 17, 1994 among certain predecessors of
Monterey and Norwest Bank Minnesota, N.A. (the "Warrant Agent"), as modified by
the Assumption Agreement dated as of December 31, 1996 among certain
predecessors of Monterey and the Warrant Agent (the "Warrant Agreement").
Holders of Warrants are referred to the Warrant Agreement which is included as
an exhibit to the Registration Statement for a complete statement of the terms
of the Warrants. The following summary does not purport to be complete and is
qualified in its entirety by reference to all of the provisions of the Warrant
Agreement. Capitalized terms used in this "Description of the Warrants" and not
defined herein have the meanings given to them in the Warrant Agreement.
Each Warrant entitles the holder to purchase one share of the Company's
Common Stock for $4.0634 per share (the "Purchase Price"), subject to adjustment
as described herein. At the time of exercise of a Warrant, the Warrant holder
will also receive an additional .2069 shares of the Contingent Warrant Stock for
each Warrant exercised, without the payment of any additional consideration or
exercise price. See "The Merger - The Merger Consideration." Moreover, the per
share exercise price of a Warrant will be reduced by an additional $0.60 if the
closing price for the Company's Common Stock on the NYSE does not reach or
exceed $9.00 per share for five consecutive days during the eighteen months
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following the effective date of the Merger (December 31, 1996). The Warrants
currently entitle the holders thereof to acquire, in the aggregate and including
the Contingent Warrant Stock that will be acquired on exercise of the Warrants,
256,345 shares of Common Stock. The Warrants became exercisable on the effective
date of the Merger and will continue to be exercisable through October 15, 2001
except as provided in the next sentence below. In the event that notice is given
in accordance with the Warrant Agreement in connection with the liquidation,
dissolution, or winding up of the Company, the right to exercise the Warrants
will expire at the close of business on the third full business day before the
date specified in such notice as the record date for determining registered
holders entitled to receive any distribution upon such liquidation, dissolution,
or winding up. The Company may not redeem the Warrants.
On the effective date of the Merger, the Monterey Warrants were
converted into Warrants of the Company, and the Company assumed all of the
rights and obligations of the Monterey Entities under the Warrant Agreement.
The Warrants may be exercised in whole or in part by surrendering at
the office of the Warrant Agent in Minneapolis, Minnesota, the Warrant
Certificate evidencing such Warrants, together with a subscription in the form
set forth on the reverse of the Warrant Certificate, duly executed and
accompanied by payment of the Purchase Price, in U.S. dollars, by tender of
federal funds or a certified or bank cashier's check, payable to the order of
the Warrant Agent. As soon as practicable after such exercise, the Company will
cause to be issued and delivered to the holder or upon his order, in such name
or names as may be directed by him, a certificate or certificates for the number
of full shares of Common Stock to which he is entitled. If fewer than all of the
Warrants evidenced by a Warrant Certificate are exercised, the Warrant Agent
will deliver to the exercising Warrant holder a new Warrant Certificate
representing the unexercised portion of the Warrant Certificate. Fractional
shares will not be issued upon exercise of a Warrant, and in lieu thereof, the
Company will pay to the holder an amount in cash equal to such fraction
multiplied by the Current Market Price Per Share, determined in accordance with
the Warrant Agreement as described below.
Irrespective of the date that certificates for Common Stock are
actually issued and delivered upon exercise of Warrants, the person in whose
name the certificate is to be issued will be deemed to have become the holder of
record of the stock represented thereby on the date when the Warrant Certificate
with the subscription duly executed and completed as described above is
surrendered and payment of the Purchase Price is made, unless the stock transfer
books of the Company are closed on such date, in which case, such person will be
deemed the record holder of the shares at the close of business on the next
succeeding date on which the stock transfer books are opened.
No service charge will be made for registration of transfer or exchange
upon surrender of any Warrant Certificate at the office of the Warrant Agent
maintained for that purpose. The Company may require payment of a sum sufficient
to cover any stamp or other tax or governmental charge that may be imposed in
connection with any registration of transfer or exchange of Warrant
Certificates.
Subject to certain conditions and limitations, and except in certain
specified cases, the number of Warrant Shares issuable upon the exercise of the
Warrants and/or the Purchase Price are subject to adjustment in certain events
including: (i) the issuance of Common Stock (including in certain cases the
issuance in a public offering of any stock, securities, obligation, option, or
other right or warrant that may be converted into, exchanged for, or satisfied
in shares of Common Stock) for consideration per share less
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than the Purchase Price prior to such issue, (ii) the declaration of a dividend
on Common Stock payable in Common Stock or the subdivision, combination, or
issuance of capital stock in connection with a reclassification of Common Stock,
(iii) any distribution of the Company's assets upon or with respect to its
Common Stock as a liquidating or partial liquidating dividend, and (iv) the
issuance of stock, securities, rights, options, or warrants to all holders of
the Common Stock or in an integrated transaction where more than 99% of such
instruments or securities are acquired by persons who, prior to the transaction,
were not security holders of the Company, entitling them to subscribe for or
purchase Common Stock or securities convertible into Common Stock at a price per
share less than the Current Market Price Per Share on the record date for the
issuance of such securities, instruments, or rights or the granting of such
securities, options, or warrants. The Current Market Price Per Share of the
Company's Common Stock on any date is determined in reference to (i) the average
of the daily closing prices (or if no sale is made on any trading date, the
average of the closing bid and asked prices) for the thirty consecutive trading
days commencing thirty-five trading days before such date, if the Company's
Common Stock is listed on an exchange, (ii) the average of the last reported
sale price or prices or the mean of the last reported bid and asked prices
reported by the National Association of Securities Dealers Automated Quotations
System ("NASDAQ"), or if not so quoted on NASDAQ, as quoted on the National
Quotations Bureau, Inc., for the thirty consecutive trading days commencing
thirty-five days before such date, or (iii) if neither (i) or (ii) is
applicable, the fair market value of the Common Stock as determined in good
faith by the Board of Directors of the Company.
In the event that the Company consolidates with, merges with or into,
or sells all or substantially all of its assets (for a consideration consisting
primarily of securities) to, another corporation, each Warrant thereafter shall
entitle the holder to receive upon exercise, the number of shares of common
stock or other securities or property which the holder would have received had
the Warrant been exercised immediately prior to the consolidation, merger, or
sale of assets.
In the event a bankruptcy or reorganization is commenced by or against
the Company, a bankruptcy court may hold that unexercised Warrants are executory
contracts which may be subject to rejection by the Company with approval of the
bankruptcy court. As a result, holders of the Warrants may, even if sufficient
funds are available, not be entitled to receive any consideration or may receive
an amount less than they would be entitled to if they had exercised their
Warrants prior to the commencement of any such bankruptcy or reorganization.
The holders of unexercised Warrants are not entitled, by virtue of
being such holders to exercise any rights whatsoever as stockholders of the
Company.
Subject to certain requirements, from time to time the Company and the
Warrant Agent, without the consent of the holders of the Warrants, may amend or
supplement the Warrant Agreement for certain purposes, including curing
ambiguities, defects, inconsistencies, or manifest errors, provided that such
amendments and supplements are not prejudicial to the rights of the Warrant
holders as indicated by the general sense or intent of the original language.
DESCRIPTION OF COMMON STOCK
The following summary of certain provisions of the Company's Common
Stock describes all material provisions of, but does not purport to be complete
and is subject to, and qualified in its entirety by, the Company's articles of
incorporation and by-laws and by the provisions of applicable law.
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The Company is authorized to issue up to 50,000,000 shares of Common
Stock, $0.01 par value. As of June 13, 1997, there were 4,580,611 shares of
Common Stock outstanding, held of record by 512 holders. Holders of Common Stock
are entitled to one vote for each share held on all matters submitted to a vote
of stockholders and do not have cumulative voting rights. Accordingly, holders
of a majority of the shares of Common Stock entitled to vote in any election of
directors may elect all of the directors standing for election. Holders of
Common Stock are entitled to receive ratably such dividends, if any, as may be
declared by the board of directors out of funds legally available therefor,
subject to any preferential dividend rights of any outstanding preferred stock.
Upon the liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to receive ratably the net assets of the Company
available after the payment of all debts and other liabilities and subject to
the prior rights of any outstanding preferred stock. Holders of Common Stock
have no preemptive (other than as determined in the sole discretion of the board
of directors of the Company), subscription, redemption or conversion rights. The
outstanding shares of Common Stock are, and the shares subject to Warrants will
be, when issued and paid for, fully-paid and nonassessable. The rights,
preferences, and privileges of holders of Common Stock are subject to, and may
be adversely affected by, the rights of the holders of shares of any series of
preferred stock which the Company may issue in the future. The Company is not
currently authorized to issue preferred stock under its articles of
incorporation.
The Company's articles of incorporation contain a provision allowing
action to be authorized by the affirmative vote of the holders of a majority of
the total number of shares of Common Stock outstanding and entitled to vote
thereon notwithstanding any provision of law requiring the authorization of the
action by a greater proportion than such a majority. This provision may allow
authorization of certain extraordinary transactions and amendment of the
Company's articles of incorporation, including an amendment changing the terms
or contract rights of any of its outstanding Common Stock by classification,
reclassification, or otherwise, by the affirmative vote of the holders of a
majority of the shares of Common Stock outstanding. But for such provision,
under Maryland law, such extraordinary transactions and amendment of the
articles of incorporation of the Company, with certain limited exceptions, would
require the affirmative vote of the holders of two-thirds of the outstanding
Common Stock entitled to vote thereon. The Common Stock is also subject to
significant restrictions on transfer. See "The Merger - Amendment to Articles of
Incorporation" and "The Merger - NOL Carryforward."
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MARYLAND LAW AND CERTAIN CHARTER PROVISIONS
The Company is incorporated in Maryland and is subject to the
provisions of the Maryland General Corporations Law (the "MGCL"), certain of
which provisions are discussed herein.
Business Combinations. The MGCL prohibits certain "business
combinations" (including, in certain circumstances and subject to certain
exceptions, a merger, consolidation, share exchange, asset transfer, issuance of
equity securities, or reclassification of securities) between a Maryland
corporation and an Interested Stockholder or any affiliate of an Interested
Stockholder. Subject to certain qualifications, an "Interested Stockholder" is a
person (a) who beneficially owns 10% or more of the voting power of the
corporation's shares after the date on which the corporation had 100 or more
beneficial owners of its stock, or (b) is an affiliate or associate of the
corporation and was the beneficial owner of 10% or more of the voting power of
the corporation's shares, at any time within the two-year period immediately
prior to the date in question and after the date on which the corporation had
100 or more beneficial owners of its stock. Unless an exemption applies, such
business combinations are prohibited for five years after the most recent date
on which the Interested Stockholder became an Interested Stockholder. Unless an
exemption applies, any business combination that is not so prohibited 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 outstanding 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. The MGCL
specifies a number of situations in which the business combination restrictions
described above would not apply. For example, such restrictions would not apply
to a business combination with a particular Interested Shareholder that is
approved or exempted by the board of directors of a corporation prior to the
time that the 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 the same
percentages and groups of the outstanding shares of voting stock of the
corporation as described above for approval of a business combination. No such
amendment to the charter of the Company has been effected.
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 or which that person is
entitled to vote (other than by revocable proxy), 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
stockholders to be held within 50 days of demand therefor to consider the voting
rights
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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 acquisition of control shares by
the acquiring person in a control share acquisition or if any meeting of
stockholders was held at which the rights of such shares were considered, as of
the date of such meeting. 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 by the acquiring
person 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 Company's
charter nor its Bylaws has provisions exempting any control share acquisitions.
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 Company's charter contains a provision limiting the personal
liability of officers and directors to the Company and its stockholders for
money damages to the fullest extent permitted under Maryland law.
In addition, with certain exceptions, 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 Company's charter provides that it
will indemnify (i) its directors to the full extent allowed under Maryland law,
(ii) its officers to the same extent it shall indemnify its directors, and (iii)
its officers who are not directors to such further extent as shall be authorized
by the board of directors and be consistent with law.
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TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is
ChaseMellon Shareholder Services.
PRICE OF COMMON STOCK AND DIVIDEND POLICY
Price of Common Stock
The Company's Common Stock is publicly traded on the NYSE under the
ticker symbol "MTH." The following table sets forth the high and low closing
sales prices, adjusted for stock splits, of the Common Stock, as reported by the
NYSE, for the periods indicated below.
High Low
---- ---
1997
First Quarter $7 1/4 $5 1/2
1996
Fourth Quarter 7 7/8 6 3/4
Third Quarter 8 1/4 6
Second Quarter 8 5/8 4 7/8
First Quarter 6 4 1/8
1995
Fourth Quarter 5 5/8 4 1/8
Third Quarter 6 3/8 4 1/2
Second Quarter 6 3/8 3 3/4
First Quarter 5 1/4 3
On June 13, 1997, the closing sales price of the Company's Common Stock
as reported by the NYSE was $7 3/4 per share. At that date, the number of
stockholder accounts of record of the Company's Common Stock was 512. The
Company believes that there are approximately 3,400 beneficial owners of Common
Stock.
Dividend Policy
Cash dividends per share paid by the Company were $.06 in 1996, $.09 in
1995, $.06 in 1994, $.09 in 1993, and $1.20 in 1992, representing distributions
of taxable income arising out of the Company's status as a REIT. The foregoing
amounts reflect the one-for-three reverse stock split which occurred on December
31, 1996. The Company's loan and debt agreements contain certain covenants that
restrict the payment of dividends if the financial condition, results of
operation, and capital requirements of the Company fail to meet certain
specified levels. In addition, the Company's board of directors has indicated
that the Company will not pay any permitted cash dividends for the foreseeable
future. Instead, the Company's board intends to retain earnings to finance the
growth of the Company's business. The future payment of cash dividends, if any,
will depend upon the financial condition, results of operations, and capital
requirements of the Company, as well as other factors deemed relevant by the
board.
28
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The following table sets forth selected historical consolidated
financial data of the Company for the quarter ended March 31, 1997 and each of
the years in the five-year period ended December 31, 1996. The selected annual
historical consolidated financial data for 1996 is derived from the Company's
Consolidated Financial Statements audited by KPMG Peat Marwick LLP, independent
auditors. The selected annual historical consolidated financial data for 1995,
1994, 1993 and 1992 is derived from the Company's Consolidated Financial
Statements audited by Ernst & Young LLP, independent auditors. For additional
information, see the Consolidated Financial Statements of the Company included
elsewhere in this Prospectus. The following table should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included herein. Due to the Merger, the historical results are not
indicative of future results. Pro forma financial information reflecting the
Merger is set forth in "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Pro-Forma Results of Operations."
<TABLE>
<CAPTION>
Historical Consolidated Financial Data
(Dollars in Thousands, Except Per Share Data)
Quarter Ended Years Ended December 31,
March 31, 1997 ------------------------
(Unaudited) 1996 1995 1994 1993 1992
----------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Home sales (net) $1,626 -- -- -- -- --
Income (loss) from mortgage assets.................... 359 $2,244 $3,564 $(1,203) $(21,814) $(14,068)
Interest expense...................................... -- 238 868 1,383 2,274 2,750
General, administrative and other expense............. 1,697 1,710 1,599 1,938 1,822 2,315
------ ------ ------ ------- -------- --------
Income (loss) before effect of accounting change and
extraordinary loss.................................... 288 296 1,097 (4,524) (25,910) (19,133)
Cumulative effect of accounting change(1)............. -- -- -- -- (6,078) --
Extraordinary loss(2)................................. -- (149) -- -- -- --
------ ------ ------ ------- -------- --------
Net income (loss)..................................... $288 $147 $1,097 $(4,524) $(31,988) $(19,133)
====== ====== ====== ======= ======== ========
Income (loss) per share before effect of accounting
change/extraordinary loss............................. $0.06 $0.09 $0.34 $(1.40) $(7.98) $(5.79)
Cumulative effect of accounting change per share...... -- -- -- -- (1.89) --
Extraordinary loss per share.......................... -- (.05) -- -- -- --
------ ------ ------ ------- -------- --------
Net income (loss) per share........................... $0.06 $0.04 $0.34 $(1.40) $(9.87) $(5.79)
====== ====== ====== ======= ======== ========
Cash dividends per share(3)........................... -- $0.06 $0.09 $0.06 $0.09 $1.20
====== ====== ====== ======= ======== ========
At December 31,
At March 31, 1997 ---------------
(Unaudited) 1996(4) 1995 1994 1993 1992
----------------- ------ ---- ---- ---- ----
Balance Sheet Data:
Real estate loans................................ $1,491 $1,696 $4,048 $9,260 $320 $0
Residual interests............................... 3,817 3,909 5,457 7,654 17,735 66,768
Total assets..................................... 70,430 72,821 27,816 31,150 43,882 87,063
Notes payable.................................... 29,846 30,542 7,819 11,783 19,926 31,000
Total liabilities................................ 43,023 45,876 9,368 13,508 21,505 32,357
Stockholders' equity............................. 27,407 26,945 18,448 17,642 22,377 54,706
</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 the Company qualified and elected to be
treated as a REIT under the Code, the Company was not subject to
federal income tax on that portion of its taxable income that was
distributed to stockholders in or with respect to that year. Regardless
of such distributions, however, the Company may
29
<PAGE>
be subject to tax on certain types of income. Due to the Merger, the
Company did not qualify as a REIT in 996.
(4) Reflects the Merger consummated on December 31, 1996.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
As a result of the Merger, the primary business of the Company has
changed from the making of real estate loans to homebuilding. Accordingly, this
Prospectus includes discussion and analysis of the financial condition and
results of operation for the Company, as well as a discussion and analysis of
the pro forma results of operations of the Company.
Historical Results of Operations
Quarter ended March 31, 1997 Compared to 1996:
The Company had net income of $288,338 or $.06 per share for the first
three months of 1997 compared to $84,333 or $.03 per share for the first three
months of 1996. Home sales revenue, cost of home sales, commissions, and other
sales costs all increased in 1997, as the Company had no homebuilding operations
prior to the Merger in December of 1996.
Residual and real estate loan interest income was less in 1997 than in
1996 due to the decreasing residual and loan portfolio balances. The increase in
general, administrative, and other costs to $1,091,686 in 1997 from $388,073 in
1996 was caused mainly by higher corporate costs, including compensation expense
that was related to the Merger transaction. All interest incurred was
capitalized in 1997, with $93,000 amortized through costs of home sales, and not
expensed directly as in 1996.
Year Ended December 31, 1996 Compared to 1995
The Company had net income of $147,000 or $.04 per share in 1996
compared to income of $1,097,000 or $.34 per share in 1995. Results for the year
ended December 31, 1996 include an extraordinary loss from the early
extinguishment of debt of $148,000 or $.05 per share.
The Company's income from Mortgage Assets was $2,244,000 in 1996
compared to income of $3,565,000 in 1995. Interest income on real estate loans
decreased from $1,618,000 in 1995 to $571,000 in 1996 due to the reduction of
the Company's real estate lending program.
The Company's interest expense declined from $868,000 in 1995 to
$238,000 in 1996 due to a reduction of the average aggregate long-term debt.
Year Ended December 31, 1995 Compared to 1994
The Company had net income of $1,097,000 or $.34 per share in 1995
compared to a net loss of $4,523,000 or $1.40 per share in 1994.
30
<PAGE>
The Company's income from Mortgage Assets was $3,565,000 in 1995
compared to a loss of $1,202,000 in 1994. The 1994 loss included a net charge of
$3,343,000 to write down the Company's investments in several of its residual
interests.
Interest income on real estate loans increased from $1,112,000 in 1994
to $1,618,000 in 1995 due to the expansion of the Company's real estate lending
program.
The Company'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.
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
Liquidity, capital resources, and commitments should be viewed for the
combined Company in light of the Merger. As a result, the following discusses
the liquidity, capital resources, and commitments of the combined Company as a
result of the Merger.
The Company uses a combination of existing cash, unused borrowing
capacity, internally generated funds, and customer deposits to meet its working
capital requirements. At December 31, 1996, the Company had $20 million in
short-term, secured, revolving construction loan agreements of which
approximately $7.3 million was outstanding. The Company also had outstanding
approximately $9.6 million at December 31, 1996 of secured construction loan
agreements.
At March 31, 1997, the Company had $20 million in a short-term,
secured, revolving construction loan facility and $20 million in an acquisition
and development guidance facility, of which $10.5 million and $7.3 million were
outstanding, respectively. The Company also had outstanding $4.1 million at
March 31, 1997 on a term loan to refinance an existing note, as well as $8
million in unsecured, senior subordinated notes due October 15, 2001 (the
"Notes"), which were issued in October 1994. The Company had available but
unborrowed funds under its credit facilities of $2.1 million at March 31, 1997.
In the first quarter of 1997, the Company used $8.2 million of cash to
purchase land for future development at the Gainey Ranch site in Scottsdale,
Arizona. Subsequent to March 31, 1997, the Company added this property to its
acquisition and development guidance facility generating $4.3 million in
available but unborrowed funds.
The Indenture relating to the Notes and the Company's various loan
agreements contain restrictions which could, depending on the circumstances,
affect the Company's ability to obtain additional financing in the future. If
the Company 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 the Company's results of operation and ability
to repay its indebtedness.
31
<PAGE>
The cash flow for each of the Company'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, and 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.
At March 31, 1997 and December 31, 1996, the Company had a net
operating loss carryforward, for income tax purposes, of approximately
$53,000,000. This tax loss may be carried forward, with certain restrictions,
for up to 13 years to offset future taxable income, if any.
Pro Forma Results of Operations
As a result of the Merger, the primary business of the Company has
shifted from the making of real estate loans and holding residual interests to
homebuilding. Due to this change, management believes that the analysis of the
activities and operations of the Company should be considered in light of the
operations of Monterey. To assist in the understanding of those operations,
management has prepared pro forma condensed combined operating results for the
periods discussed below. These results are not meant to be indicative of future
results of operations.
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 influential 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. See "Risk Factors" above.
During the past several years 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 March 31,
1997, Monterey was actively selling homes in eleven communities, was sold out in
one community, and was in various stages of preparation to open for sales in two
communities. As of December 31, 1996, Monterey was actively selling homes in
twelve communities and preparing to open for sales in one new community. At
December 31, 1995, Monterey was actively selling homes in five communities.
There can be no assurance that the favorable conditions in Arizona will
continue, and although housing demand in the Phoenix metropolitan area during
1996 was at record levels, recent reports indicate that there will be a
significant slowing in new home sales in the Phoenix metropolitan area and that
new home sales in the Tucson metropolitan area will remain relatively flat in
1997. In addition, housing permits in the Tucson metropolitan area remained
relatively flat from 1995 to 1996.
32
<PAGE>
Due to faster than anticipated sales and closing rates occurring in
certain Monterey subdivisions 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. In spite of
the low beginning lot inventory, Monterey was able to complete and begin sales
of these lots in 1996, and along with sales in new communities, increased unit
sales and home closing revenue in the Scottsdale area in 1996. Start up costs
incurred by in the Tucson area and merger related costs negatively impacted
Monterey's net income in 1996. The continuation of Monterey's past revenue and
profitability levels is dependent on its ability to identify and obtain
competitively priced and well located replacement land inventory.
Results Of Operations for the Quarters
Ended March 31, 1997 and 1996 (Pro Forma)
Management has prepared proforma condensed combined operating results
for the three months ended March 31, 1996, which reflect the impact of combining
the pre-merger companies as though the acquisition had taken place on January 1,
1996.
Results of Operations
For the Three Months ended March 31,
------------------------------------
1997 1996
(Pro Forma)
(Dollars in thousands, except per share data)
Home sales revenue $12,573 $14,767
Cost of home sales 10,947 12,924
------ ------
Gross profit 1,626 1,843
Selling, general and administrative 1,847 2,180
----- -----
Operating loss (221) (337)
Other income 535 638
--- ---
Earnings before income taxes 314 301
Income tax expense 26 33
-- --
Net earnings $288 $268
==== ====
Earnings per share $ .06 $ .06
===== =====
The key assumptions in the pro forma results of operations relate to
the following:
(1) The transaction was consummated on January 1, 1996.
(2) Compensation expense was adjusted to add the new employees'
cost and to deduct the terminated employees' cost.
(3) The net operating loss was utilized to reduce the maximum
amount of taxable income possible.
The following discussion and analysis provides information regarding
results of operations of the Company and its subsidiaries for the three months
ended March 31, 1997 and pro forma operations for the three months ended March
31, 1996. All material balances and transactions between Monterey Homes
Corporation and its subsidiaries have been eliminated. This discussion should be
read in conjunction with the Company's and Subsidiaries' financial statements
contained elsewhere in this Prospectus. In the
33
<PAGE>
opinion of management, the unaudited interim data reflect all adjustments,
consisting only of normal recurring 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.
Home Sales Revenue
Home sales revenue for any period is the product of the number of units
closed during the period and the average sales price per unit. The following
table presents comparative first quarter 1997 and 1996 housing revenues (dollars
in thousands):
Quarter Ended Dollar/Unit Percentage
(Dollars in Thousands) March 31 Increase Increase
1997 1996 (Decrease) (Decrease)
---- ---- ---------- --------
Dollars........................... $12,573 $14,767 ($2,194) (14.9%)
Units Closed...................... 40 53 (13) (24.5%)
Average Sales Price............... $314.3 $278.6 $35.7 12.8%
Home sales revenue decreased 14.9% due to 13 fewer closings during the
first quarter of 1997. The average sales price increased 12.8% due to closing
higher priced homes in 1997. In the first quarter of 1996, 23 lower priced
condominium units were closed. There were no condominium closings in the first
quarter of 1997 as this project was sold out in 1996.
Gross Profit
Gross profit equals home sales revenue, 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 complex and architectural,
legal, and zoning costs), interest, sales tax, warranty, construction overhead,
and closing costs. The following table presents comparative first quarter 1997
and 1996 housing gross profit (dollars in thousands):
Dollar Percentage
(Dollars in Thousands) Quarter Ended March 31, Increase Increase
1997 1996 (Decrease) (Decrease)
---- ---- ---------- ----------
Dollars.......................... $1,626 $1,843 ($217) (11.8%)
Percent of Housing Revenues...... 12.9% 12.5% .4% 3.2%
The 11.8% decrease in dollar gross profit is a result of 13 fewer closings in
the first quarter of 1997.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses, which include
advertising, model and sales office, sales administration, commissions, and
corporate overhead costs, were $1.8 million for the first quarter of 1997, as
compared to $2.2 million for the same period in 1996, a decrease of 8%. This
change was caused mainly by fewer home closings and higher administrative and
corporate costs paid in 1996 than in 1997.
34
<PAGE>
Development Projects
At March 31, 1997, the Company had 14 subdivisions under various stages
of development. The Company was actively selling in 11 subdivisions, was sold
out in one subdivision, and was in various stages of preparation to open for
sales in two subdivisions. The Company owns the underlying land in seven
subdivisions subject to bank acquisition financing, and the underlying land in
two subdivisions free from any acquisition financing. The lots in the remaining
five subdivisions are purchased from developers on a rolling option basis.
During the first quarter of 1997, the Company purchased one new subdivision and
entered into one new rolling lot option contract to increase the lots available
to the Company in one existing subdivision. Depending on market conditions,
management may elect to make additional selective property acquisitions
throughout the remainder of the current year.
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 quarter 1997 and 1996 net orders
(dollars in thousands):
(Dollars in Thousands) Quarter Ended March 31, Dollar/Unit Percentage
1997 1996 Increase Increase
---- ---- -------- --------
Dollars........................ $27,868 $15,490 $12,378 79.9%
Units Ordered.................. 81 59 22 37.3%
Average Sales Price............ $344.1 $262.5 $81.6 31.1%
The dollar volume of net orders increased by 79.9% over the 1996 first
quarter due primarily to an increase in average sales price and higher unit
sales. The increase in average sales price was caused by activity in a new
semi-custom subdivision with higher priced homes. The increase in net orders has
generally been caused by an increase in the number of subdivisions actively open
for sales to eleven in 1997 from six in 1996.
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 Backlog
Backlog represents net orders of Monterey which have not closed. The
following table presents comparative March 31, 1997 and 1996 net sales backlog
(dollars in thousands):
(Dollars in Thousands) Quarter Ended March 31, Dollar/Unit Percentage
1997 1996 Increase Increase
---- ---- -------- --------
Dollars....................... $61,224 $40,602 $20,622 50.8%
Units in Backlog.............. 161 150 11 7.3%
Average Sales Price........... $380.3 $270.7 $109.6 40.5%
Dollar backlog increased 50.8% over the prior year due to an increase
in units in backlog and by an increase in average sales price. Average sales
price has increased due to the sell out of lower priced Vintage Condominium
subdivision and the opening of a higher priced semi-custom subdivision. Units in
backlog have increased 7.3% over the prior year due to the increase in net
orders.
35
<PAGE>
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 their semi-custom, luxury product homes. Management 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.
Pro Forma Results of Operations for the Years Ended
December 31, 1996 and 1995
To assist in the understanding of those operations of the Company
considered in light of the operations of Monterey, management has prepared pro
forma condensed combined operating results for the years ended December 31, 1996
and 1995 and they reflect the impact of combining Monterey with the Company as
though the acquisition occurred on January 1, 1995. These results are presented
only for purposes of analysis and they are not meant to be indicative of future
results of operations, nor are they meant to be considered for purposes other
than additional information.
Pro Forma Results of Operations
For the Year Ended December 31,
-------------------------------
1996 1995
(Dollars in thousands, except per share data)
Sales revenue $87,754 $71,491
Cost of sales 75,099 60,557
------ ------
Gross profit 12,655 10,934
Selling, general and administrative 7,777 6,792
----- -----
Operating income 4,878 4,142
Other income 1,998 2,836
----- -----
Earnings before income taxes 6,876 6,978
Income tax expense 756 768
----- -----
Net earnings $6,120 $6,210
====== ======
$1.27 $1.28
===== =====
Earnings per share
The key assumptions in the pro forma results of operations relate to
the following:
(1) The transaction was consummated on January 1, 1995.
(2) Compensation expense was adjusted to add the new employees'
cost and to deduct the terminated employees' cost.
(3) The net operating loss was utilized to reduce the maximum
amount of taxable income possible.
Home Sales Revenue
The following table presents comparative 1996 and 1995 home sales
revenue.
36
<PAGE>
Year Ending Dollar/Unit Percentage
(Dollars in Thousands) December 31, Increase Increase
1996 1995 (Decrease) (Decrease)
---- ---- ---------- ----------
Dollars............................ $86,829 $67,926 $18,903 27.8%
Units Closed....................... 307 239 68 28.5%
Average Sales Price................ $282.8 $284.2 ($1.4) (1.0%)
The increase in revenues of approximately $19 million during 1996 over
the previous year was caused by the increase in unit closings partially offset
by lower average sales prices. The average sales price decreased from the prior
year due to an increase in closings produced by Monterey's lower priced move-up
subdivisions, which made up approximately 55% of the homes closed in 1996. The
average sales price of Monterey's luxury, semi-custom product line is in excess
of $300,000 and Monterey's move-up product line averages $205,000. Unit closings
increased due to the growth in the number of subdivisions producing home
closings from nine in the prior year to fifteen in 1996.
Land Sales Revenue
Monterey closed one land sale during 1996, which produced revenue of
$925,000 and gross profit of $506,000 and sold one land parcel during 1995,
which produced revenue of $3,565,000 and gross profit of $433,000.
Gross Profit
The following table presents comparative 1996 and 1995 gross profit.
Year Ending Dollar Percentage
(Dollars in Thousands) December 31, Increase Increase
1996 1995 (Decrease) (Decrease)
---- ---- ---------- ----------
Dollars............................ $12,665 $10,934 $1,721 15.7%
Percent of Housing Revenues........ 14.6% 16.1% (1.5%) (9.3%)
The increase in gross profit is primarily attributable to a 27.8%
increase in dollar revenues offset slightly by a 1.5% decrease in the gross
profit margin. The gross profit margin decreased slightly mainly due to higher
lot costs and capitalized interest in cost of sales which was mostly offset by
lower direct construction costs and construction overhead.
Interest incurred and capitalized by Monterey was $3,700,000 and
$2,240,000 in 1996 and 1995, respectively. Interest amortized and included in
cost of sales in 1996 was $2,600,000 compared to $1,700,000 in 1995. As a
percentage of revenue the amortized amounts in 1996 and 1995 were 2.8% and 2.4%,
respectively.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses were approximately $7.8
million for the year ended December 31, 1996 compared to approximately $6.8
million for 1995. Sales commissions paid in 1996 were $2,581,000 compared to
$2,039,000 in 1995, an increase of 27%, based on greater sales volume. There
were also increased advertising and overhead expenses generated in supporting a
greater number of active subdivisions.
37
<PAGE>
Net Earnings
Net earnings decreased to approximately $6.1 million for the year ended
December 31, 1996 from approximately $6.2 million for the prior year. This
decrease is primarily the result of a $1 million decrease in interest income
from real estate loans along with increased selling, general, and administrative
expenses offset by greater gross profit recognized from housing revenues.
Net Orders
The following table presents comparative 1996 and 1995 net orders.
Year Ending
(Dollars in Thousands) December 31, Dollar/Unit Percentage
1996 1995 Increase Increase
---- ---- -------- --------
Dollars............................ $90,182 $59,933 $30,249 50.5%
Units Ordered...................... 283 241 42 17.4%
Average Sales Price................ $318.6 $248.7 $69.9 28.1%
The dollar volume of net orders increased by 50.5% over the prior year
due to an increase in average sales prices and higher unit sales. The average
sales price increased due to a greater portion of sales occurring in Monterey's
lower-priced move-up communities during the prior year. The increase in net
orders is primarily attributable to a greater number of subdivisions open for
sale.
Monterey does not include sales which are contingent upon 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 Backlog
The following table presents comparative 1996 and 1995 net sales
backlog.
Year Ending
(Dollars in Thousands) December 31, Dollar/Unit Percentage
1996 1995 Increase Increase
---- ---- -------- --------
Dollars........................... $42,661 $37,891 $4,770 12.6%
Units Ordered..................... 120 144 (24) (16.7%)
Average Sales Price............... $355.5 $263.1 $92.4 35.1%
Dollar backlog increased 12.6% over the December 31, 1995 amount due to
an increase in average sales price. Average sales price has increased due to the
sell out of Monterey's lower-priced Vintage Condominium subdivision and greater
sales in the other move-up communities. Units in backlog decreased due to
seasonal fluctuations which cause year-end backlog to typically be lower than at
other times during the year.
Financial and Operating Data of Monterey Prior to the Merger
As a result of the Merger, management believes that the Combined
Financial Data for Monterey for the year ended December 31, 1996, and for each
of the years in the five-year period then ended, are also relevant in evaluating
the Company's operating results on a going forward basis. Accordingly, the table
below sets forth certain financial and operating data regarding Monterey.
38
<PAGE>
Monterey Combined Financial Data
(Dollars In Thousands, Except Per Share Data)
Year Ended December 31,
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating Statement Data:
Total revenues.............................................. $87,754 $71,491 $60,941 $40,543 $35,111
Cost of sales............................................... 74,874 60,332 50,655 34,664 29,544
Selling, general and administrative expenses................ 6,863 4,899 4,123 3,267 3,383
----- ----- ----- ----- -----
Operating income............................................ 6,017 6,260 6,163 2,612 2,184
Other income (expense)...................................... (49) 141 102 (92) 32
---- --- --- ---- --
Net earnings................................................ $5,968 $6,401 $6,265 $2,520 $2,216
====== ====== ====== ====== ======
Year Ended December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Operating Data: (Unaudited)
Unit sales contracts (net of cancellations)................. 283 241 243 167 151
Units closed................................................ 307 239 201 142 133
Units in backlog at end of period........................... 120 144 142 100 75
Aggregate sales value of homes in backlog................... $42,661 $37,891 $43,981 $30,826 $19,970
Average sales price per home closed......................... $283 $284 $299 $285 $264
At December 31,
1996(1) 1995 1994 1993 1992
------ ---- ---- ---- ----
Balance Sheet Data:
Real estate under development............................... $36,501 $33,929 $17,917 $13,736 $9,553
Total assets................................................ 45,741 42,654 28,820 19,227 12,366
Notes payable............................................... 30,542 24,316 12,255 7,632 3,463
Stockholders' equity........................................ 1,783 9,108 6,898 3,121 2,193
- ----------------------
(1) Does not reflect the Merger consummated on December 31, 1996
</TABLE>
39
<PAGE>
BUSINESS OF THE COMPANY
The Company's business has changed substantially as a result of the
Merger. The Company will no longer be engaged primarily in the business of
making Real Estate Loans, but instead will be engaged primarily in the
homebuilding business -- the business engaged in by Monterey. Accordingly, this
section will focus primarily on the operators of Monterey for the periods
discussed.
History of Monterey and Background
Monterey Management, Inc., an Arizona corporation ("MMI"), and Monterey
Homes Corporation, an Arizona corporation ("MHC"), were originally formed by the
Monterey Stockholders in 1986 and 1992, respectively. These companies originally
operated only in Scottsdale, Arizona and nearby areas. In June of 1996, the
Monterey Stockholders formed Monterey Management - Tucson, Inc., an Arizona
corporation ("MM-TI"), and Monterey Homes-Tucson Corporation, an Arizona
corporation ("MH-TC"), to operate in the area of Tucson, Arizona. In September
of 1996, MMI was merged with and into its Tucson counterpart MM-TI, with MM-TI
surviving and changing its name to Monterey Homes Construction II, Inc.
(MHC-II), and MHC was merged with and into its Tucson counterpart MH-TC, with
MH-TC surviving and changing its name to Monterey Homes Arizona II, Inc. (MHA
II).
On December 31, 1996, immediately prior to the Merger, MHC II
contributed all of its assets and its liabilities and obligations to Monterey
Homes Construction I, Inc., an Arizona corporation ("MHC I"), a newly-formed,
wholly-owned subsidiary of MHC II, and MHA II contributed all of its assets and
its liabilities and obligations to Monterey Homes Arizona I, Inc., an Arizona
corporation ("MHA I"), a newly-formed, wholly-owned subsidiary of MHA II. Upon
the Merger of MHC II and MHA II into Homeplex, with Homeplex surviving and
changing its name to Monterey Homes Corporation, MHC I and MHA I continued as
wholly-owned subsidiaries of the Company.
Monterey designs, builds, and sells single-family, move-up and
semi-custom, luxury homes in the Phoenix and Tucson, Arizona metropolitan areas.
Monterey achieved revenue growth from $20.4 million in 1991 to $86.8 million in
1996 and achieved pre-tax income of $6 million in 1996. For the quarter ended
March 31, 1997, the Company had pre-tax income of $314,000. Monterey attributes
this growth principally to the market knowledge and experience of its management
team and strong economic conditions in the Phoenix metropolitan area. For the
year ended December 31, 1996, Monterey closed 307 homes generating revenues of
$86.8 million and as of that date had a backlog of 120 homes under contract. For
the quarter ended March 31, 1997, Monterey closed 40 homes generating revenues
of $12,573,000 and as of that date had a backlog of 161 homes under contract.
Industry
The homebuilding industry is highly competitive and extremely
fragmented, and 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
40
<PAGE>
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 distinctive designs and by offering custom home features at
prices that offer a better value than 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 more distinguished designs within a
defined price range or category than those built by its competitors.
Service. Monterey attempts to involve the customer in every phase of
the building process through a series of conferences with the sales staff,
project managers, and construction superintendents. This procedure is designed
to give the buyer the opportunity to add custom design features and monitor
development of the home, creating a sense 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 unique 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 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 share of the
overall housing market in the Phoenix and Tucson metropolitan areas.
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
part-time basis. 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
is somewhat less affected by economic downturns. For the quarter ended March 31,
1997 approximately 42% and 58% of the Company's revenues were derived from the
sale of move-up and semi-custom luxury homes, respectively. For the years ended
December 31, 1996, 1995, and 1994, approximately 45% and 55%, 32% and 68%, and
15% and 85%, of Monterey's revenues were derived from the sale of move-up and
semi-custom, luxury homes, respectively. Although semi-custom, luxury home sales
as a percentage of the Company's total revenues have declined over the last
three years due to a greater emphasis on increasing sales of move-up homes, the
Company currently expects to continue to derive a significant portion of its
revenues from sales of semi-custom, luxury homes.
41
<PAGE>
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. The expansion may be effected through acquisitions of
homebuilders operating in such geographic markets.
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.
Markets and Products
Overview. Monterey's operations primarily serve Scottsdale, Northeast
Phoenix and Fountain Hills, Arizona (the "Scottsdale Area") and, beginning in
the first half of 1996, Tucson and Oro Valley, Arizona (the "Tucson Area").
Monterey believes that both of these areas represent attractive homebuilding
markets with opportunity for long-term 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 single-story, two to five
bedroom homes, ranging in base price from approximately $244,900 to $505,900.
Basements are available on some plans. The homes vary in size from 2,540 square
feet to 4,530 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, ranging
in base price from approximately $169,900 to $227,900. The homes range from
1,970 square feet to 3,050 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 the first quarter
of 1997 was $314,300. At March 31, 1997, the Company had a total of 81 home
purchase contracts in backlog totaling $27,868,000, with an average sales price
of $344,100. The average sales price for all homes closed during 1996 and 1995
was $282,800 and $284,200, 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 December 31, 1996, Monterey had 120
home purchase contracts in backlog totaling $43 million, with an average sales
price of $355,500.
Scottsdale, Arizona. For 1995 and prior years, Monterey derived its
revenues from operations in the Scottsdale Area. Scottsdale is a relatively
affluent city within the Phoenix metropolitan area. In addition, Scottsdale has
developed detailed master planning and zoning regulations and the Scottsdale
Area has typically appealed to the type of higher-income 144 buyer which
Monterey generally targets.
42
<PAGE>
From 1995 to 1996, permits issued for single-family residential units
in the City of Scottsdale decreased 3% from 3,194 to 3,077. Permits issued in
the Phoenix metropolitan area increased 8.6% from 24,697 to 26,811 for the same
time period. Moreover, although single-family housing permits in the Phoenix
metropolitan area were at record levels in 1996, real estate analysts are
predicting that new home sales in the Phoenix metropolitan area will slow
significantly in 1997 and 1998. Any such slowing in new home sales could have a
material adverse affect on the Company's operating results.
The following table presents information relating to the current
communities in the Scottsdale Area served by the Company.
<TABLE>
<CAPTION>
Number of
Number of Number of Number of Homes
Total Homes Homes Homes in Remaining Estimated
Number Sold as of Closed at Backlog at at Average
of Home March 31, March 31, March 31, March 31, Sales
Community Sites 1997 1997 1997 1997(1) Price(2)
--------- ----- ---- ---- ---- ------- --------
<S> <C> <C> <C> <C> <C>
Luxury:
Canada Vistas 41 32 20 12 9 $294,400
DC Ranch (3) 64 -0- -0- -0- 64
Eagle Mountain 29 15 1 14 14 $432,900
Gainey Village - Casitas 76 -0- -0- -0- 76
Gainey Village - Villas 101 -0- -0- -0- 101
Lincoln Place 56 41 1 40 15 $449,150
Portales 72 67 64 3 5 $364,900
Scottsdale Country Club 23 23 18 5 -0- $379,900
(Estates)
Scottsdale Country Club 43 43 43 -0- -0- $307,600
(Fairway)
SunRidge Canyon 75 32 12 20 43 $297,100
Tierra Bella 35 19 9 10 16 $382,500
The Preserve (3) 143 -0- -0- -0- 143
-------- -------- -------- -------- --------
Luxury Subtotal: 758 272 168 104 486
-------- -------- -------- -------- --------
Move-up:
-------- -------- -------- -------- --------
Grayhawk 147 60 52 8 87 $207,500
Palos Verdes 72 50 37 13 22 $194,100
-------- -------- -------- -------- --------
Move-up Subtotal: 219 110 89 21 109
-------- -------- -------- -------- --------
Total Scottsdale Area: 977 382 257 125 595
======== ======== ======== ======== ========
</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.
(3) Escrow is scheduled to close in the third quarter of 1997 and marketing
is currently expected to begin in the fourth quarter of 1997.
Tucson, Arizona. Monterey began offering homes for sale in the Tucson
Area in April 1996. The Tucson Area also has experienced growth over the last
five years. Annual building permits issued for single-family residential units
in the Tucson Area increased moderately from approximately 5,000 in 1995
43
<PAGE>
to approximately 5,200 in 1996, a 4% increase. Real estate analysts are
predicting that new home sales in the Tucson metropolitan area will remain
relatively flat in 1997.
The following table presents information relating to the current
communities in the Tucson Area served by the Company.
<TABLE>
<CAPTION>
Number of Number of Number of Number of
Total Homes Homes Homes in Homes Estimated
Number of Sold as of Closed at Backlog at Remaining at Average
Home March 31, March 31, March 31, March 31, Sales
Community Sites 1997 1997 1997 1997(1) Price(2)
--------- ----- ---- ---- ---- ------- --------
<S> <C> <C> <C> <C> <C> <C>
The Lakes at Castle 46 15 6 9 31 $354,200
Rock (The Estates)
The Lakes at Castle 66 19 9 10 47 $290,700
Rock (The Park)
The Lakes at Castle 56 38 22 16 18 $193,300
Rock (The Retreat)
Rancho Vistoso (3) 144 -0- -0- -0- 144 --
-------- -------- -------- -------- --------
Total Tucson Area 312 72 37 35 240
======== ======== ======== ======== ========
</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.
(3) Sales currently scheduled to open in the second quarter of 1997.
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. 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. In certain situations in the
future, Monterey may consider purchasing unentitled property where it perceives
an opportunity to build on such property in a manner consistent with its
business strategy.
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
44
<PAGE>
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.
Due to the strong market in the Scottsdale area, the availability of
land in the Scottsdale area has decreased and the cost of such land has
increased. There can be no assurance that the Company will be able to continue
to acquire land in the Scottsdale area on terms that are favorable to the
Company. The Company's inability to acquire land in the Scottsdale Area on
favorable terms could have a material adverse effect on the Company's business
and operating results.
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 of approximately 10% of the total option price at the inception of the
option and an additional 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. 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 March 31, 1997, Monterey was buying lots under five
rolling option contracts totaling 323 lots. The 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 builds homes in master planned communities with home sites
that are along or close in proximity to a major amenity, such as a golf course.
These master planned communities are designed and developed by major land
developers who develop 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 finishing paving, final grading,
and installing all utilities.
Monterey also develops its own subdivisions by purchasing entitled
property and commencing site planning and development activities. In such cases,
its employees supervise the land development process.
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<PAGE>
Monterey has occasionally used partnerships or joint ventures to
purchase and develop land where such arrangements were necessary to acquire the
property 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 one year.
At March 31, 1997, Monterey owned 203 finished lots and had 177 lots
under development in the Scottsdale Area. Monterey also had under contract or
subject to the satisfaction of purchase contingencies, 99 finished lots and 241
lots under development in the Scottsdale Area.
At March 31, 1997, Monterey owned 149 finished lots and 55 lots under
development in the Tucson Area. At March 31, 1997, Monterey also had under
contract or subject to the satisfaction of purchase contingencies, 71 finished
lots in the Tucson Area.
The following table sets forth by project Monterey's land inventory as
of March 31, 1997.
46
<PAGE>
<TABLE>
<CAPTION>
Land Under Contract or
----------------------
Land Owned Option
---------- ------
Lots Under Lots Under
Finished Development Finished Development
Projects Lots (estimate) Lots (estimate) Total
-------- ---- ---------- ---- ---------- -----
<S> <C> <C> <C> <C> <C>
Scottsdale Area:
Canada Vistas 21 - - - 21
DC Ranch (1) - - - 64 64
Eagle Mountain 11 - 17 - 28
Gainey Village - Casitas 0 76 - - 76
Gainey Village - Villas 0 101 - - 101
Grayhawk 24 - 71 - 95
Lincoln Place 55 - - - 55
Palos Verdes 35 - - - 35
Portales 8 - - - 8
Scottsdale Country Club (Estates) 5 - - - 5
Scottsdale Country Club (Fairway) - - - - -
SunRidge Canyon 18 - 11 34 63
Tierra Bella 26 - - - 26
The Preserve (1) - - - 143 143
------- ------------ --------- ----------- ---------
Total Scottsdale Area: 203 177 99 241 720
------- ------------ --------- ----------- ---------
Tucson Area:
The Lakes at Castle Rock (The
Estates) 40 - - - 40
The Lakes at Castle Rock (The
Park) 9 - 48 - 57
The Lakes at Castle Rock (The
Retreat) 11 - 23 - 34
Rancho Vistoso 89 55 - - 144
------- ------------ --------- ------------ ---------
Total Tucson Area: 149 55 71 -0- 275
------- ------------ --------- ----------- ---------
Total: 352 232 170 241 995
======= ============ ========= =========== =========
</TABLE>
(1) Escrow is scheduled to close in the third quarter of 1997, and
marketing currently is expected to begin in the fourth quarter of 1997.
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 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
47
<PAGE>
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.
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 on workmanship
and building 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 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 generally builds between two 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 March 31, 1997,
Monterey owned five model homes in the Scottsdale area, with no model units
under construction. There were no model homes under construction nor any owned
in the Tucson area at March 31, 1997. Monterey attempts, to the extent possible,
to sell its model homes and to lease them back from purchasers who own the
models for investment purposes or who do not intend to live in the home
immediately, either because they are moving from out of state or for other
reasons. At March 31, 1997, Monterey had sold and was leasing back 23 model
homes at a total monthly lease amount of $62,200.
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.
48
<PAGE>
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 pays 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 vast majority of the homes sold
but not closed in fiscal year 1996 and first quarter 1997 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
but not yet closed are considered as "backlog." For a detailed itemization of
Monterey's backlog at March 31, 1997, see "Business--Homebuilding Operations of
Monterey - Markets and Products." 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.
The Company's backlog in number of units decreased to 120 at December
31, 1996 from 144 at December 31, 1995. The dollar value of such backlog,
however, increased to $42,661,000 at December 31, 1996 from $37,891,000 at
December 31, 1995. The decrease in the number of units in backlog at December
31, 1996, due to strong fourth quarter 1996 deliveries may result in lower
closings in the first quarter of 1997, which will have an adverse effect on the
Company's operating results in that quarter. The Company's backlog in number of
units increased to 161 at March 31, 1997 from 150 at March 31, 1996. The dollar
value of such backlog increased to $61,224,000 at March 31, 1997 from
$40,602,000 at March 31, 1996. The increase in the number of units in backlog at
March 31, 1997 is due to strong first quarter 1997 sales.
For more information concerning the Company's backlog, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Pro Forma Results of Operations."
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.
49
<PAGE>
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 all phases of
the building process in most of its communities. Monterey usually 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, a new home orientation manager meets with the
customer for a new home orientation.
Competition and Market Factors
The development and sale of residential property is a highly
competitive and fragmented industry. 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) its
experience within its specific geographic markets which allows it to develop and
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, the
availability of and changes in mortgage financing programs, and the availability
and cost of land and building materials. Real estate analysts are predicting
that new home sales in the Phoenix metropolitan area may slow significantly in
1997 and 1998 and that sales in the Tucson metropolitan area will remain
relatively flat in 1997. Such a slowing in new home sales would increase
competition among homebuilders in these areas. There can be no assurance that
the Company will be able to compete successfully against other homebuilders in
the Phoenix and Tucson metropolitan areas in a more competitive business
environment that would result from such a slowing in new home sales or that such
50
<PAGE>
increased competition will not have a material adverse affect on the Company's
business and operating results.
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.
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 fees are normally
established 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, "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
At March 31, 1997, Monterey had 92 employees, of which 16 were in
management and administration, 27 in sales and marketing, and 49 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 its construction operations are conducted through project
managers and field
51
<PAGE>
superintendents who manage third party subcontractors. Monterey utilizes
independent contractors for construction, architectural, and advertising
services.
Real Estate Loan Business Prior to Merger
Prior to the Merger, the Company made or acquired 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.
In the latter half of 1995, in anticipation of a potential acquisition
transaction, the Company slowed its origination of Real Estate Loans. The
following table sets forth information relating to the Company's only
outstanding Real Estate Loan at December 31, 1996 and March 31, 1997.
<TABLE>
<CAPTION>
Amount Amount
Interest Outstanding at Outstanding at
Description Rate Payment Terms December 31, 1996 March 31, 1997
----------- ---- ------------- ----------------- --------------
<S> <C> <C> <C> <C>
First Deed of Trust on 41 acres 16% Interest only monthly, principal $1,696,000 $1,491,000
of land in Gilbert, Arizona, due October 18, 1997.
face value of $2,800,000.
</TABLE>
The above loan was current at March 31, 1997. The Company does not
intend to make any additional Real Estate Loans in the future.
Mortgage Assets Acquired Prior to Merger
Prior to the Merger, the Company acquired a number of 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 the Company 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 the Company's mortgage instruments and the mortgage instruments
underlying the Company's mortgage interests currently secure or underlie
mortgage-collateralized bonds ("CMOs"), mortgage pass-through certificates
("MPCs"), or other mortgage securities (collectively, "Mortgage Securities").
The Company'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 the Company. The revenues
received by the Company are derived from the Net Cash Flows received directly by
the Company as well as any Net Cash Flows received by trusts in which the
Company has a beneficial interest to the extent of distributions to the Company
as the owner of such beneficial interest.
52
<PAGE>
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 payments.
Certain Classes of the Mortgage Securities will be subject to redemption at the
option of the issuer of such series or upon the instruction of the Company (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.
As of March 31, 1997, the Company owned mortgage interests with respect
to eight separate series of Mortgage Securities with a net amortized cost
balance of approximately $3,817,000. This cost represents the aggregate purchase
price paid for such mortgage interests less the amount of distributions on such
mortgage interests received by the Company representing a return of investment.
As a result of the Merger and the termination of the Company's REIT
status, the Company does not intend to acquire any additional mortgage assets.
The Company may elect in the future to (i) hold the mortgage assets to maturity,
(ii) redeem the mortgage assets on or after the allowable redemption dates
specified in the controlling agreement, or (iii) sell the mortgage assets. The
impact of each of the foregoing actions on the Company's operating results is
set forth under "Risk Factors -- Mortgage Asset Considerations" above.
PROPERTIES
The Company 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 approximately 14,000 square foot office
building 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 $173,160 and
$164,394 during fiscal years 1996 and 1995, respectively. For the first quarter
of 1997, rent paid to the LLC totaled $46,011. The Company 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. Management
believes that the terms of the lease are no less favorable than those which it
could obtain in an arm's length negotiated transaction. The Company leases
approximately 1,500 square feet of office space in Tucson, Arizona. The lease
term is for 37 months commencing on
53
<PAGE>
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.
The Company also leases, on a triple net basis, 23 model homes. Such
leases are for terms ranging from 2 months to 27 months, with renewal options
ranging from 30 days to over 1 year, on a month-to-month basis. The lease rates
are typically equal to 7% to 12% of the sales price of the homes per annum.
LEGAL PROCEEDINGS
The Company 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 the Company.
MANAGEMENT OF THE COMPANY
The Articles of Incorporation of the Company divide the Board of
Directors into two classes serving staggered two-year terms. Class I consists of
three directors whose terms expire at the 1998 Annual Meeting of Stockholders.
Class II consists of two directors whose terms expire at the 1997 Annual Meeting
of Stockholders.
Information concerning the Company's directors and executive officers
is set forth below.
Name Age Position with the Company
- ---- --- -------------------------
William W. Cleverly 41 Chairman of the Board, Class I Director and
Co-Chief Executive Officer
Steven J. Hilton 35 President, Class I Director and Co-Chief
Executive Officer
Larry W. Seay 41 Vice President-Finance, Chief Financial
Officer, Secretary and Treasurer
Anthony C. Dinnell 45 Vice President-Marketing and Sales
Irene Carroll 41 Vice President-Land Acquisition and
Development
Christopher T. Graham 33 Vice President-Construction Operations
Jeffrey R. Grobstein 37 Vice President-Tucson Division
Alan D. Hamberlin(2) 48 Class I Director
Robert G. Sarver(1) 35 Class II Director
C. Timothy White(1)(2) 36 Class II Director
- ------------------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
54
<PAGE>
William W. Cleverly has served as Chairman of the Board and Co-Chief
Executive Officer of the Company since the Merger on December 31, 1996. Mr.
Cleverly co-founded the Monterey Entities in 1986 and served as President and
director of the Monterey Entities until the Merger on December 31, 1996. From
1983 to 1986, 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 has served as President, Co-Chief Executive Officer
and Director of the Company since the Merger on December 31, 1996. Mr. Hilton
co-founded the Monterey Entities in 1986 and served as Treasurer, Secretary and
director of the Monterey Entities until the Merger on December 31, 1996. 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, the National Board of Realtors and the Scottsdale
Board of Realtors.
Larry W. Seay has served as the Vice President-Finance and Chief
Financial Officer of the Company since the Merger on December 31, 1996 and as
Secretary and Treasurer of the Company since January 1997. Mr. Seay was
appointed Vice President-Finance and Chief Financial Officer of the Monterey
Entities in April 1996 and served in that capacity until the Merger on December
31, 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 the Company since the Merger on December 31, 1996. Mr. Dinnell served as Vice
President-Marketing and Sales of the Monterey Entities from 1992 until the
Merger. 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 Trailor Homes, also a homebuilder 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 the Company since the Merger on December 31, 1996. Ms. Carroll
served as Vice President-Land Acquisition and Development of the Monterey
Entities from 1994 until the Merger on December 31, 1996. From 1992 to 1994, Ms.
Carroll served as a Division Manager for Richmond American Homes, a residential
homebuilder in Phoenix, Arizona. From 1983 to 1992, Ms. Carroll held a number of
other positions with Richmond American Homes and its predecessor, Wood Brothers
Homes, including Vice President of
55
<PAGE>
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 has served as the Vice President-Construction
Operations of the Company since the Merger on December 31, 1996. Mr. Graham was
appointed Vice President- Construction Operations of the Monterey Entities in
1996 and served in that capacity until the Merger on December 31, 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 represents the Company in the
Central Arizona Homebuilders Association.
Jeffrey R. Grobstein has served as the Vice President-Tucson Division
of the Company since the Merger on December 31, 1996. Mr. Grobstein joined the
Monterey Entities 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 and served in that capacity until the Merger on
December 31, 1996. 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.
Alan D. Hamberlin has served as a director of the Company since the
Company's organization in July 1988. Mr. Hamberlin served as Chief Executive
Officer of the Company from July 1988 until the Merger on December 31, 1996, and
as Chairman of the Board of Directors from January 1990 until the Merger. He
also served as the President of the Company from its organization until
September 1995. Mr. Hamberlin served as the President and Chief Executive
Officer of the managing general partner of the Company's former Manager and 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, as a Director of American
Southwest Affiliated Companies since its organization in March 1985 and of
American Southwest Holdings, Inc. since August 1994.
Robert G. Sarver has served as a director of the Company since the
Merger on December 31, 1996. Mr. 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 1993.
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 the Company since the
Merger on December 31, 1996. Mr. White served as a director of the Monterey
Entities from February 1995 until the Merger on December 31, 1996. Since 1989,
Mr. White has been an attorney with the law firm of Tiffany & Bosco, P.A. in
Phoenix, Arizona. During 1996 and 1995, the Monterey Entities paid Tiffany &
Bosco, P.A.
56
<PAGE>
approximately $100,000 and $206,000, respectively, for legal services rendered.
Mr. White received his undergraduate degree from the University of Arizona and
his law degree from Arizona State University.
COMMITTEES OF THE BOARD OF DIRECTORS
Compensation Committee. In 1996, the Compensation Committee of the
Board of Directors consisted of the entire Board of Directors. Since the Merger
on December 31, 1996 the Compensation Committee has consisted of Messrs.
Hamberlin and White. The Compensation Committee reviews all aspects of
compensation of executive officers of the Company and makes recommendations on
such matters to the full Board of Directors.
Audit Committee. The Audit Committee, which met once during 1996, makes
recommendations to the Board concerning the selection of outside auditors,
reviews the financial statements of the Company and considers such other matters
in relation to the external audit of the financial affairs of the Company as may
be necessary or appropriate in order to facilitate accurate and timely financial
reporting. Mr. Sarver and Mr. White are the members of the Audit Committee.
Other Committees. The Company does not maintain a standing nominating
committee or other committee performing similar functions.
Compensation Committee Interlocks and Insider Participation. Prior to
the Merger, the Compensation Committee of the Board of Directors consisted of
the entire Board of Directors. After the Merger, Mr. Hamberlin and Mr. White,
neither of whom are employees of the Company, were appointed to the Compensation
Committee.
DIRECTOR COMPENSATION
Prior to the Merger, directors who were not employees of the Company
received an annual retainer of $20,000, plus $1,000 per meeting of the Board of
Directors attended by the director. Currently, non-employee directors of the
Company receive an annual retainer of $10,000 and are not additionally
compensated for attendance at Board or Committee meetings. Subject to the
approval of the Monterey Homes Corporation Stock Option Plan by the shareholders
of the Company, it is currently anticipated that each of the non-employee
directors also will be granted an option to purchase 5,000 shares of the
Company's Common Stock as additional consideration for their service as
directors. These options shall vest in equal 2,500 share increments on each of
the first two anniversary dates of the date of grant and shall have an exercise
price equal to the closing price of the Company's Common Stock on the date of
grant.
In connection with the Merger, the Company's stockholders approved an
extension of certain of the Company's stock options. The Company's former
directors are parties to stock option agreements (collectively, the "Existing
Stock Option Agreements") pursuant to which such former directors were issued
stock options to purchase shares of the Company Common Stock under the stock
plan of the Company existing prior to the Merger (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 an employee or
director of the Company of three months after cessation of employment or service
as a director. To facilitate the Merger, and in consideration thereof and in
light of their past service to the Company, the stockholders approved an
extension of the post-termination exercise period from three months to two
years.
57
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The table below sets forth information concerning the annual and
long-term compensation for services in all capacities to the Company for the
fiscal years ended December 31, 1996, 1995 and 1994, of those persons who were,
at December 31, 1996 (i) the Chief Executive Officer of the Company and (ii) the
other most highly compensated executive officer of the Company (collectively,
the "Named Officers"). Information with respect to the Company's current
Co-Chief Executive Officers and certain other current executive officers is not
provided as such persons did not receive compensation from the Company during
1996 for their services.
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Annual Compensation Awards
------------------------- ------------
All Other
Name and Principal Position Year Salary Bonus Options(#) Compensation
--------------------------- ---- ------ ----- ---------- ------------
<S> <C> <C> <C> <C> <C>
Alan D. Hamberlin(1) 1996 $1 --- 861 ---
Chairman of the Board and 1995 $240,000 --- 273,338 ---
Chief Executive Officer of 1994 $250,000 $2,100 1,547 ---
the Company
Jay R. Hoffman(2) 1996 $200,016 $100,000 178 $200,000(3)
President, Secretary, 1995 $183,000 $25,000 413 ---
Treasurer and Chief 1994 $175,000 $15,000 405 ---
Financial Officer of the
Company
</TABLE>
- ------------------------
(1) Mr. Hamberlin resigned all positions with the Company, other than director,
in conjunction with the Merger on December 31, 1996.
(2) Mr. Hoffman resigned his positions with the Company in conjunction with the
Merger on December 31, 1996.
(3) Represents change of control payment made to Mr. Hoffman upon consummation
of the Merger.
58
<PAGE>
Option Grants in Last Fiscal Year
The table below sets forth information with respect to the granting of
stock options during the fiscal year ended December 31, 1996, to the Named
Officers and to Messrs. Cleverly and Hilton, who became the Company's Co-Chief
Executive Officers at the close of business on December 31, 1996.
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation for Option
Individual Grants Term(1)
- ------------------------------------------------------------------------------------- ----------------------------------
Percentage of
Total Options Exercise
Granted to or Base
Options Employees In Price Expiration
Name Granted # Last Fiscal Year ($/Share) Date 0% 5% 10%
- -------------------- --------- ---------------- --------- ---------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Alan D. Hamberlin 861(2) * --- 12/31/98 $3,900 $4,300 $4,700
Jay R. Hoffman 178(2) * --- 12/31/98 $800 $900 $1,000
William W. Cleverly 166,667(3) 49.8% $5.25 12/31/02 $297,600 $675,100
Steven J. Hilton 166,667(3) 49.8% $5.25 12/31/02 $297,600 $675,100
</TABLE>
- -----------------
* Represents less than 1% of total options granted to employees in 1996.
(1) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option terms. The
potential realizable value is calculated by assuming that the market
price of the underlying security appreciates in value from the date of
grant to the end of the option term at certain specified rates, and
that the option is exercised at the exercise price and sold on the last
day of its term at the appreciated price. These gains are based on
assumed rates of stock appreciation of 0%, 5% and 10% compounded
annually from the date the respective options were granted to their
expiration date, and are not presented to forecast future appreciation,
if any, in the price of the Common Stock.
(2) Represents dividend equivalent rights earned in 1996, all of which are
currently exercisable.
(3) Represents options granted in connection with the Merger. These options
vest in equal one-third increments on December 31, 1997, 1998 and 1999.
Excludes 266,667 shares of contingent stock in which Messrs. Cleverly
and Hilton each have a one-half interest and which will be issued only
if certain stock price goals are achieved.
Aggregated Option Exercises in Last Fiscal Year and Option Value as of
December 31, 1996
The table below sets forth information with respect to the exercise of
stock options during the fiscal year ended December 31, 1996 to the Named
Officers and to Messrs. Cleverly and Hilton, who became the Company's Co-Chief
Executive Officers at the close of business on December 31, 1996. The Company
does not have a long-term incentive plan or a defined benefit or actuarial plan
and has never issued any stock appreciation rights.
59
<PAGE>
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised In-the-
Options at Fiscal Money Options at Fiscal Year
Year End (#) End ($)(1)
----------------------------- -----------------------------
Shares
Acquired on Value
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ------------------- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Alan D. Hamberlin --- --- 261,435 91,667 $724,600 $275,000
Jay R. Hoffman --- --- 21,268 --- $25,700 ---
William W. Cleverly --- --- --- 166,667 --- $375,000
Steven J. Hilton --- --- --- 166,667 --- $375,000
</TABLE>
- ------------------------
(1) Calculated based on the closing price of the Company's Common Stock on
December 31, 1996 of $7.50 per share less the exercise price per share,
multiplied by the number of applicable shares in the money (including
dividend equivalent rights).
Change of Control Arrangements
In the event there is a change of control of the Company that is not
unanimously approved by the Company's Board of Directors, all unvested options
granted to Alan D. Hamberlin will vest in full and be immediately exercisable by
Mr. Hamberlin. The Company currently does not have any other change of control
agreements or arrangements.
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS
AND MANAGEMENT
The following table sets forth, as of April 30, 1997, the number and
percentage of outstanding shares of the Company's Common Stock beneficially
owned by each person known by the Company to beneficially own more than 5% of
such stock, by each director and executive officer of the Company and by all
directors and executive officers of the Company as a group.
Name and Address of Shares Beneficially Percent
Beneficial Owner(1) Owned(2) Owned(3)
- ----------------------- ---------- -----
William W. Cleverly 647,696 14.31%
Steven J. Hilton 644,363 14.23%
Alan D. Hamberlin 286,701(4) 5.97%
Robert G. Sarver 61,666 1.36%
C. Timothy White -- --
Larry W. Seay -- --
Irene Carroll 6,666 *
Anthony Dinnell 500 *
Christopher T. Graham 500 *
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<PAGE>
Name and Address of Shares Beneficially Percent
Beneficial Owner(1) Owned(2) Owned(3)
- -------------------- -------- --------
Jeffrey R. Grobstein 1,020 *
All Directors and Executive Officers 1,649,113 36.06%
as a group (10 persons)
* Represents less than 1% of the Company's outstanding Common Stock.
(1) The address for each director and officer is c/o Monterey Homes
Corporation, 6613 North Scottsdale Road, Suite 200, Scottsdale, Arizona
85250.
(2) Includes, where applicable, shares of Common Stock owned of record by such
person's minor children and spouse and by other related individuals and
entities over whose shares of Common Stock such person has custody, voting
control or the power of disposition.
(3) The percentages shown include the shares of Common Stock actually owned as
of April 30, 1997 and the shares of 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 Common Stock which the identified
person or group had the right to acquire within 60 days of April 30, 1997
upon the exercise of options are deemed to be outstanding for the purpose
of computing the percentage of the shares of 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 Common Stock owned by any other
person.
(4) Includes 12,633 shares of Common Stock indirectly beneficially owned by
Mr. Hamberlin through a partnership and 274,068 shares of Common Stock
which Mr. Hamberlin had the right to acquire within 60 days of April 30,
1997 upon the exercise of stock options (including dividend equivalent
rights).
CERTAIN TRANSACTIONS AND RELATIONSHIPS
Alan D. Hamberlin, the former Chairman of the Board of Directors, and
Chief Executive Officer of the Company, is also 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.
The Company is a party to a Subcontractor Agreement pursuant to which
ASFG, as assignee of ASFS, performs certain services for the Company in exchange
for administration fees. ASFS received administration fees of approximately
$133,000 during 1996, $144,000 during 1995 and $165,000 during 1994. The
Subcontractor Agreement renews on an annual basis and the Company has the right
to terminate the Subcontractor Agreement upon the happening of certain events.
Since September 1994, Monterey has leased approximately 11,000 square feet
of office space in a Scottsdale, Arizona 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
61
<PAGE>
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
$173,160, $164,394 and $53,244 during fiscal years 1996, 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 1996 and 1995, Monterey incurred fees for legal services to Tiffany
& Bosco, P.A. of approximately $100,000 and $206,000, respectively. C. Timothy
White, a director of the Company, is a shareholder of Tiffany & Bosco, P.A.
LEGAL MATTERS
The validity of the issuance of the Warrants will be passed on for the
Company by Venable, Baetjer & Howard, LLP, 1800 Mercantile Bank & Trust
Building, 2 Hopkins Plaza, Baltimore, Maryland 21201.
EXPERTS
The consolidated financial statements of Monterey Homes Corporation as of
December 31, 1995 and for each of the two years in the period ended December 31,
1995 included in this Prospectus have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing. The consolidated financial
statements of Monterey Homes Corporation as of December 31, 1996 and for the
year then ended have been included herein in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, and upon the
authority of said firm as experts in accounting and auditing.
62
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Annual Audited Financial Statements:
Report of Independent Accountants..................................... F-2
Report of Independent Auditors........................................ F-3
Consolidated Balance Sheets, December 31,
1995 and 1996.................................................... F-4
Consolidated Statements of Operations for
the years ended December 31, 1994, 1995
and 1996......................................................... F-5
Consolidated Statements of Cash Flows
for the years ended December 31, 1994, 1995
and 1996......................................................... F-6
Consolidated Statement of Changes in
Stockholders' Equity for the years ended
December 31, 1994, 1995 and 1996................................. F-7
Notes to Consolidated Financial Statements............................ F-8
Unaudited Consolidated Financials Statements:
Consolidated Balance Sheets as of March 31, 1997
and December 31, 1996................................................. F-21
Consolidated Statements of Earnings for the
Three Months ended March 31, 1997 and 1996....................... F-22
Consolidated Statements of Cash Flows for the
Three Months ended March 31, 1997 and 1996....................... F-23
Notes to Consolidated Financial Statements............................ F-24
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Monterey Homes Corporation
We have audited the accompanying consolidated balance sheet of Monterey
Homes Corporation and subsidiaries (previously known as Homeplex Mortgage
Investments Corporation and subsidiaries) as of December 31, 1996 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above, present fairly in all material respects, the financial position of
Monterey Homes Corporation and subsidiaries as of December 31, 1996, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Phoenix, Arizona
February 21, 1997
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Monterey Homes Corporation
We have audited the accompanying consolidated balance sheet of Monterey Homes
Corporation and subsidiaries (previously known as Homeplex Mortgage Investments
Corporation and subsidiaries) as of December 31, 1995 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the two 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
Monterey Homes Corporation and subsidiaries as of December 31, 1995 and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Phoenix, Arizona
February 13, 1996
F-3
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 15,567,918 $ 3,347,243
Short-term investments (Note 3) 4,696,495 8,969,100
Real estate loans and other receivables (Note 4) 2,623,502 4,047,815
Real estate under development (Note 5) 35,991,142 --
Option deposits 546,000 --
Residual interests (Note 6) 3,909,090 5,457,165
Other assets 940,095 356,684
Funds held by Trustee -- 5,637,948
Deferred tax asset (Note 11) 6,783,000 --
Goodwill (Note 10) 1,763,488 --
------------ ------------
$ 72,820,730 $ 27,815,955
============ ============
LIABILITIES
Accounts payable and accrued liabilities $ 10,569,872 $ 1,549,481
Home sale deposits 4,763,518 --
Notes payable (Note 7) 30,542,276 7,818,824
------------ ------------
Total Liabilities 45,875,666 9,368,305
------------ ------------
STOCKHOLDERS' EQUITY (Notes 8 and 10)
Common stock, par value $.01 per share; 50,000,000 shares
authorized; issued and outstanding - 4,580,611 shares at
December 31, 1996, and 3,291,885 shares at December 31,
1995 45,806 32,919
Additional paid-in capital 92,643,658 84,112,289
Accumulated deficit (65,334,117) (65,287,275)
Treasury stock - 53,046 shares (410,283) (410,283)
------------ ------------
Total Stockholders' Equity 26,945,064 18,447,650
------------ ------------
Commitments and contingencies (Notes 9 and 12)
$ 72,820,730 $ 27,815,955
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income (loss) from Mortgage Assets
Interest income on real estate loans $ 571,139 $ 1,618,308 $ 1,112,445
Income (loss) from residual interests (Note 6) 1,039,247 1,283,045 (2,662,734)
Other income 633,449 663,343 347,882
----------- ----------- -----------
2,243,835 3,564,696 (1,202,407)
----------- ----------- -----------
Expenses
Interest 237,945 868,414 1,382,951
General, administration and other 1,683,407 1,599,157 1,938,047
----------- ----------- -----------
1,921,352 2,467,571 3,320,998
----------- ----------- -----------
Income (loss) before income tax expense and
extraordinary loss from early extinguishment of debt 322,483 1,097,125 (4,523,405)
Income tax expense (Note 11) 26,562 -- --
----------- ----------- -----------
Income (loss) before extraordinary loss from early
extinguishment of debt 295,921 1,097,125 (4,523,405)
Extraordinary loss from early extinguishment
of debt (Note 7) (148,433) -- --
----------- ----------- -----------
Net Income (loss) $ 147,488 $ 1,097,125 ($4,523,405)
=========== =========== ===========
Earnings (loss) per share:
Income before extraordinary loss from early
extinguishment of debt $ 0.09 $ 0.34 ($ 1.40)
Extraordinary loss from early extinguishment of debt (0.05) -- --
----------- ----------- -----------
Net Income (loss) $ 0.04 $ 0.34 ($ 1.40)
=========== =========== ===========
Dividends declared per share $ 0.06 $ 0.09 $ 0.06
=========== =========== ===========
Weighted average common shares outstanding 3,334,562 3,245,767 3,240,204
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 147,488 $ 1,097,125 ($ 4,523,405)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Extraordinary loss from early extinguishment of debt 148,433 -- --
Depreciation and amortization 38,300 122,970 332,429
Amortization of residual interests 1,548,076 2,196,394 6,738,000
(Increase) decrease in other assets 153,350 370,454 (361,675)
Increase (decrease) in accounts payable and accrued
liabilities 317,094 (272,828) 243,789
Net write-downs and non-cash losses on residual interests -- -- 3,342,773
------------ ------------ ------------
Net cash provided by (used in) operating activities 2,352,741 3,514,115 5,771,911
------------ ------------ ------------
Cash flows from investing activities:
Cash acquired in Monterey Merger (Note 10) 6,495,255 -- --
Cash paid for Merger costs (Note 10) (779,097) -- --
Principal payments received on real estate loans 3,710,000 9,114,000 670,000
Real estate loans funded (1,358,457) (3,902,000) (9,610,000)
(Increase) decrease in short term investments 4,272,605 (8,969,100) --
Decrease in funds held by Trustee 5,637,948 1,082,549 2,040,528
------------ ------------ ------------
Net cash provided by (used in) investing activities 17,978,254 (2,674,551) (6,899,472)
------------ ------------ ------------
Cash flows from financing activities:
Repayment of borrowings (7,818,824) (3,964,000) (8,143,532)
Distributions to shareholders (291,496) (194,330) (291,952)
Repurchases of common stock, net of common stock issuances -- -- (17,480)
------------ ------------ ------------
Net cash used in financing activities (8,110,320) (4,158,330) (8,452,964)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 12,220,675 (3,318,766) (9,580,525)
Cash and cash equivalents at beginning of year 3,347,243 6,666,009 16,246,534
------------ ------------ ------------
Cash and cash equivalents at end of year $ 15,567,918 $ 3,347,243 $ 6,666,009
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 286,276 $ 804,113 $ 1,245,952
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Additional
Number Common Paid-in Accumulated Treasury
of Shares Stock Capital Deficit Stock Total
--------- ----- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 3,291,885 $ 32,919 $ 84,112,289 ($61,375,169) ($ 392,802) 22,377,237
Treasury stock acquired - 5,067 shares -- -- -- -- (17,481) (17,481)
Net loss -- -- -- (4,523,405) -- (4,523,405)
Dividend declared -- -- -- (194,330) -- (194,330)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1994 3,291,885 32,919 84,112,289 (66,092,904) (410,283) 17,642,021
Net income -- -- -- 1,097,125 -- 1,097,125
Dividend declared -- -- -- (291,496) -- (291,496)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1995 3,291,885 32,919 84,112,289 (65,287,275) (410,283) 18,447,650
Net income -- -- -- 147,488 -- 147,488
Dividend declared -- -- -- (194,330) -- (194,330)
Shares issued in connection with Merger 1,288,726 12,887 8,531,369 -- -- 8,544,256
(Note 10) ------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1996 4,580,611 $ 45,806 $ 92,643,658 ($65,334,117) ($ 410,283) $ 26,945,064
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Monterey Homes Corporation (previously Homeplex Mortgage Investments
Corporation), the Company, commenced operations in July 1988. Prior to the
Merger (see Note 10), the Company's main line of business was investing in
mortgage certificates securing collateralized mortgage obligations (CMOs),
interests relating to mortgage participation certificates (MPCs) (collectively
residual interests) and loans secured by real estate (see Notes 4 and 3,
respectively).
The combined entities intend to continue with Monterey Homes' building
operations as its main line of business. The operations are currently conducted
primarily in the Phoenix, Scottsdale and Tucson, Arizona markets, which are
significantly impacted by the strength of surrounding real estate markets and
levels 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, although recent
reports project a slowing in housing demand in the metropolitan Phoenix area,
and housing permits in the Tucson metropolitan area have increased only slightly
from 1995 to 1996. A 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.
Basis of Presentation
The consolidated financial statements include the accounts of Monterey
Homes Corporation and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Upon consummation of the Merger a one-for-three reverse stock split of
the Company's issued and outstanding common stock, $.01 par value per share, was
effected. Except as otherwise indicated, the share information contained herein
reflects the one-for-three reverse stock split.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all short-term investments purchased with an original maturity of
three months or less to be cash equivalents. Cash and cash equivalents of
approximately $856,000 at December 31, 1996, is restricted as collateral for the
payment of the Company's short-term credit facility (Note 7).
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. The Company values its real estate under development in accordance with
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
Accordingly, amounts are carried at cost unless expected future net cash flows
(undiscounted and without interest) are less than cost and then amounts are
carried at estimated fair value less cost to sell. Adoption
F-8
<PAGE>
of this Statement did not have a material impact on the Company's financial
position, results of operations or liquidity. Costs capitalized include direct
construction costs for homes, development period interest and certain common
costs which benefit the entire subdivisions. 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.
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.
Residual Interests
Interests relating to mortgage participation certificates and residual
interest certificates are accounted for as described in Note 6.
Property and Equipment
Property and equipment are recorded at cost, net of accumulated
depreciation. Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets, which range from three to five years. Net
property and equipment was $268,096 and $11,195 at December 31, 1996 and 1995,
respectively, and is included in other assets in the accompanying consolidated
balance sheets for those years.
Goodwill
Goodwill, which represents the excess of purchase price over fair value
of net assets acquired, is amortized on a straight-line basis over 20 years,
which is the expected period to be benefited. The Company assesses the
recoverability of this intangible asset by determining whether the amortization
of the goodwill balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operation. The amount
of goodwill impairment, if any, is measured based on projected discounted future
operating cash flows using a discount rate reflecting the Company's average cost
of funds. The assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Under the asset and liability method of SFAS No.
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in future years in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in the consolidated statement of operations as an adjustment to the
effective income tax rate in the period that includes the enactment date.
F-9
<PAGE>
Net Income (Loss) Per Share
For 1996 and 1995, primary net income per share is calculated using the
weighted average number of common and common stock equivalent shares outstanding
during the year. Common stock equivalents of 92,224 and 6,928 in 1996 and 1995,
respectively, consist of dilutive stock options and contingent stock. Net loss
per share for 1994 is calculated using the weighted average number of common
shares outstanding during the year.
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 consolidated 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 these
estimates.
Fair Value of Financial Instruments
The carrying amounts of the Company's receivables, cash and cash
equivalents, option deposits, accounts payable and accrued liabilities and home
sale deposits approximate their estimated fair values due to the short maturity
of these assets and liabilities. The fair value of the Company's short-term
investments and residual interests is discussed in Notes 3 and 6, respectively.
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 would pay or receive in actual market
transactions.
Stock Option Plan
Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees", and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation", which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
Reclassifications
Certain 1995 and 1994 amounts have been reclassified to conform with the
1996 financial statement presentation.
F-10
<PAGE>
NOTE 3 - SHORT-TERM INVESTMENTS
At December 31, 1996, short-term investments, recorded at fair value,
consist of three CMO PAC bonds with a combined principal balance of
approximately $4,700,000, estimated yields to maturity of approximately 5.2% to
5.4% and estimated maturities of approximately two to four months. At December
31, 1995, short-term investments consisted 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%. Short-term investments are restricted as collateral for the
payment of the Company's short-term credit facility (Note 7).
NOTE 4 - REAL ESTATE LOANS AND OTHER RECEIVABLES
The following is a summary of the real estate loans and other receivables
outstanding at December 31:
<TABLE>
<CAPTION>
Interest Payment Principal and
Description Rate Terms Carrying Amount (1)
----------- ---- ----- -------------------
1996 1995
---- ----
<S> <C> <C> <C> <C>
First Deed of Trust on 41
acres of land in Gilbert,
Arizona, face amount of Interest only monthly, principal
$2,800,000. (2) 16% due October 18, 1997. $1,696,272 $1,277,413
First Deed of Trust on 33
acres of land in Tempe,
Arizona. 16% Paid in full in 1996. - 2,272,402
First Deed of Trust on 21.4
acres of land in Tempe,
Arizona. 16% Paid in full in 1996. - 498,000
Other receivables consisting
primarily of sales
commission advances and
home closing proceeds due
from title companies. - - 927,230
------------ ------------
$2,623,502 $4,047,815
============ ============
</TABLE>
(1) Principal payments on real estate loans were $3,710,000 in 1996, and
loan draws were $1,358,457 in 1996.
(2) Loan was current at December 31, 1996.
NOTE 5 - REAL ESTATE UNDER DEVELOPMENT
The components of real estate under development at December 31, 1996 are
as follows:
Homes in production.............................. $22,839,500
Finished lots and lots under development......... 13,151,642
-----------
$35,991,142
===========
F-11
<PAGE>
NOTE 6 - RESIDUAL INTERESTS
The Company owns residual interests in collateralized mortgage
obligations (CMOs) and in mortgage participation certificates (MPCs)
(collectively residual interests). The residual interests are accounted for
using the prospective net level yield method, in which the interest is recorded
at cost and amortized over the life of the related CMO or MPC issuance.
The projected yield and estimated fair value of the Company's residual
interests are based on prepayment, interest rate and fair value assumptions.
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.
At December 31, 1996, the estimated prospective net level yield of the
Company's residual interests, in the aggregate, is 29% without early redemptions
or terminations being considered and 121% if early redemptions or terminations
are considered. Based on discussions with brokers and investors who trade
residual interests, Management believes that the estimated fair value of the
Company's residual interests, in the aggregate, is approximately $7,000,000 at
December 31, 1996 ($5,500,000 at December 31, 1995). This estimated fair value
is based on prevailing market interest rates at December 31, 1996. Should
interest rates increase in the future, the fair value amount could decrease
significantly.
Interests In Residual Interest Certificates
The Company owns residual interest certificates representing the residual
interests in five series of CMOs secured by fixed interest rate mortgage
certificates and cash funds held by trustee. The classes of CMOs have either
fixed interest rates or 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.
The 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 real estate mortgage investment conduits ("REMICs"). The Company also has
the right, under certain conditions, to cause an early redemption of the CMOs,
in which the mortgage certificates are sold at the then current market price and
the CMOs repaid at par value, with any excess cash flowing to the Company.
Generally, the remaining outstanding CMO balance must be less than 10% of the
original balance before early redemption can take place.
Interests In Mortgage Participation Certificates
The Company owns residual interests in REMICs with respect to three
separate series of Mortgage Participation Certificates (MPCs). These residual
interests entitle the Company to receive its proportionate share of the excess,
if any, of payments received from the fixed rate mortgage certificates
underlying the MPCs over principal and interest required to be passed through to
the holders of such MPCs. The
F-12
<PAGE>
Company is not entitled to reinvestment income earned on the underlying mortgage
certificates, is not required to pay related administrative expenses and does
not have the right to elect early termination of any of the MPC classes. The
classes of the MPCs either have fixed interest rates or interest rates that are
determined monthly based on LIBOR or based on the Monthly Weighted Average Cost
of Funds Index (COFI) for Eleventh District Savings Institutions as published by
the Federal Home Loan Bank of San Francisco, subject to specified maximum
interest rates. At December 31, 1996, LIBOR was 5.35% and COFI was 4.84%.
The following summarizes the Company's investment in residual interests
at December 31, 1996 and 1995.
<TABLE>
<CAPTION>
Series Type of Company's Amortized Costs Company's Percentage
- ------ Investments 1996 1995 Ownership
----------- ---- ---- ---------
<S> <C> <C> <C> <C>
Westam 1 Residual Interest Certificate $ 386,192 $ 702,918 100.00%
Westam 3 Residual Interest Certificate 24,495 29,923 100.00%
Westam 5 Residual Interest Certificate 157,385 204,033 100.00%
Westam 6 Residual Interest Certificate 1,845 11,731 100.00%
ASW 65 Residual Interest Certificate 1,996,601 2,520,574 100.00%
FHLMC 17 Interest in MPCs 93,112 140,035 100.00%
FNMA 1988-24 Interest in MPCs 762,510 1,220,418 20.20%
FNMA 1988-25 Interest in MPCs 486,950 627,533 45.07%
------- -------
$3,909,090 $5,457,165
========== ==========
</TABLE>
F-13
<PAGE>
NOTE 7 - NOTES PAYABLE
In December 1996, Monterey consolidated its outstanding construction,
acquisition and development ("A&D") and term loan notes to various banks into a
single revolving credit agreement. The components of this loan are (i) a
revolving $20,000,000 line of credit to finance construction, (ii) a revolving
$20,000,000 guidance line facility to finance acquisition and development, and
(iii) a $6,052,000 term loan to refinance an existing note. Both the
construction and A&D lines of credit are secured by first deeds of trust on
land. The term loan is cross-collateralized with the credit facility and is
secured by cash and short-term investments.
Notes payable consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Construction line of credit to bank, interest payable
monthly approximating prime (8.25% at
December 31, 1996) plus .25%, payable at the
earlier of close of escrow, maturity date of
individual homes within the line or June 19, 2000.................... $7,251,958 N/A
Guidance line of credit to bank for acquisition and
development interest payable monthly
approximating prime plus .5%, payable at the
earlier of funding of construction financing, the
maturity date of individual within the line or June
19, 2000............................................................. 9,628,993 N/A
Short-term credit facility to bank maturing in August
1997, annual interest of prime plus .5%, principal
payments of $500,000 plus interest payable
monthly with remaining principal and interest
payable at maturity date............................................. 5,552,500 N/A
Senior subordinated notes payable, maturing October
15, 2001, annual interest of 13%, payable semi-
annually, principal payable at maturity date with a
put to the Company at June 30, 1998, unsecured
8,000,000............................................................ 8,000,000 N/A
Notes payable to institutional investment group,
secured by residual interests and by funds held by
Trustee, annual interest of 7.81%. Note balance
paid in full May 15, 1996, resulting in
extraordinary loss of approximately $149,000
from prepayment penalties and the write-off of
unamortized debt costs............................................... 0 $7,818,824
Other................................................................... 108,825 N/A
----------- ----------
Total............................................................... $30,542,276 $7,818,824
=========== ==========
</TABLE>
F-14
<PAGE>
The principal payment requirements on notes payable, as of December 31,
1996 are as follows:
Year ending
December 31,
------------
1997.................................................... $15,653,873
1998.................................................... 6,888,403
1999.................................................... -
2000.................................................... -
2001 and thereafter..................................... 8,000,000
-----------
$30,542,276
===========
A provision of the senior subordinated bond indenture provides the
bondholders with the option, at June 30, 1998, to require the Company to buy
back the bonds at 101% of face value. Also, approximately $2,800,000 of the
bonds are held by the Co-Chief Executive Officers of the Company.
NOTE 8 - STOCK OPTIONS
At December 31, 1996, the Company has one stock based compensation plan
which is described below. The per share weighted average fair value of stock
options granted during 1996 and 1995 was $1.63 on the date of grant using the
Black Scholes pricing model with the following weighted average assumptions;
expected dividend yield 1.40%, risk-free interest rate of 5.85% and an expected
life of five years. The Company applies APB Opinion No. 25 and related
interpretations in accounting for its plans. No compensation cost has been
recognized for its stock based compensation plan (which is a fixed stock option
plan). Had compensation cost for the Company's stock based compensation plan
been determined consistent with FASB Statement No. 123, the Company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below:
1996 1995
---- ----
Net income (loss) As reported $147,488 $1,097,125
Pro forma ($151,345) $988,458
Earnings (loss) per share As reported $.04 $.34
Pro forma ($.05) $.30
The Company's Stock Option Plan 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
145,833 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.
F-15
<PAGE>
At December 31, 1996, 148,498 options, including dividend equivalent
rights, were exercisable at effective exercise prices ranging from $3.63 per
share to $13.32 per share. At December 31, 1996 and 1995, 119 common shares were
available for future grants.
Optionholders also receive, at no additional cost, dividend equivalent
rights (DER's) 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, 1996 and 1995 accounts
payable and accrued 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.
The following summarizes stock option activity under the Stock Option
Plan:
For the Year ended December 31, 1996 1995 1994
- ------------------------------ ---- ---- ----
Options granted..................................... - 24,667 -
Exercise price per share of options granted......... - 4.50 -
DER's granted....................................... 1,249 2,909 2,593
Options cancelled (including DER's)................. - 11,424 -
Options exercised (including DER's)................. - - -
At December 31, 1996 1995
- -------------- ---- ----
Options outstanding................................. 95,256 95,256
DER's outstanding................................... 54,385 53,136
------ ------
Total options and DER's outstanding................. 149,641 148,392
======= =======
In addition to the above referenced options, in December 1995, in
connection with the renegotiation of the prior Chief Executive Officer's
Employment Agreement, the Company replaced his annual salary of $250,000 plus
bonus with 250,000 non-qualified stock options which become fully vested at
December 21, 1997. The exercise price of the options is $4.50 per share which
was equal to the closing market price of the common stock on grant date. The
options will expire in December 2000.
F-16
<PAGE>
At the 1997 Annual Meeting of Stockholders to be held in the third
quarter of 1997, a new stock option plan will be submitted for stockholder
approval. It is currently anticipated that 225,000 shares of the Company's
common stock will be reserved for issuance upon the exercise of stock options
granted under the new plan. The plan will be administered by the Compensation
Committee of the Board of Directors and will provide for grants of incentive
stock options to key employees and non-qualified stock options to Directors and
key employees. The purpose of this new plan is to provide a means of
performance-based compensation in order to attract and retain key personnel
whose job performance affects the Company.
NOTE 9 - 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 December 31, 1996:
Year Ending
December 31,
------------
1997....................................................... $937,981
1998....................................................... 363,927
1999....................................................... 201,907
Thereafter................................................. 0
-------------
$1,503,815
=============
Rental expense was $22,639 and $21,780 for the years ended December 31,
1995 and 1996, respectively.
NOTE 10 - HOMEPLEX / MONTEREY MERGER
On December 23, 1996, the stockholders of Homeplex Mortgage Investments
Corporation, now known as Monterey Homes Corporation (the "Company"), approved
the Merger (the "Merger") of Monterey Homes Construction II, Inc. and Monterey
Homes Arizona II, Inc., both Arizona corporations (collectively, the "Monterey
Entities" or "Monterey"), with and into the Company. The Merger was effective on
December 31, 1996, and the Company will focus on homebuilding as its primary
business. Also, ongoing operations of the Company will be managed by the two
previous stockholders of Monterey, who at the time of the Merger, became
Co-Chief Executive Officers with one serving as Chairman and the other as
President. At consummation of the Merger, 1,288,726 new shares of common stock,
$.01 par value per share, were issued equally to the Co-Chief Executive
Officers.
Monterey, in connection with an $8,000,000 subordinated debt private
placement that occurred during October 1994, issued warrants to the bondholders
to purchase approximately 16.48% of Monterey. Accordingly, of the 1,288,726
shares issued in the Merger, 212,398 are held by the Company on behalf of the
Co-Chief Executive Officers, to be delivered to the warrantholders upon payment
of the warrant
F-17
<PAGE>
exercise price to the Co-Chief Executive Officers. Upon expiration of the
warrants, any of the remaining 212,398 will be delivered to the Co-Chief
Executive Officers.
In addition, up to 266,667 shares of contingent stock will be issued
equally to the Co-Chief Executive Officers provided that certain stock trading
price thresholds are met and that the Officer is still an employee of the
Company at the time of issuance. The price thresholds are $5.25, $7.50 and
$10.50 for dates after the first, second and third anniversaries of the Merger,
respectively, and the prices must be maintained for 20 consecutive trading days.
The number of contingent shares issued would be 44,943, 88,888 and 88,889,
respectively. Included in the above mentioned 266,667 contingent shares are
43,947 shares (approximately 16.48%) issuable to the Company's warrantholders,
upon exercise of the warrants. Such shares are not subject to meeting certain
stock trading price thresholds or employment of the Co-Chief Executive Officers.
Upon expiration of unexercised warrants, any of the remaining 43,947 contingent
shares will be issued to the Co-Chief Executive Officers.
The total consideration paid by the Company for the net assets of
Monterey Homes was $9,323,353. This amount included 1,288,726 shares of the
Company's common stock valued at $8,544,256 and $779,097 of transaction costs.
The purchase method of accounting was used by the Company, and the purchase
price was allocated among the Monterey net assets based on their estimated fair
market value at the date of acquisition, resulting in goodwill of $1,763,488
which will be amortized over 20 years.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company as if the Merger had occurred
at January 1, 1995, with pro forma adjustments together with related income tax
effects. The pro forma results have been prepared for comparative purposes only
and do not purport to be indicative of the results of operations that would
actually have resulted had the combination been in effect on the date indicated.
Years ended December 31,
(Unaudited)
1996 1995
---- ----
Total revenues.................................... $ 89,990 $ 75,195
Net income........................................ $ 6,120 $ 6,210
Net earnings per common share..................... $ 1.27 $ 1.28
NOTE 11 - INCOME TAXES
Current income tax expense for the year ended December 31, 1996 was
$26,562 and was attributed to federal estimated tax of $18,700 and state
estimated tax of $7,862. No current income tax was recorded in 1995 and deferred
income tax was -0- in 1996 and 1995.
Deferred Tax Assets
The net deferred tax asset at December 31, 1996 was recorded as part of
the Homeplex/Monterey Merger purchase accounting (Note 10).
F-18
<PAGE>
Deferred tax assets have been recorded in the December 31, 1996
consolidated balance sheet due to temporary differences and carryforwards as
follows:
Net operating loss carryforward........................ $21,200,000
Residual interests basis differences................... 2,100,000
Real estate basis differences.......................... 400,000
Debt issuance costs.................................... 266,000
Other.................................................. 85,000
-----------
24,051,000
Valuation Allowance.................................... (17,268,000)
-----------
Deferred tax liabilities............................... 0
-----------
Net Deferred Tax Asset.......................... $ 6,783,000
===========
Management of the Company believes it is more likely than not that the
results of future operations will generate sufficient taxable income to realize
the net deferred tax asset.
Carryforwards
For federal and state income tax purposes, at December 31, 1996 the
Company had a net operating loss carryforward of approximately $53 million that
expires beginning in 2007.
NOTE 12 - 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
Company's financial statements taken as a whole.
NOTE 13 - QUARTERLY FINANCIAL DATA (Unaudited)
(In Thousands Except Per Share Amount)
Net Net Income (Loss)
Revenue Income (Loss) Per Share
------- ------------- ---------
1996
- ----
First.................... $ 635 $ 84 $ .03
Second (1)............... 636 148 .04
Third.................... 530 314 .09
Fourth................... 443 (399) (.12)
F-19
<PAGE>
1995
First.................... $ 1,103 $ 462 $ .15
Second................... 1,078 335 .10
Third.................... 707 58 .02
Fourth................... 677 242 .07
(1) Net income in the second quarter of 1996 includes an extraordinary charge
of $148,000, or $.05 per share, to record the result of early
extinguishment of debt.
[End of Notes to Consolidated Financial Statements]
F-20
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 6,964,580 $ 15,567,918
Short-term investments 319,732 4,696,495
Real estate loans and other receivables 2,304,066 2,623,502
Real estate under development (Note 2 & 4) 46,003,850 35,991,142
Option deposits 1,690,991 546,000
Residual interests 3,817,410 3,909,090
Other assets 804,811 940,095
Deferred tax asset 6,783,000 6,783,000
Goodwill (Note 5) 1,741,444 1,763,488
------------ ------------
$ 70,429,884 $ 72,820,730
============ ============
LIABILITIES
Accounts payable and accrued liabilities $ 6,648,167 $ 10,569,872
Home sale deposits 6,708,704 4,763,518
Notes payable (Note 3) 29,846,248 30,542,276
------------ ------------
Total Liabilities 43,023,119 45,875,666
------------ ------------
STOCKHOLDERS' EQUITY (Note 5)
Common stock, par value $.01 per share; 50,000,000 shares
authorized; issued and outstanding - 4,580,611 shares 45,806 45,806
Additional paid-in capital 92,817,021 92,643,658
Accumulated deficit (65,045,779) (65,334,117)
Treasury stock - 53,046 shares (410,283) (410,283)
------------ ------------
Total Stockholders' Equity 27,406,765 26,945,064
------------ ------------
$ 70,429,884 $ 72,820,730
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-21
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1997 1996
---- ----
<S> <C> <C>
REVENUES
Home sales (Notes 1 and 5)................................................ $12,572,837 --
Residential interest and real estate loan interest income................. 359,294 $438,082
Other income.............................................................. 175,316 196,613
----------- ---------
13,107,447 634,695
COSTS AND EXPENSES
Cost of home sales (Notes 1 and 5)........................................ 10,946,502 --
Commissions and other sales costs (Notes 1 and 5)......................... 755,048 --
General, administrative and other......................................... 1,091,686 388,073
Interest.................................................................. -- 162,289
----------- ---------
12,793,236 550,362
----------- ---------
Income before income tax expense.......................................... 314,211 84,333
Income tax expense........................................................ 25,873 --
----------- ---------
Net income....................................................... $ 288,338 $ 84,333
=========== =========
Earnings per share........................................................ $ 0.06 $ 0.03
=========== =========
Weighted average common shares outstanding................................ 4,671,173 3,273,118
</TABLE>
See accompanying notes to consolidated financial statements
F-22
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 288,338 $ 84,333
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Increase in real estate under development (10,012,708) --
Depreciation and amortization 195,407 19,300
Amortization of residual interest 91,680 472,388
Increase in other assets (895,999) (179,023)
Decrease in accounts payable and accrued liabilities (1,962,189) (94,385)
------------ ------------
Net cash provided by (used in) operating activities (12,295,471) 302,613
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal payments received on real estate loans 384,000 498,330
Real estate loans funded (178,272) (50,000)
(Increase) decrease in short-term investments 4,376,763 (113,040)
Decrease in funds held by Trustee -- 388,813
------------ ------------
Net cash provided by investing activities 4,582,491 724,103
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings 4,797,651 --
Repayment of borrowings (5,493,679) (991,000)
Distributions to stockholders (194,330) (291,496)
------------ ------------
Net cash used in financing activities (890,358) (1,282,496)
------------ ------------
Net decrease in cash and cash equivalents (8,603,338) (255,780)
Cash and cash equivalents at beginning of period 15,567,918 3,347,243
------------ ------------
Cash and cash equivalents at end of period $ 6,964,580 $ 3,091,463
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-23
<PAGE>
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Monterey Homes Corporation (previously Homeplex Mortgage Investments
Corporation), the Company, commenced operations in July 1988. Prior to the
Merger (see Note 5), the Company's main line of business was investing in
mortgage certificates securing collateralized mortgage obligations (CMOs),
interests relating to mortgage participation certificates (MPCs) (collectively
residual interests) and loans secured by real estate.
Since January 1, 1997, the operation of the Company has focused on
homebuilding, and the combined entities intend to continue with Monterey Homes'
building operations as its main line of business. These operations are currently
conducted primarily in the Phoenix, Scottsdale and Tucson, Arizona markets.
Basis of Presentation
The consolidated financial statements include the accounts of Monterey
Homes Corporation and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Certain prior period amounts have been reclassified to be consistent with
current financial statement presentation. In the opinion of Management, the
unaudited consolidated financial statements reflect all adjustments, consisting
only of normal recurring 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.
Upon consummation of the Merger a one-for-three reverse stock split of
the Company's issued and outstanding common stock, $.01 par value per share, was
effected. Except as otherwise indicated, the share information contained herein
reflects the one-for-three reverse stock split.
NOTE 2 - REAL ESTATE UNDER DEVELOPMENT
The components of real estate under development at March 31, 1997 and
December 31, 1996 are as follows:
December 31,
(Unaudited) ------------
March 31, 1997 1996
-------------- ----
Homes in production............................ $25,245,383 $22,839,500
Finished lots and lots under development....... 20,758,467 13,151,642
----------- -----------
$46,003,850 $35,991,142
=========== ===========
F-24
<PAGE>
NOTE 3 - NOTES PAYABLE
Notes payable consist of the following at March 31, 1997 and December
31, 1996:
<TABLE>
<CAPTION>
December 31,
(Unaudited) ------------
March 31, 1997 1996
-------------- ----
<S> <C> <C>
Construction line of credit to bank, interest payable
monthly approximating prime (8.5% at March
31, 1997) plus .25%, payable at the earlier of
close of escrow or maturity date of individual
homes within the line or June 19, 2000 $10,458,076 $7,251,958
Guidance line of credit to bank for acquisition and
development, interest payable monthly
approximating prime plus .5%, payable at the
earlier of funding of construction financing, the
maturity date of individual projects within the
line or June 19, 2000 7,276,638 9,628,993
Short-term credit facility to bank maturing in August
1997, annual interest of prime plus .5%,
principal payments of $500,000 plus interest
payable monthly with remaining principal and
interest payable at maturity date 4,052,500 5,552,500
Senior subordinated notes payable, maturing October
15, 2001, annual interest of 13%, payable semi-
annually, principal payable at maturity date with
a put to the Company at June 30, 1998,
unsecured 8,000,000 8,000,000
Other 59,034 108,825
----------- ----------
Total $29,846,248 $30,542,276
=========== ===========
</TABLE>
A provision of the senior subordinated bond indenture provides the
bondholders with the option, at June 30, 1998, to require the Company to buy
back the bonds at 101% of face value. Approximately $2,800,000 of the bonds are
held equally by the Co-Chief Executive Officers of the Company.
NOTE 4 - CAPITALIZED INTEREST
The Company capitalizes interest costs incurred on homes in production
and lots under development. This capitalized interest is allocated to unsold
lots, and included in cost of home sales in the accompanying statements of
earnings when the units are delivered. The following tables summarize interest
capitalized and interest expensed (dollars in thousands):
F-25
<PAGE>
Quarter ended March 31,
1997 1996
---- ----
Beginning unamortized capitalized interest $ -- $ N/A
Interest 692 N/A
Amortized - cost of home sale (93) N/A
----- -----
Ending unamortized capitalized interest $ 599 N/A
===== =====
Interest incurred $ 692 $ 162
Interest capitalized 692 N/A
----- -----
Interest expensed $ -- $ 162
===== =====
Had the Merger not occurred, interest capitalized by the Monterey
Entities would have been $692,000 and $832,000 for the three months ended March
31, 1997 and 1996, respectively. Interest amortized through cost of home sales
would have been $532,000 and $430,000 for the same periods, respectively.
NOTE 5 - HOMEPLEX / MONTEREY MERGER
On December 23, 1996, the stockholders of Homeplex Mortgage Investments
Corporation, now known as Monterey Homes Corporation (the "Company"), approved
the Merger (the "Merger") of Monterey Homes Construction II, Inc. and Monterey
Homes Arizona II, Inc., both Arizona corporations (collectively, the "Monterey
Entities" or "Monterey"), with and into the Company. The Merger was effective on
December 31, 1996, and the Company will focus on homebuilding as its primary
business. Also, ongoing operations of the Company will be managed by the two
previous stockholders of Monterey, who at the time of the Merger, became
Co-Chief Executive Officers with one serving as Chairman and the other as
President. At consummation of the Merger, 1,288,726 new shares of common stock,
$.01 par value per share, were issued equally to the Co-Chief Executive
Officers.
Monterey, in connection with an $8,000,000 subordinated debt private
placement that occurred during October 1994, issued warrants to the bondholders
to purchase approximately 16.48% of Monterey. Accordingly, of the 1,288,726
shares issued in the Merger, 212,398 are held by the Company on behalf of the
Co-Chief Executive Officers, to be delivered to the warrantholders upon payment
of the warrant exercise price to the Co-Chief Executive Officers. Upon
expiration of the warrants, any of the remaining 212,398 will be delivered to
the Co-Chief Executive Officers.
In addition, up to 266,667 shares of contingent stock will be issued
equally to the Co-Chief Executive Officers provided that certain stock trading
price thresholds are met and that the Officer is still an employee of the
Company at the time of issuance. The price thresholds are $5.25, $7.50 and
$10.50 for dates after the first, second and third anniversaries of the Merger,
respectively, and the prices must be maintained for 20 consecutive trading days.
The number of contingent shares issued would be 44,943, 88,888 and 88,889,
respectively. Included in the above mentioned 266,667 contingent shares are
43,947 shares (approximately 16.48%) issuable to the Company's warrantholders,
upon exercise of the warrants. Such shares are not subject to meeting certain
stock trading price thresholds or employment of the Co-Chief Executive Officers.
Upon expiration of unexercised warrants, any of the remaining 43,947 contingent
shares will be issued to the Co-Chief Executive Officers.
F-26
<PAGE>
The total consideration paid by the Company for the net assets of
Monterey Homes was $9,323,353. This amount included 1,288,726 shares of the
Company's common stock valued at $8,544,256 and $779,097 of transaction costs.
The purchase method of accounting was used by the Company, and the purchase
price was allocated among the Monterey net assets based on their estimated fair
market value at the date of acquisition, resulting in goodwill of $1,763,488
which will be amortized over 20 years.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company as if the Merger had occurred
at January 1, 1996, with pro forma adjustments together with related income tax
effects. The pro forma results have been prepared for comparative purposes only
and do not purport to be indicative of the results of operations that would
actually have resulted had the combination been in effect on the date indicated.
Three Months
ended March 31,
1997 1996
---- ----
Total revenues $13,107,447 $15,405,525
Net income 288,338 268,393
Net earnings per share $.06 $.06
NOTE 6 - INCOME TAXES
Deferred tax assets of approximately $6.8 million have been recorded in
the March 31,1997 and December 31, 1996 balance sheet due to temporary
differences and carryforwards. For federal and state income tax purposes at
March 31, 1997 and at December 31, 1996, the Company had a net operating loss
carryforward of approximately $53 million that expires beginning in 2007.
Income tax expense for the three months ended March 31, 1997 was
$25,873. No income tax was recorded in the first quarter of 1996, due to the
Company's status as a real estate investment trust in that year.
F-27
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses payable by the Company in connection with the issuance and
distribution of the securities being registered (other than underwriting
discounts and commissions), all of which are payable by the Company, are
estimated to be as follows:
Registration Fee......................................... $ 262
Printing Fees............................................ 1,000
Legal Fees and Expenses.................................. 15,000
Accounting Fees and Expenses............................. 8,000
Other Fees and Expenses.................................. 2,000
---------
Total........................................... $ 26,262
=========
ITEM 14. 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 Company's charter contains a provision limiting the personal
liability of officers and directors to the Company 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 Company's 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 liability arising under the Securities
Act may be permitted to directors, officers, or persons controlling the Company
pursuant to the foregoing provisions, the Company 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.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Pursuant to the Stock Option Agreement dated as of December 21, 1995
between the Company and Alan Hamberlin, Mr. Hamberlin was granted options (the
"Options") to purchase 250,000 (post-split) shares of the Company's Common
Stock. The Options were issued in connection with an employment agreement
entered into between the Company and Mr. Hamberlin as of December 21, 1995. See
"The Merger -- Hamberlin Stock Options." The Options were issued in reliance on
the exemption from registration under the Securities Act contained in Section
4(2) of the Securities Act. At the time of issuance of the Options, Mr.
Hamberlin was the Chief Executive Officer of the Company.
During the years 1994, 1995, and 1996, certain grants of options and
dividend equivalent rights ("DERs") were made under the Company's Stock Option
Plan dated July 27, 1988, as amended to the date hereof (the "Plan"). Options
totaling 21,334 and DERs totaling 4,413 were granted to Mr. Hamberlin; 996 DERs
were granted to Mr. Jay Hoffman, who was at the time the President, Secretary,
Treasurer, and Chief Financial Officer of the Company; and a total of 3,333
options and 1,342 DERs were granted under the Plan to five other senior
employees or directors of the Company during those years. All such options and
DERs were issued in reliance on Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
<TABLE>
<CAPTION>
Exhibit Page or
Number Description Method of Filing
- ------ ----------- ----------------
<S> <C> <C>
2 Agreement and Plan of Reorganization, dated Incorporated by reference to
as of September 13, 1996, by and among Exhibit 2 of the Form S-4
Homeplex, the Monterey Merging Companies Registration Statement No.
and the Monterey Stockholders. 333-15937 ("S-4 #333-
15937").
3.1 Amended and Restated Articles of Incorporated by reference to
Incorporation of the Company Exhibit 3(a) of the Registration
Statement on Form S-11 No.
33-22092 ("S-11 #33-22092")
3.2 Articles of Merger Incorporated by reference to
Exhibit 3.2 to the Form 10-K for
the year ended December 31, 1996.
3.3 Bylaws of the Company Incorporated by reference to
Exhibit 3(b) to the Form 10-Q
for the quarter ended June 30,
1995.
3.4 Amendment to the Bylaws Incorporated by reference to
Exhibit 3.4 to the Form 10-K for
the year ended December 31, 1996.
4.1 Specimen of Common Stock Certificate Incorporated by reference to
Exhibit 4 to the Form 10-K for
the year ended December 31, 1996.
4.2 Warrant Agreement dated as of October 17, Filed herewith
1994 among Monterey and the Warrant Agent
4.3 Assumption Agreement dated as of December 31, Filed herewith
1996 modifying the Warrant Agreement
in certain respects, and relating to the assumption
of the Warrant Agreement by the Company and
certain other matters
4.4 Specimen Warrant Certificate Filed herewith
5.1 Opinion of Venable, Baetjer & Howard Filed herewith
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C> <C>
10.1 Subcontract Agreement between Homeplex Incorporated by reference
and American Southwest Financial Services, to Exhibit 10(b) of S-11
Inc. #33-22092.
10.2 Form of Master Servicing Agreement Incorporated by reference
to Exhibit 10(c) of S-11
#33-22092.
10.3 Form of Servicing Agreement Incorporated by reference
to Exhibit 10(d) of S-11
#33-22092.
10.4 Indenture dated October 17, 1994, as Incorporated by reference to
amended, relating to 13% Senior Subordinated Exhibit 10(j) of the S-4 # 333-
Notes Due 2001 15937.
10.5 Master Revolving Line of Credit by and Incorporated by reference to
between Norwest Bank Arizona, N.A. and the Exhibit 10.5 to the Form 10-K for
Company the year ended December 31, 1996.
10.6 Revolving Model Home Lease Back Incorporated by reference to
Agreement between AMHM-1, L.P. and the Exhibit 10.6 to the Form 10-K for
Company the year ended December 31, 1996.
10.7 Stock Option Plan* Incorporated by reference
to Exhibit 10(d) of Form
10-K for the fiscal year
ended December 31, 1995
("1995 Form 10-K").
10.8 Amendment to Stock Option Plan* Incorporated by reference
to Exhibit 10(e) of
the 1995 Form 10-K.
10.9 Amendment to Stock Option Plan dated as of Filed herewith
December 31, 1996*
10.10 Monterey Homes Corporation Stock Incorporated by reference to
Option Plan *+ Exhibit 10.9 to the Form 10-K for
the year ended December 31, 1996.
10.11 Employment Agreement between the Incorporated by reference to
Company and William W. Cleverly* Exhibit 10.10 to the Form 10-K
for the year ended December 31,
1996.
10.12 Employment Agreement between the Incorporated by reference to
Company and Steven J. Hilton* Exhibit 10.11 to the Form 10-K
for the year ended December 31,
1996.
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C> <C>
10.13 Stock Option Agreement between the Incorporated by reference to
Company and William W. Cleverly* Exhibit 10.12 to the Form 10-K
for the year ended December 31,
1996.
10.14 Stock Option Agreement between the Incorporated by reference to
Company and Steven J. Hilton* Exhibit 10.13 to the Form 10-K
for the year ended December 31,
1996.
10.15 Registration Rights Agreement between the Incorporated by reference to
Company and William W. Cleverly* Exhibit 10.14 to the Form 10-K
for the year ended December 31,
1996.
10.16 Registration Rights Agreement between the Incorporated by reference to
Company and Steven J. Hilton* Exhibit 10.15 to the Form 10-K
for the year ended December 31,
1996.
10.17 Escrow and Contingent Stock Agreement Incorporated by reference to
Exhibit 10.16 to the Form 10-K
for the year ended December 31,
1996.
10.18 Amended and Restated Employment Incorporated by reference to
Agreement and Addendum between the Exhibit 10(g) of the 1995
Company and Alan D. Hamberlin* Form 10-K.
10.19 Stock Option Agreement between the Incorporated by reference to
Company and Alan D. Hamberlin* Exhibit 10(h) of the 1995
Form 10-K
10.20 Agreement of Purchase and Sale of Assets Incorporated by reference to the
by and among the Company, Legacy Homes, Company's Form 8-K/A dated
Ltd., Legacy Enterprises, Inc., and John Landon May 29, 1997
and Eleanor Landon, dated May 29, 1997
23.1 Consent of KPMG Peat Marwick LLP Filed herewith
23.2 Consent of Ernst & Young LLP Filed herewith
23.3 Consent of Venable, Baetjer & Howard Included in Exhibit No. 5.1
24 Powers of Attorney See signature page
</TABLE>
- ---------------------
* Indicates a management contract or compensation plan.
+ To be submitted for stockholder approval at the 1997 Annual Meeting of
Stockholders to be held on or about September 25, 1997.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
II-4
<PAGE>
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement.
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) above do not apply
if the registration statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to section 13 or section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose 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.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 ("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 Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
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 of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
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 June 19, 1997.
MONTEREY HOMES CORPORATION
By: /s/ William W. Cleverly
-------------------------------------------
William W. Cleverly
Chairman of the Board and
Co-Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints William W. Cleverly, Steven J. Hilton and Larry
W. Seay, and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to
this registration statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
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 and to
all intents and purposes as he might or could do in person hereby ratifying and
confirming all that said attorneys-in-fact and agents, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
- --------- ----- ----
/s/ William W. Cleverly Chairman of the Board and Co- June 19, 1997
- ----------------------- Chief Executive Officer (Co-
William W. Cleverly Principal Executive Officer)
and Director
/s/ Steven J. Hilton President and Co-Chief June 19, 1997
- ----------------------- Executive Officer (Co-Principal
Steven J. Hilton Executive Officer) and Director
II-6
<PAGE>
Signature Title Date
- --------- ----- ----
/s/ Larry W. Seay Vice President - Finance and June 19, 1997
- ----------------------- Chief Financial Officer
Larry W. Seay (Principal Financial Officer and
Principal Accounting Officer)
/s/ Alan D. Hamberlin Director June 19, 1997
- -----------------------
Alan D. Hamberlin
/s/ Robert G. Sarver Director June 19, 1997
- -----------------------
Robert G. Sarver
/s/ C. Timothy White Director June 19, 1997
- -----------------------
C. Timothy White
II-7
MONTEREY MANAGEMENT, INC.,
MONTEREY HOMES CORPORATION
and
BANK ONE, ARIZONA, NA
WARRANT AGREEMENT
THIS WARRANT AGREEMENT (the "Agreement") is made effective as of the
17th day of October, 1994, among Monterey Management, Inc., an Arizona
corporation (the "Company"), Monterey Homes Corporation, an Arizona corporation
("MHC") and Bank One, Arizona, NA (the "Warrant Agent").
R E C I T A L S
---------------
A. The Company and MHC has entered into an agreement (the "Placement
Agreement") with Friedman, Billings, Ramsey & Co., Inc. (the "Placement Agent"),
pursuant to which the Placement Agent has agreed to assist the Company in the
placement of up to 150 Units, each consisting of $100,000 in principal amount of
13.0% Senior Subordinated Notes Due 2001 and 5,000 Common Stock Purchase
Warrants ("Warrants"), subject to the terms of the Placement Agreement (the
"Private Placement").
B. Each Warrant entitles the holder to purchase one share of the
Company's Common Stock through October 15, 2001.
C. The Company and MHC desire to provide for the form and provisions of
the Warrants, the terms upon which they shall be issued and exercised, and the
respective rights, limitation of rights and immunities of the Company and MHC,
the Warrant Agent, and the registered holders of the Warrants.
D. Items not otherwise deferred herein shall have the meanings
described to them in the Indenture dated October 17, 1994 among the Company, MHC
and Bank One, Arizona, N.A.
E. All acts and things necessary to make the Warrants, when executed on
behalf of the Company and countersigned by or on behalf of the Warrant Agent as
provided in this Agreement, the valid, binding and legal obligations of the
Company, and to authorize the execution and delivery of this Agreement, have
been done and performed.
NOW, THEREFORE, it is hereby agreed as follows:
1
<PAGE>
ARTICLE 1
ISSUANCE OF WARRANTS
Section 1.01 Issuance of Definitive Warrants. At the closing date under
the Placement Agreement (the "Warrant Date"), the Company will issue
Certificates, in substantially the form attached as Exhibit A hereto, which are
exchangeable for Common Stock ("Warrant Certificates") only as provided in
Article 2 hereof and not after October 15, 2001. Each Warrant evidences the
right of the registered holder thereof, subject to the terms and conditions
hereof, to subscribe for one share of Common Stock of the Company or MHC or any
holding company which is formed to own all of the common stock of the Company
and MHC or any other firm, partnership or corporation which owns substantially
all of the assets or business which is conducted under the trade name "Monterey
Homes" or through the Company or MHC that becomes publicly held (the foregoing
entity or entities are for convenience hereinafter referred to as the "Company,"
as the context requires).
Section 1.02 Execution and Delivery of Warrants. Each Warrant
Certificate shall be dated the Warrant Date and shall be signed on behalf of the
Company by the facsimile or manual signature of the President and Secretary. The
Company may adopt and use the facsimile or manual signature of any person who is
such an officer of the Company at the time of the execution of any Warrant
Certificate, irrespective of the date as of which the same is executed, or of
any person now or hereafter holding such office, notwithstanding the fact that
at the time the Warrant is issued he has ceased to be such officer of the
Company, and prior to the delivery of any Warrant it shall be authenticated by
or on behalf of the Warrant Agent by an authorized officer (who may sign by
facsimile or manual signature). No Warrant shall be valid unless it shall have
been authenticated as herein provided.
SECTION 2
DURATION, EXERCISE AND REDEMPTION OF WARRANTS
Section 2.01 Duration of Warrants and Terms of Exercise. Each Warrant
entitles the holder to purchase one share of the Company's Common Stock or
equivalent security of any successor to the Company at a price of $6.25 per
share (the "Purchase Price"), subject to adjustment as provided herein, for a
term, commencing on the Warrant Date and ending October 15, 2001 (the "Exercise
Period"). If notice has been given as provided in Section 4.01 in connection
with the liquidation, dissolution or winding up of the Company, the right to
exercise Warrants shall expire at the close of business on the third full
business day before the date specified in such notice as the record date for
determining registered holders entitled to receive any distribution upon such
liquidation, dissolution or winding up.
Section 2.02 Conditions Precedent to Exercise of Warrants. The Warrants
are not exercisable unless and until (a) the Company completes an initial public
offering of its securities; (b) any consolidation of the Company with, or merger
of the Company into, another
2
<PAGE>
corporation where the Company is not the surviving Company; (c) the sale of
substantially all of the assets of the Company; or (d) a change of control as
described below; provided, however, that any internal reorganization of the
Company and its affiliate, MHC, into a single corporation or the sale of
substantially all of the assets from the Company to MHC or from MHC to the
Company will not result in the Warrants becoming exercisable.
For purposes of this Agreement, "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 an entity or group of
entities 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 MHC consolidates with or merges or amalgamates with or into another
entity or conveys, transfers, or leases all or substantially all of its assets
to any entity, or any entity consolidates with, or merges or amalgamates with or
into the Company or MHC, 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 MHC, 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 MHC approve any
plan of liquidation or dissolution of the Company or MHC; provided, however,
that any internal reorganization of the Company and MHC into a single
corporation will not constitute a Change of Control.
Section 2.03 Exercise of Warrants. Upon satisfaction of one or more of
the conditions precedent set forth in Section 2.02 hereof, Warrants may be
exercised by surrendering, at the office of the Warrant Agent in Phoenix,
Arizona, the Warrant Certificate evidencing such Warrants, together with a
subscription in the form set forth on the reverse side of the Warrant
Certificate, duly executed, and accompanied by the tender, in U.S. dollars, of
either federal funds or a certified check or bank cashier's check, payable to
the order of the Warrant Agent for the applicable Purchase Price. The Warrants
may be exercised from time to time and at any time during the Exercise Period,
in whole or in part. As soon as practicable after any Warrants have been so
exercised, the Company shall cause to be issued and delivered to the holder, or
upon the order of the registered holder of such Warrants, in such name or names
as may be directed by him, a certificate or certificates for the number of full
shares of Common Stock and Warrants to which he is entitled, and if such Warrant
Certificate shall not have been exercised in full, a new Warrant Certificate for
the number of Warrants as to which such Warrant Certificate shall not have been
exercised. All Warrant Certificates so surrendered shall be delivered to and
canceled by the Warrant Agent.
3
<PAGE>
Section 2.04 Common Stock Issued Upon Exercise of Warrants. All shares
of Common Stock (or equivalent equity security) issued upon the exercise of
Warrants shall be duly authorized, validly issued and outstanding, fully-paid
and nonassessable. Fractional shares of the Company's Common Stock will not be
issued upon exercise of a Warrant. With respect to any fraction of a share
called for upon any such exercise hereof, the Company shall pay to the holder an
amount in cash equal to such fraction multiplied by the Current Market Price Per
Share, determined in accordance with Section 3.08.
Section 2.05 Record Date of Shares. Irrespective of the date of issue
and delivery of certificates for any Common Stock issuable upon the exercise of
Warrants, each person in whose name any such certificate is issued shall be
deemed to have become the holder of record of the shares represented thereby on
the date on which the Warrant Certificate surrendered in connection with the
subscription therefor was surrendered and payment of the Purchase Price was
tendered. No surrender of Warrant Certificates on any date when the stock
transfer books of the Company are closed, however, shall be effective to
constitute the person or persons entitled to receive shares upon such surrender
as the record holder of such shares on such date, but such person or persons
shall be constituted the record holder or holders of such shares at the close of
business on the next succeeding date on which the stock transfer books are
opened. Except as otherwise provided in Section 3.04, each person holding any
shares received upon exercise of Warrants shall be entitled to receive only
dividends or distributions payable to holders of record on or after the date on
which such person shall be deemed to have become the holder of record of such
shares.
Section 2.06 Redemption of Warrants. The Company may not redeem the
Warrants.
ARTICLE 3
ADJUSTMENT OF PURCHASE PRICE,
NUMBER OF SHARES OR NUMBER OF WARRANTS
Section 3.01 General. The Purchase Price and the number of shares of
Common Stock covered by each Warrant and the number of Warrants outstanding are
subject to adjustment from time to time upon the occurrence of the events
enumerated in this Article 3.
Section 3.02 Issuance of Additional Shares and Warrants. If and
whenever the Company shall issue any shares of its Common Stock for
consideration per share which is less than the Purchase Price prior to such
issue, under circumstances not specifically enumerated in Sections 3.03 through
3.09 inclusive, the Purchase Price under the Warrants shall be reduced to a
price determined by dividing (i) the sum of (A) the number of shares of Common
Stock outstanding immediately prior to such issue multiplied by the Purchase
Price, plus (B) the consideration, if any, received by the Company upon such
issue, by (ii) the number of shares of Common Stock outstanding immediately
after such issue. No such adjustment shall be made in
4
<PAGE>
an amount less than $.05, but any such amount shall be carried forward and shall
be given effect in connection with the next subsequent adjustment. For purposes
of this Section 3.02, the following shall also be applicable:
Section 3.02.a. Public Offerings of Convertible Securities, Options,
Rights or Warrants. Subject to Section 3.03, if the Company shall issue in a
public offering any stock, security, obligation, option or other right or
warrant which directly or indirectly may be converted into, exchanged for, or
satisfied in shares of Common Stock in an integrated transaction where 1% or
more of such securities or instruments are acquired by persons who, prior to
such transaction, were not security holders of the Company, the Common Stock
issuable upon exercise of such rights shall thereupon be deemed to have been
issued and to be outstanding and the consideration received by the Company
therefor shall be deemed to include the sum of the consideration received for
the issue of such securities or instruments and the minimum additional
consideration payable upon the exercise of such securities or instruments. No
further adjustment shall be made for the actual issuance of the Common Stock
upon the exercise of any such right, security or instrument. If the provision of
any such rights, securities or instruments with respect to purchase price or
shares purchasable shall change or expire, any adjustment previously made
hereunder with respect to such rights, securities or instruments shall be
readjusted to such as would have obtained on the basis of the rights as modified
by such change or expiration.
Section 3.02.b. Consideration. In case the Company shall issue shares
of its Common Stock for a consideration wholly or partly other than cash, the
amount of the consideration other than cash received by the Company shall be
deemed to be the lesser of (i) the Current Market Price Per Share (as defined in
Section 3.08) on the issue date of the Common Stock so issued by the Company or
(ii) the fair market value of such consideration as determined by the Board of
Directors of the Company. In case Common Stock shall be deemed (under Section
3.02.a or otherwise) to have been issued upon the issuance by the Company of any
right to acquire such Common Stock, in connection with the issue or sale of
other securities of the Company, together comprising one integrated transaction
in which no specific consideration is allocated to rights, such rights shall be
deemed to have been issued without consideration. Consideration received by the
Company for issuance of its Common Stock shall be determined in all cases
without deduction therefrom of any expenses, underwriting commissions or
concessions incurred in connection therewith.
Section 3.02.c. Treasury Stock. The number of shares of Common Stock
outstanding at any given time shall include shares owned or held by or for the
account of the Company in its treasury, and the disposition of any such shares
so owned or held shall not be considered an issue of Common Stock.
Section 3.03 When No Adjustment Required. Notwithstanding any other
provision of this Article 3, no change in the Purchase Price or the number of
shares of Common Stock or equivalent security issuable upon exercise of the
Warrants shall be required by reason of any issue or sale by the Company of
shares of Common Stock, options, warrants, rights or
5
<PAGE>
securities convertible into shares of Common Stock (i) in exchange for cash in
an amount equal to or in excess of (A) in the case of transactions described in
Sections 3.07 or 3.09, the Current Market Price Per Share, or (B) in the case of
all other transactions, $6.25 per share or (ii) pursuant to any Warrants
presented to the initial purchasers pursuant to the Private Placement or
pursuant to any Warrants entered into with any underwriter or professional
consultant in connection with the public or private offering of any securities
of the Company or with any lender in connection with any loan heretofore or
hereafter made by the Company, or (iii) pursuant to options and stock purchase
agreements heretofore or hereafter granted to or entered into with officers or
employees of the Company or of any subsidiary in connection with their
employment, whether granted or entered into at the beginning of the employment
or at any time thereafter, or as a result of or in connection with the granting
of such options or the making of such stock purchase agreements, or (iv) as
consideration, in whole or in part, for any acquisition of another corporation
or business whether by means of consolidation, merger or sale to the Company of
assets or securities, and whether such shares of Common Stock are issued
directly or upon exchange or exercise of convertible securities or rights or
options to subscribe to or purchase the same; provided, however, that this
Section shall not apply to, and no adjustment shall be required with respect to,
the issue or sale by the Company of shares of Common Stock pursuant to options
or stock purchase agreements hereafter granted to or entered into with officers
or employees of the Company if and to the extent the aggregate number of shares
of Common Stock so issued during the Exercise Period shall not exceed fifteen
percent (15%) of the Common Stock as of the date of adoption of such plans or
agreements; and provided further, that this Section shall not apply to, and no
adjustment shall be required with respect to, any merger, consolidation or
reorganization in which the Common Stock of the Company shall be reclassified or
in which the Company shall be the disappearing corporation; provided, however,
notwithstanding the foregoing provisions of this Section 3.03, in the event that
the Company shall issue any shares of its Common Stock, other than in connection
with the occurrence of an event set forth in Sections 3.04 to 3.07 inclusive and
3.09 hereof, at any time prior to or in connection with the Company conducting
an initial public offer, whether or not the consideration therefor shall exceed
the Purchase Price or the Current Market Price Per Share (as defined in Section
3.08 hereof), the number of Warrants then outstanding shall be adjusted so as to
increase the number of shares of Common Stock issuable upon the exercise thereof
so as to enable the ratio of the number of shares of Common Stock issuable upon
exercise of the Warrants to the total number of shares outstanding to be the
same as the ratio of shares of Common Stock issuable upon the exercise of
Warrants to the total number of shares of Common Stock outstanding prior to such
additional issuance of Common Stock (including for purposes of the calculation
of the total number of shares outstanding in both instances, the number of
shares of Common Stock issuable upon exercise of the Warrants). With respect to
the immediately preceding sentence, in the event the shares of Common Stock are
issued for consideration per share which is less than the Purchase Price prior
to such issuance, the Purchase Price under the Warrants will be adjusted as
provided in Section 3.02 hereof.
Section 3.04 Stock Dividends, Stock Splits, Combinations,
Reclassification, etc. In case the Company shall at any time after the date of
this Agreement (i) declare a dividend on the Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding
6
<PAGE>
Common Stock into a larger number of shares, (iii) combine the outstanding
Common Stock into a smaller number of shares or (iv) issue any shares of its
capital stock in connection with a reclassification of the Common Stock
(including any such reclassification in connection with a consolidation or
merger in which the Company is the continuing corporation), the Purchase Price
in effect at the time of the record date for such dividend or the effective date
of such subdivision, combination or reclassification, and/or the number and kind
of shares of stock issuable on such date shall be proportionately adjusted so
that the holder of any Warrant exercised after such time shall be entitled, at
no additional expense, to receive the aggregate number and kind of shares of
stock and Warrants which, if such Warrant had been exercised immediately prior
to such date, he would have owned upon such exercise and been entitled to
receive by virtue of such dividend, subdivision, combination or
reclassification. Such adjustment shall be made successively whenever any event
listed above shall occur.
Section 3.05 Distribution of Assets. If at any time after the date
hereof the Company shall make any distribution of its assets upon or with
respect to its Common Stock, as a liquidating or partial liquidating dividend
(other than upon a liquidation, dissolution or winding up of the Company as
provided for in Section 4.01, or other than as a dividend payable out of
earnings or any surplus legally available for dividends under the laws of
Arizona), each registered holder of any Warrant then outstanding shall, upon the
exercise of such Warrant after the record date for such distribution or, in the
absence of a record date, after the date of such distribution, receive in
addition to the shares of Common Stock to which he would otherwise be entitled
hereunder, such assets (or, at the option of the Company, a sum equal to the
value thereof at the time of the distribution as determined by its Board of
Directors in its sole discretion) which would have been distributed to such
registered holder if he had exercised his Warrants immediately prior to the
record date for such distribution or, in the absence of a record date,
immediately prior to the date of such distribution.
Section 3.06 Consolidation, Merger and Sale of Assets. If, prior to the
end of the Exercise Period, the Company shall at any time consolidate with or
merge into another corporation, the holder of any Warrant will thereafter
receive, upon exercise thereof, in lieu of the shares of Common Stock of the
Company immediately theretofore issuable upon exercise of the rights then
represented by the Warrants, such shares of stock, securities or assets as may
be issued or payable with respect to or in exchange for a number of outstanding
shares of the Common Stock of the Company equal to the number of shares of such
Common Stock immediately theretofore issuable upon exercise of the Warrants, had
such consolidation or merger not taken place. The Company shall take such steps
in connection with such consolidation or merger as may be necessary to assure
that the provisions hereof shall thereafter be applicable, as nearly as
reasonably may be, in relation to any securities or property thereafter
deliverable upon the exercise of the Warrants. The Company or the successor
corporation, as the case may be, shall execute and deliver to the Warrant Agent
a supplemental agreement so providing. The provisions of this Section 3.06 shall
similarly apply to successive mergers or consolidations. A sale of all or
substantially all of the assets of the Company for a consideration (apart from
the
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assumption of obligations) consisting primarily of securities, shall be deemed a
consolidation or merger for the foregoing purposes.
Section 3.07 Dividends in Convertible Securities, Options, Rights or
Warrants. In case the Company shall issue stock, securities, rights, options or
warrants to all holders of the Common Stock, or in an integrated transaction
where more than 99% of such instruments or securities are acquired by persons
who, prior to such transaction, were security holders of the Company, entitling
them to subscribe for or purchase Common Stock or securities convertible into
Common Stock at a price per share less than the Current Market Price Per Share
(as defined in Section 3.08) on the record date for the issuance of such
securities, instruments or rights or the granting of such securities, options or
warrants, as the case may be, the Purchase Price to be in effect after the
record date for the issuance of such rights or the granting of such options or
warrants shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be (i) the sum of (a) the number of shares of Common Stock outstanding
immediately prior to such sale and (b) the number of shares of Common Stock
which could be purchased al the Current Marker Price Per Share (as defined in
Section 3.08) with the consideration received by the Company upon such sale, and
the denominator of which shall be the total number of shares of Common Stock
that would be outstanding immediately after such sale if the full amount of
convertible securities, options, rights or warrants were exercised immediately
after the sale. In the event the consideration for such securities, rights,
options or warrants is paid in a form other than cash, the value of such
consideration shall be determined as provided in Section 3.02.b. In the event
such securities, instruments or rights shall change or expire, or such
convertible securities shall not be converted, any adjustment previously made
hereunder shall be readjusted to such as would have obtained on the basis of the
rights as modified by such change or expiration.
Section 3.08 Current Market Price Per Share. For the purpose of
Sections 2.04, 3.02.b., 3.03, 3.07 and 3.09, the Current Market Price Per Share
of the Company's Common Stock on any date shall be determined as follows:
Section 3.08.a. If the Common Stock is listed on a national
securities exchange or admitted to unlisted trading privileges on any such
exchange, the Current Market Price Per Share shall be the average of the daily
closing prices for the thirty (30) consecutive trading days commencing
thirty-five (35) trading days before such date. If no sale is made on any
trading day, the closing price shall be deemed to be the average of the closing
bid and asked prices for such day on such exchange; or
Section 3.08.b. If the Common Stock is not listed or admitted
to unlisted trading privileges on any exchange, the Current Market Price Per
Share shall be the average of the last reported sale price (or prices, if
applicable) or the mean of the last reported bid and asked prices reported by
the National Association of Securities Dealers Automated Quotations System
("NASDAQ") or, if not so quoted on NASDAQ, as quoted by the National Quotations
Bureau, Inc., for the thirty (30) consecutive trading days commencing 35 days
before such date; or
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<PAGE>
Section 3.08.c. If the Common Stock is not so listed or
admitted to unlisted trading privileges and prices are not reported on NASDAQ or
the National Quotations Bureau, Inc., the Current Market Price Per Share shall
be the fair market value of the Common Stock as determined by the Board of
Directors of the Company in good faith, whose determination shall be conclusive.
Section 3.09 Dividends in Options, Warrants, Rights or Convertible
Securities Causing Substantial Dilution. In case the Company shall issue rights,
options, warrants or convertible securities to all holders of Common Stock
entitling them to subscribe for or purchase Common Stock or securities
convertible into Common Stock at a price less than the Current Market Price Per
Share (as defined in Section 3.08) and where the number of shares of Common
Stock issuable upon exercise of all rights, options, warrants or convertible
securities so issued by the Company in the preceding (12) months exceeds 10% of
the then outstanding Common Stock of the Company (excluding Common Stock
issuable upon exercise of such options, rights or warrants or conversion of such
convertible securities), and where an adjustment to the Purchase Price is made
under Section 3.07, each Warrant outstanding immediately prior to the making of
such adjustment shall thereafter evidence the right to purchase, at the adjusted
Purchase Price, that number of shares obtained by (i) multiplying the number of
shares covered by the Warrant immediately prior to such adjustment by the
Purchase Price in effect immediately prior to such adjustment and (ii) of
dividing the product so obtained by the Purchase Price in effect immediately
after the adjustment made under Section 3.07.
Section 3.10 Form of Warrant. The form of Warrant need not be changed
because of any change in the Purchase Price or the number of shares of Common
Stock or Warrants issuable upon exercise of the Warrants pursuant to this
Article 3 and Warrants issued after such change may state the same terms with
respect to the Purchase Price and number of shares of Common Stock and Warrants
issuable thereunder as stated in the Warrants initially issued pursuant to this
Agreement. The Company may at any time, in its sole discretion, make any change
in the form of Warrant that the Company may deem appropriate and that does not
affect the substance thereof in a manner inconsistent with this Agreement; any
Warrant thereafter issued or countersigned, whether in exchange or substitution
for an outstanding Warrant or otherwise, may be in the form so changed.
Section 3.11 Dividends. No registered holder of any Warrant shall, upon
the exercise thereof, be entitled to any dividend that may have accrued or which
may previously have been paid with respect to shares of stock issuable upon
exercise of the Warrants.
Section 3.12 Reduction of Purchase Price Below Par Value. Before taking
any action which would cause an adjustment reducing the Purchase Price below the
then par value, if any, of the shares of Common Stock of the Company issuable
upon exercise of the Warrants, the Company shall take any corporate action which
may, in the opinion of its counsel, be necessary in order that the Company may
validly and legally issue fully paid and nonassessable shares of such Common
Stock at such adjusted Purchase Price.
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Section 3.13 Certification of Adjusted Purchase Price and Number of
Shares and Warrants Issuable. Whenever the Purchase Price and the number of
shares of Common Stock and Warrants issuable upon the exercise of each Warrant
are adjusted as provided in this Article 3, the Company shall (a) promptly
prepare a certificate signed by the Chairman of the Board, President or a Vice
President of the Company and by the Treasurer or Assistant Treasurer or the
Secretary or Assistant Secretary setting forth the Purchase Price as so
adjusted, the number of shares of Common Stock and Warrants issuable upon the
exercise of each Warrant as so adjusted and/or the number of Warrants as so
adjusted and a brief statement of the facts accounting for such adjustment, (b)
promptly file with the Warrant Agent and with each transfer agent for the Common
Stock a copy of such certificate and (c) mail a brief summary thereof to each
registered holder of Warrants in accordance with Section 7.01.
Section 3.14 Certificates and Opinions. The Warrant Agent may rely upon
the certificate of any independent firm of public accountants of recognized
standing, selected by the Board of Directors, as to the correctness of any
adjustment or as to the method to be employed in making the same, which may be
provided for in any supplemental agreement entered into pursuant to any of the
provisions of this Article 3, and shall not be responsible or accountable to any
Warrant holder for any such provision if the correctness thereof shall have been
approved by such firm of public accountants. The Warrant Agent may receive an
opinion of legal counsel (who may be counsel for the Company) as conclusive
evidence that any supplemental agreement executed pursuant to the provisions of
this Article 3 is authorized or permitted by the terms of this Agreement and
that it is proper for the Warrant Agent to join in the execution thereof.
ARTICLE 4
OTHER PROVISIONS FOR PROTECTION OF WARRANT HOLDERS
Section 4.01 Liquidation of the Company. In the event of the
liquidation, dissolution or winding up of the Company, a notice thereof shall be
filed by the Company with the Warrant Agent and each transfer agent for the
Common Stock at least shiny (30) days before the record date (which date shall
be specified in such notice) for determining holders of the Common Stock
entitled to receive any distribution upon such liquidation, dissolution or
winding up. Such notice shall also specify the date on which the right [o
exercise Warrants shall expire, as provided in Section 2.01. A copy of such
notice shall be published once in an Authorized Newspaper in Phoenix, Arizona,
not more than thirty (30) nor less than twenty (20) days from such record date.
Failure to give such notice, or any defect therein, shall not affect the
legality or validity of the liquidation, dissolution or winding up, or of any
distribution in connection therewith.
Section 4.02 Reservation of Shares. The Company shall reserve and keep
available out of its authorized but unissued Common Stock, such number thereof
as shall from time to time be sufficient to permit the exercise of all
outstanding Warrants. If at any time the number of authorized but unissued
shares of Common Stock shall not be sufficient for such
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<PAGE>
purposes, the Company will take such corporate action as may, in the opinion of
its counsel, be necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for such purpose.
Section 4.03 No Rights as Stockholder Conferred by Warrants. The
Warrants shall not entitle the registered holders thereof to any of the rights,
either at law or in equity, of a stockholder of the Company.
Section 4.04 Lost, Stolen, Mutilated or Destroyed Warrants. If any
Warrant becomes lost, stolen, mutilated or destroyed, the Company and the
Warrant Agent may, on such terms as to indemnify each of them, respectively, or
otherwise as they may in their discretion impose, respectively, issue and
countersign a new Warrant of like denomination, tenor and date as the Warrant so
lost, stolen, mutilated or destroyed. Any such new Warrant shall constitute an
original contractual obligation of the Company, whether or not the allegedly
lost, stolen, mutilated or destroyed Warrant shall be at any time enforceable by
anyone.
Section 4.05 Enforcement of Warrant Rights. All rights of action in
respect of this Agreement are vested in the respective registered holders of the
Warrants; and any registered holder of any Warrant may in his own behalf and for
his own benefit enforce, and may institute and maintain any suit, action or
proceeding against the Company suitable to enforce, or otherwise in respect of,
his right to exercise his Warrant for the purchase of stock in the manner
provided in the Warrant and in this Agreement.
Section 4.06 Registration. Pursuant to the terms and provisions of the
Notes Registration Rights Agreement, of even date herewith, between the Company
and each Purchaser, the Company shall file and maintain a current registration
statement at its sole cost and expense with the Securities and Exchange
Commission ("SEC") for the shares of Common Stock underlying the Warrants during
the Exercise Period. The Company will use its best efforts to qualify such
underlying shares under the blue sky or securities laws of such of the
jurisdictions in which holders of Warrants reside as may be required for such
holders to exercise their Warrants.
ARTICLE 5
TRANSFER AND OWNERSHIP OF WARRANTS
Section 5.01 Negotiability and Ownership. Warrants issued hereunder
shall be transferable only upon the occurrence of the following: (a) the Company
conducts an initial public offering; (b) any of the events described in Section
2.02 occur; or (c) the Company ceases to be qualified as an "S" corporation
under Subchapter S of the Internal Revenue Code of 1986, as amended, and by
transfer on the books of the Warrant Agent. Presentations may be made and
notices and demands may be served at the principal corporate office of the
Warrant Agent in Phoenix, Arizona.
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Section 5.02 Warrant Register. The Company shall, by and through the
Warrant Agent, cause to be kept a register or registers in which, subject to
such reasonable regulations as the Company or as the Warrant Agent may
prescribe, the Warrant Agent shall register transfer of Warrants as herein
provided. Upon surrender for transfer of any Warrant, the Warrant Agent shall
countersign, authenticate and deliver in the name of the transferee or
transferees a new Warrant for a like amount of Warrants.
Section 5.03 Endorsement of Warrants. All Warrants presented or
surrendered for exchange, transfer or registration as provided in this Section,
shall be accompanied (if so required by the Company or the Warrant Agent) by a
written instrument or instruments of transfer, in form satisfactory to the
Company and the Warrant Agent, duly executed by the registered holder or by his
duly authorized attorney.
Section 5.04 Exchange of Warrants. On and after the Warrant Date and
prior to the end of the Exercise Period, one or more Warrants may be surrendered
at the office of the Warrant Agent for exchange, and, upon cancellation thereof,
there shall be issued and delivered in exchange therefor, one or more new
Warrants, as requested by the registered holder of the canceled Warrant or
Warrants, for the same aggregate number of shares of Common Stock as were
evidenced by the Warrant or Warrants so canceled. In case of any exchange of
Warrants pursuant to this Article 5 or of any transfer of a Warrant, the Company
may make a charge sufficient to reimburse it for any stamp or other tax or
governmental charge required to be paid in connection therewith, but no other
charge shall be made to the Warrant holder for any transfer or issue of new
Warrants in case of any such exchange.
Section 5.05 Agreement of Warrant Holders. Every holder of a Warrant
Certificate, by accepting the same, consents and agrees with the Company and the
Warrant Agent and with all other Warrant holders that: (a) the Warrants are
transferrable only as permitted by Section 5.01 above; (b) the Warrants are
transferable only on the registry books of the Warrant Agent as herein provided;
and (c) the Company and the Warrant Agent may deem and treat the person in whose
name the Warrant Certificate is registered as the absolute owner thereof and of
the Warrants evidenced thereby for all purposes whatsoever, and neither the
Company nor the Warrant Agent shall be affected by any notice to the contrary,
whether such notice be in the form of notations on the Warrant Certificates or
otherwise.
ARTICLE 6
CONCERNING THE WARRANT AGENT
Section 6.01 Appointment of Warrant Agent. The Company hereby appoints
Bank One, Arizona, NA to act as warrant agent for the Company in accordance with
the terms and condition! herein set forth in this Agreement and Bank One,
Arizona, NA hereby accepts such appointment. The Company may, from time to time,
appoint such Co-Warrant Agents as it may
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deem necessary or desirable. The Company may terminate the appointment of Bank
One, Arizona, NA as warrant agent upon thirty (30) days' notice in writing to
Bank One, Arizona, NA.
Section 6.02 Payment of Taxes. The Company will from time to time
promptly pay or make provision for the payment of any and all taxes and charges
which may hereafter be imposed by the laws of the United States or of any state
or any local governmental unit thereof and which shall be payable with respect
to the issuance or delivery to or upon the order of the registered holders of
the Warrants (upon the exercise of the right to subscribe) of Common Stock of
the Company pursuant to the terms of such Warrants and of this Agreement, but
the Company shall not be obligated to pay and transfer taxes in respect of the
Warrants or such shares.
Section 6.03 Resignation of Warrant Agent. The Warrant Agent may resign
its duties and be discharged from all further duties and liabilities hereunder
after giving thirty (30) days' notice in writing to the Company; provided that
such shorter notice may be given as the Company shall accept as sufficient. In
the event the office of the Warrant Agent shall become vacant by resignation or
incapacity to act or otherwise, the Company shall appoint in writing a new
Warrant Agent hereunder in place of the Warrant Agent vacating office. If the
Company fails for a period of ten (10) days in making such appointment then the
registered holder of any of the Warrants may petition any court of competent
jurisdiction for the appointment of a new Warrant Agent. On any new appointment,
the new Warrant Agent shall be vested with the same powers, rights, duties,
responsibilities and immunities as if it had been originally named as Warrant
Agent without any further assurance, conveyance, act or deed; but if for any
reason it becomes necessary or expedient to execute any further assurance,
conveyance, act or deed, the same shall be done at the expense of the Company
and shall be legally and validly executed by the former Warrant Agent.
Subject to the foregoing provisions, any corporation into which any
Warrant Agent or any new Warrant Agent may be merged or with which it may be
consolidated or any corporation resulting from any merger or consolidation to
which any Warrant Agent shall be a party shall be the successor Warrant Agent
under this Agreement without any further act.
Section 6.04 Fees and Expenses of Warrant Agent. The Company covenants
and agrees:
(a) that it will pay the Warrant Agent reasonable remuneration
for its services as such hereunder and will repay to the Warrant Agent
on demand the amount of all expenditures whatsoever which the Warrant
Agent may reasonably incur in and about the execution of the duties
hereby created; and
(b) that it will do, execute, acknowledge and deliver or cause
to be done, executed, acknowledged or delivered, all and every such
other acts, deeds and assurances in law as the Warrant Agent may
reasonably require for better accomplishing and effectuating the
intentions and provisions of this Agreement.
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Section 6.05 Actions by Warrant Agent. The Warrant Agent may, for the
execution of the duties and in the execution of the powers conferred upon it,
appoint or employ as agents or representatives or otherwise any solicitors,
counsel, bankers, brokers, accountants, clerks or inspectors or other agents,
and all reasonable expenses and disbursements made and incurred by the Warrant
Agent in connection with the execution of its duties hereunder shall be
forthwith paid by the Company.
Section 6.06 Exculpatory Provisions. In order to induce the Warrant
Agent to act hereunder, the Company agrees, and each registered holder of a
Warrant, by acceptance thereof, also agrees, that:
(a) The Warrant Agent shall be entitled to take legal or other
advice and employ such assistance as it may deem necessary to the
proper discharge of its duties hereunder and to pay proper and
reasonable compensation therefor and may in connection with any matter
relating to this Agreement, act on the opinion or advice or information
obtained from any lawyer, auditor, valuer or other expert whether
obtained by such Warrant Agent or by the Company or otherwise and shall
not be responsible for any loss occasioned by acting thereon;
(b) Whenever, in the administration of its duties under this
Agreement, the Warrant Agent shall deem it necessary or desirable that
any matter be provided or established by the Company prior to taking or
suffering any action hereunder, such matter (unless other evidence in
respect thereof be herein specifically prescribed) may be deemed to be
conclusively proved and established by an Officer's Certificate
delivered to the Warrant Agent and such certificate shall be full
justification and cause to the Warrant Agent for any action taken or
suffered in good faith by it under the provisions of this Agreement on
the faith thereof; but in its discretion the Warrant Agent may in lieu
thereof accept other evidence of such fact or matter or may require
such further or additional evidence as it may deem reasonable;
(c) The Warrant Agent shall be liable hereunder only for its
own negligence or willful misconduct;
(d) The Warrant Agent shall not be liable for or by reason of
any of the statements of facts or recitals contained in this Agreement
or in the Warrants or be required to verify the same but all such
statements and recitals are and shall be deemed to have been made by
the Company only;
(e) The Warrant Agent shall not be under any responsibility in
respect of the validity of this Agreement or the execution and delivery
hereof or in respect of the validity of the execution of any Warrant
issued hereunder; nor shall it be responsible for any breach by the
Company of any covenant or condition contained in this Agreement or in
any such Warrant; nor shall it by any act hereunder be deemed to make
any representation
14
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or warranty as to the authorization or reservation of any shares to be
issued upon the right of purchase provided for in this Agreement or in
any Warrant or as to whether any shares will when issued be duly
authorized or be validly issued and fully paid and nonassessable, it
being hereby agreed and declared that as to all the matters and things
referred to in this subparagraph the duty and responsibility shall rest
upon the Company and not upon the Warrant Agent and the failure of the
Company to discharge any such duty and responsibility shall not in any
way render the Warrant Agent liable or place upon it any duty or
responsibility for breach of which it would be liable;
(f) The Warrant Agent shall not at any time be under any duty
or responsibility to determine whether any facts exist which may
require any change in Warrants pursuant to any of the provisions of
Article 2, or with respect to the nature or extent of any such change,
or with respect to any adjustment provided for in Article 3, or with
respect to the method provided herein (or which may be provided in any
supplemental agreement) to be employed in making any such change or
adjustment; and
(g) Except as in this Agreement expressly provided, the
Warrant Agent acts hereunder solely as agent of the Company and does
not assume any fiduciary or other relationship or agency or trust for
or with any registered holder of any of the Warrants. The duties and
obligations of the Warrant Agent under this Agreement shall be
determined solely by the provisions hereof, and no implied covenants or
obligations shall be read into this Agreement against the Warrant
Agent.
Section 6.07 Modification of Agreement. The Warrant Agent may, without
the consent or concurrence of the registered holders of the Warrants by
supplemental agreement or otherwise, concur with the Company in making any
changes or corrections in these presents as to which it shall have been advised
by counsel (who may but need not also be counsel for the Company) that the same
are not prejudicial to the rights of the Warrant holders as indicated by the
general sense or intent of the original language and are required for the
purpose of curing or correcting any ambiguity or defective or inconsistent
provision or clerical omission or mistake or manifest error herein contained.
ARTICLE 7
CERTAIN DEFINITIONS AND OTHER MATTERS
Section 7.01 Notice of Proposed Actions. In case the Company shall
propose (a) to pay any dividend payable in stock of any class or to make any
other distribution to the holders of its Common Stock (other than a cash
dividend), or (b) to offer to the holders of its Common Stock rights or warrants
to subscribe for or to purchase any additional shares of Common Stock, or (c) to
effect any stock dividend, stock split, combination or reclassification of its
Common Stock, or (d) to effect any distribution of assets or capital
reorganization, merger, consolidation or sale, transfer or other disposition of
all or substantially all of its assets or
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business, or (e) to effect the liquidation, dissolution or winding-up of the
Company, or (f) to effect any other transaction which would, upon consummation,
result in a change in the Purchase Price of the Warrants or the number of shares
of Common Stock and Warrants issuable upon exercise of the Warrants pursuant to
Articles 2 and 3 hereof, the Company shall give notice to each holder of a
Warrant in accordance with Section 7.02 of such proposed action, which shall
specify the date on which a record is to be taken for purposes of such proposed
transaction. Such notice shall be given not later than fifteen (15) days prior
to the record date for determining the holders of Common Stock for purposes of
such action or, if no record date is required, not later than fifteen (15) days
prior to the date of the taking of such proposed action.
Section 7.02 Notices. Subject to the provisions of Section 7.03, any
notice or demand authorized by this Agreement to be given or made by the Warrant
Agent or by the holder of any Warrant Certificate to or upon the Company shall
be sent by first class mail, postage prepaid, addressed (until another address
or notice of name change is filed in writing by the Company with the Warrant
Agent) and received by the noticed party as follows:
Monterey Management, Inc.
Monterey Homes Corporation
6263 North Scottsdale Road
Suite 220
Scottsdale, Arizona 85250
Attn: President, Monterey Management, Inc.
Subject to the provisions of Section 7.03, any notice or demand authorized by
this Agreement to be given or made by the Company or by the holder of any
Warrant Certificate to or on the Warrant Agent shall be deemed given or made if
sent by first class mail, postage prepaid, addressed (until another address is
filed in writing by the Warrant Agent with the Company) and received by the
noticed party as follows:
Bank One, Arizona, NA
241 North Central Avenue
Phoenix, Arizona 85004
Notices or demands authorized by this Agreement to be given or made by the
Company or the Warrant Agent to the holder of any Warrant Certificate shall be
deemed given or made if sent first class mail, postage prepaid, addressed to
such holder at the address of such holder as shown on the registry books of the
Company.
Section 7.03 Authorized Newspaper. The term "Authorized Newspaper" when
used with reference to the publication of a notice provided for in this
Agreement shall mean a newspaper printed in the English language and customarily
published on each business day (whether or not published on Saturdays, Sundays
or legal holidays) and of general circulation.
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Section 7.04 Officer's Certificate. The term "Officer's Certificate" in
this Agreement shall mean a certificate or instrument signed by one of the
following: the Chief Executive Officer, the President, a Vice President, the
Treasurer or the Secretary of the Company.
Section 7.05 Applicable Law. The validity, interpretation and
performance of this Agreement and the validity and interpretation of the
Warrants shall be governed by the laws of the State of Arizona.
Section 7.06 Examination of Agreement. A copy of this Agreement shall
be available at all reasonable times at the office of the Warrant Agent for
examination by the registered holder of any Warrant. Any such registered holder
may be required to submit his Warrant for inspection before being entitled to
make such examination.
IN WITNESS WHEREOF, this Agreement shall been duly executed by the
parties hereto under their respective corporate seals, as of the date first
above written.
BANK ONE, ARIZONA, NA
By:
-------------------------------------
Its
--------------------------------
MONTEREY MANAGEMENT, INC., an
Arizona corporation
By:
-------------------------------------
Its
--------------------------------
MONTEREY HOMES CORPORATION, an
Arizona corporation
By:
-------------------------------------
Its
--------------------------------
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EXHIBIT A
MONTEREY MANAGEMENT, INC.
WARRANT
Common Stock Purchase Warrant Certificate
Warrants to Purchase
No.________________ ________________ Shares
THIS IS TO CERTIFY that, for value received __________ or registered assigns, is
the registered holder ("Holder") of the number of Warrants ("Warrants") set
forth above, each of which entitles the holder to purchase, subject to the terms
and conditions set forth in the Warrant Agreement, which is hereby incorporated
herein and made a pan hereof, and as hereinafter set forth, at any time on or
after October 17, 1994 and at or prior to the close of business on October 15,
2001, but not thereafter fully paid and non-assessable shares of the common
stock, no par value per share ("Common Stock"), of MONTEREY MANAGEMENT, INC., an
Arizona corporation (the "Company"), or equivalent security of any successor to
it (the "Company"), at a purchase price of $6.25, as adjusted, for a term
commencing on the date hereof and ending October 15, 2001 and to receive one or
more certificates for the Common Stock or equivalent securities so purchased,
upon satisfaction of one or more conditions precedent set forth herein and
presentation and surrender to BANK ONE, ARIZONA, NA, 241 North Central Avenue,
Phoenix, Arizona 85004 (the "Warrant Agent"), or its successor as Warrant Agent,
with the form of subscription duly executed, and accompanied by payment of the
purchase price of each share purchased, in U.S. dollars, either in cash or by
certified check or bank cashier's check, payable to the order of the Company.
Fractional shares of the Company's Common Stock will not be issued upon the
exercise of the Warrants.
No Warrant will be exercisable unless and until (a) the Company
completes an initial public offering of its securities; (b) any consolidation of
the Company with, or merger of the Company into, another corporation where the
Company is not the survivor; (c) the sale of substantially all of the assets of
the Company; or (d) a change of control of the Company as defined in the Warrant
Agreement.
The Company covenants and agrees that all shares of Common Stock
delivered upon the exercise of these Warrants will, upon delivery, be free from
all taxes, liens and charges with respect to the purchase thereof hereunder. The
Warrants shall not be exercisable in any jurisdiction where exercise would be
unlawful. The Company will use its best efforts to qualify the shares that may
be purchased upon exercise of these Warrants for sale in all jurisdictions where
holders of the Warrants reside.
18
<PAGE>
The number of shares of Common Stock, or other equivalent equity
security, issuable upon the exercise of these Warrants and the purchase price
shall be subject to adjustment from time to time, in certain events, as set
forth in the Warrant Agreement, including certain sales of additional stock,
stock options, convertible securities, distribution of stock dividends, stock
splits, reclassifications or mergers.
The Company agrees at all times to reserve or hold available, or cause
to reserve or hold available, a sufficient number or shares of its Common Stock,
or other equivalent equity security, to cover the number of shares, or other
equivalent equity security, issuable upon the exercise of these and all other
Warrants of like tenor then outstanding.
This Warrant Certificate does not entitle the holder hereof, either at
law or in equity, to any voting rights or other rights as a stockholder of the
Company, or to any other rights whatsoever except the rights expressly herein
set forth, and no dividend shall be payable or accrue in respect of these
Warrants or the interest represented hereby, or the shares that may be purchased
upon exercise hereof until or unless, and except to the extent that, these
Warrants shall be duly exercised.
This Warrant Certificate is exchangeable at any time prior to
expiration upon the surrender hereof by the registered holder to the Warrant
Agent for one or more new Warrant Certificates of like tenor and date
representing in the aggregate the right to purchase the number of shares that
may be purchased upon exercise hereof, each of such new Warrant Certificates to
represent the right to purchase such number of shares as may be designated by
the registered holder at the time of such surrender. Notwithstanding the
foregoing, this Warrant may not be transferred to any other party until (a) the
Company conducts an initial public offering; (b) any of the events described in
the second paragraph hereof occur, or (c) the Company ceases to be qualified as
an "S" corporation under Subchapter S of the Internal Revenue Code of 1986, as
amended.
The Company may deem and treat the registered holder of this Warrant
Certificate at any time as the absolute owner hereof and of the Warrants covered
hereby for all purposes and shall not be affected by any notice to the contrary.
The issuance of the Warrants covered by this Warrant Certificate is
subject to the terms of the Warrant Agreement which is available at the
principal corporate trust office of the Warrant Agent. The Warrant Agreement is
incorporated herein by reference and made a part hereof and reference is hereby
made to the Warrant Agreement for a full description of the rights, limitations
of rights, obligations, duties and immunities hereunder of the Warrant Agent,
the Company and the holders of the Warrants. A copy of the Warrant Agreement is
on file at the above mentioned office of the Warrant Agent.
This Warrant Certificate shall not be valid or obligatory for any
purpose unless countersigned by the Warrant Agent.
19
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be executed by its duly authorized officers, and the corporate seal hereunto
affixed.
Dated: __________________________
MONTEREY MANAGEMENT, INC.
By
--------------------------------------
ITS PRESIDENT
ATTEST:
- ---------------------------------
SECRETARY
This is one of the Warrants referred to in the within mentioned Warrant
Agreement.
BANK ONE, ARIZONA, NA
(Phoenix, Arizona)
Warrant Agent
By
-------------------------------
Authorized Representative
20
<PAGE>
Form of Reverse Side of Certificate
ASSIGNMENT FORM
To assign this Warrant, fill in the form below:
I or we assign and transfer this Warrant 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 Warrant 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 or credit union with
membership in an approved signature
guarantee medallion program) pursuant
to Rule 17Ad-15 of ~e Securities
Exchange Act of 1934.
21
<PAGE>
SUBSCRIPTION
(To be completed and signed only upon an exercise
of the Warrants in whole or in part)
TO:_________________________________
as Transfer Agent for Monterey Management, Inc.
The undersigned, the Holder of the attached Warrants, hereby
irrevocably elects to exercise the purchase right represented by the Warrants
for, and to purchase thereunder, Shares (as such terms are defined in the
Warrant dated ________________, 1994, from Monterey Management, Inc. (or other
securities or property), and herewith makes payment of $_______________ therefor
in cash or by certified or official bank check. The undersigned hereby requests
that the Certificate(s) for such securities be issued in the name(s) and
delivered to the address(es) as follows:
Name: ______________________________________________________________________
Address: _________________________________________________________________
Deliver to: _________________________________________________________________
Address: _________________________________________________________________
If the foregoing Subscription evidences an exercise of the Warrants to
purchase fewer than all of the Shares or Warrants (or other securities or
property) to which the undersigned is entitled under such Warrants, please issue
a new Warrants, of like tenor, for the remaining Shares or Warrants (or other
securities or property) in the name(s), and deliver the same to the address(es),
as follows:
Name: ______________________________________________________________________
Address: _________________________________________________________________
DATED: _________________________, 19____.
________________________________________
(Name of Holder)
________________________________________
(Signature of Holder or Authorized
Signatory)
________________________________________
(Social Security or Taxpayer
Identification Number of Holder)
22
ASSUMPTION AGREEMENT
--------------------
THIS ASSUMPTION AGREEMENT (the "Assumption Agreement") is executed as
of this 31st day of December, 1996, by among Monterey Management, Inc., an
Arizona corporation ("MMI"); Monterey Homes Corporation, an Arizona corporation
("MHC"); Monterey Management-Tucson, Inc., an Arizona corporation ("MMT"),
Monterey Homes-Tucson Corporation, an Arizona corporation ("MHT" and,
collectively with MMI, MHC, and MM-TI, the "Company"); and Norwest Bank,
Minnesota, NA ("Warrant Agent"). Capitalized terms used and not defined herein
shall have the meanings ascribed to them in the Warrant Agreement (the "Warrant
Agreement"), dated as of October 17, 1994, by and among MMI, MHC and the Warrant
Agent.
W I T N E S S E T H:
WHEREAS, MMI has agreed to merge with and into MMT and MHC has agreed
to merge with and into MHT (the "Monterey Mergers"), with MMT and MHT assuming
the obligations of MMI and MHC under the Warrant Agreement; and
WHEREAS, MMT and MHT have agreed, subsequent to the Monterey Mergers
and subject to the execution and delivery of an Agreement and Plan of
Reorganization (the "HPX Merger Agreement") with Homeplex Mortgage Investments
Corporation, a Maryland corporation ("HPX") and satisfaction of the conditions
thereto, to merge with and into HPX (the "HPX Merger"), with HPX assuming the
obligations of MMT and MHT under the Warrant Agreement;
WHEREAS, pursuant to the HPX Merger Agreement, on the effective date of
the HPX Merger, the Warrants will be converted into warrants ("HPX Warrants") to
purchase shares of HPX common stock, par value $.01 per share, in an amount and
at an exercise price as set forth herein;
WHEREAS, pursuant to Section 6.07 of the Warrant Agreement, the parties
hereto desire to modify the Warrant Agreement to clarify certain ambiguous
provisions.
NOW THEREFORE, in consideration of the foregoing premises and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
A G R E E M E N T
1. Assumption by MMT and MHT. As of the effective date of the Monterey
Mergers, MMT and MHT hereby expressly assume all rights, responsibilities,
obligations, and liabilities of MMI and MHC under the Warrant Agreement and
represent and warrant that MMT and MHT will timely discharge the same.
1
<PAGE>
2. Effect of Monterey Mergers and Assumption by MMT and MHT. The
parties hereto agree that the Monterey Mergers will not result in any change in
the overall stock ownership or operations of the Company and are an "internal
reorganization" as that term is used in Section 2.02 of the Warrant Agreement.
Consequently, as a result of the Monterey Mergers: (i) the Warrants will not
become exercisable or transferable; and (ii) no adjustment will be made with
respect to the number of shares of stock or other securities covered by each
Warrant, the number of Warrants outstanding, or the Purchase Price at which a
Warrantholder may purchase shares of stock or other securities upon the exercise
of the Warrants.
3. Assumption by HPX. As of the Effective Date of the HPX Merger
Agreement and upon the execution and delivery of the acceptance set forth as
Supplement A hereto (the "HPX Assumption Date"), HPX hereby expressly assumes
all rights, responsibilities, obligations, and liabilities of MMT and MHT under
the Warrant Agreement and represents and warrants that it will timely discharge
the same.
4. Effect of Merger and Assumption by HPX. On the HPX Assumption Date,
the Warrants will be converted into HPX Warrants to purchase shares of HPX
Common Stock. The number of shares covered by the HPX Warrants and the Purchase
Price of the HPX Common Stock issuable upon exercise of the HPX Warrants shall
be determined as follows:
(a) Number of Shares. The number of shares of HPX Common Stock
issuable upon exercise of each HPX Warrant shall be equal to the sum of: (i) the
total number of Exchange Shares (as such term is defined in the Merger
Agreement) issued in the HPX Merger (calculated in accordance with the terms of
the HPX Merger Agreement) divided by 2,427,776 (the number of shares of Common
Stock of the Company outstanding following the Monterey Mergers on a fully
diluted basis) (the "Warrant Conversion Ratio"); and (ii) 131,840 (the Warrant
holders' proportionate share of the 800,000 shares of Contingent Stock (as such
term is defined in the Merger Agreement) to be issued by HPX in the HPX Merger)
divided by 400,000 (the number of shares issuable upon the exercise of currently
outstanding Warrants). The number of shares of HPX Common Stock issuable upon
exercise of the HPX Warrants shall be subject to further adjustment pursuant to
Article 3 of the Warrant Agreement with respect to any events that may occur
after the effective date of the HPX Merger.
(b) Purchase Price. The Purchase Price of each HPX Warrant
will be determined by: (i) subtracting from the current Purchase Price of $6.25
an amount determined by dividing the Previously Taxed Earnings Distribution (as
such term is defined in the HPX Merger Agreement) by 2,027,776 (the number of
issued and outstanding shares of Common Stock of the Company following the
Monterey Mergers); (ii) dividing the resulting number by the Warrant Conversion
Ratio; and (iii) subtracting $.15. This adjusted Purchase Price will be reduced
by an additional $.20 if during the 18 month period following the HPX Merger the
closing price of the HPX Common Stock on the New York Stock Exchange does not
exceed $3.00 per share for five consecutive trading days.
2
<PAGE>
5. Escrowed Shares. Upon the HPX Assumption Date and pursuant to the
HPX Merger Agreement, all Exchange Shares issued in the Merger will be issued in
the name of the Monterey Stockholders; provided, that HPX will hold in escrow
approximately 16.5% of the Exchange Shares issued in the names of the Monterey
Stockholders for issuance to Warrant holders upon exercise of the HPX Warrants,
and HPX will remit the Purchase Price paid upon such exercises to the Monterey
Stockholders. Upon expiration of any unexercised HPX Warrants, HPX will
distribute the Exchange Shares underlying such unexercised HPX Warrants to the
Monterey Stockholders.
6. Failure to Close Merger. In the event that the HPX Merger does not
become effective, the Warrants will not be converted into HPX Warrants and no
adjustment will be made to the number of shares covered by the Warrants or the
Purchase Price of the Warrants; provided, that pursuant to the terms of that
certain Limited Guarantee of Payment, dated as of , 1996, the Monterey
Stockholders, on or before March 31, 1997, will re-contribute to the Company the
amount of the Previously Taxed Earnings Distribution which would exceed the
amount permitted to be distributed under the Indenture relating to the Company's
13% Senior Subordinated Notes Due 2001 (which were issued with the Warrants).
7. Clarifications. Pursuant to Section 6.07 of the Warrant Agreement,
the Warrant Agent may, without the concurrence of the Warrant holders, by
supplemental agreement or otherwise, concur with the Company in making any
changes or corrections to the Warrant Agreement that are necessary to cure or
correct any ambiguity or defective or inconsistent provision or clerical
omission or mistake or manifest error therein contained and that are not
prejudicial to the rights of the Warrant holders. The parties hereto agree that
certain provisions of the Warrant Agreement are ambiguous and in need of
clarification and that the Warrant Agreement is modified as follows:
(a) Section 3.03 of the Warrant Agreement, entitled "When No
Adjustment Required," is hereby modified to provide that, following the HPX
Merger: (i) any shares of stock issued upon the exercise of options granted to
HPX officers or employees prior to the Merger will not be counted in determining
whether the aggregate number of shares of stock issued pursuant to any option or
stock purchase agreement entered into with officers or employees of HPX
following the HPX Merger exceeds 15% of the issued and outstanding HPX Common
Stock as of the date of adoption of any such plans or agreements; and (ii)
options granted to the Monterey Stockholders in connection with employment
agreements entered into by HPX and the Monterey Stockholders following the HPX
Merger will be counted against the 15% limitation referred to above only to the
extent that the exercise price of such options is lower than the Purchase Price
of the HPX Warrants as of the date of such option grants.
(b) The Warrant Agreement is hereby modified to provide that
the HPX Merger constitutes the Company's "initial public offering" as that term
is used in the Warrant Agreement.
3
<PAGE>
8. Successors and Assigns. This Assumption Agreement shall be binding
on and inure to the benefit of the parties and their respective successors and
assigns.
9. Captions. The captions of this Assumption Agreement are solely for
the convenience of reference and shall not affect its interpretation.
10. Counterparts. This Assumption Agreement may be executed in two or
more counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
11. Governing Law. This Assumption Agreement shall be governed by and
interpreted in accordance with the laws of the State of Arizona (without regard
to conflict of law principles).
12. No Other Changes. The parties acknowledge that, except as provided
herein, all terms of the Warrant Agreement remain unchanged and are in full
force and effect.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
4
<PAGE>
IN WITNESS WHEREOF, the undersigned, by their duly authorized officers,
have set their hands effective as of the day and year first noted above.
MONTEREY MANAGEMENT, INC.,
an Arizona corporation
By: /s/ Larry W. Seay
-------------------------------
Name: Larry W. Seay
-----------------------------
Title: Vice President
----------------------------
MONTEREY HOMES CORPORATION,
an Arizona corporation
By: /s/ Larry W. Seay
-------------------------------
Name: Larry W. Seay
-----------------------------
Title: Vice President
----------------------------
MONTEREY MANAGEMENT-TUCSON, INC.,
an Arizona corporation
By: /s/ Larry W. Seay
-------------------------------
Name: Larry W. Seay
-----------------------------
Title: Vice President
----------------------------
MONTEREY HOMES-TUCSON CORPORATION,
an Arizona Corporation
By: /s/ Larry W. Seay
-------------------------------
Name: Larry W. Seay
-----------------------------
Title: Vice President
----------------------------
NORWEST BANK, MINNESOTA, NATIONAL
ASSOCIATION
By: /s/ Raymond S. Hamstadt
-------------------------------
Name: Raymond S. Hamstadt
-----------------------------
Title: Vice President
----------------------------
5
<PAGE>
SUPPLEMENT A
------------
Homeplex Mortgage Investments Corporation, a Maryland corporation
("HPX"), hereby agrees that it shall assume all rights, responsibilities,
obligations, and liabilities of Monterey Management-Tucson, Inc., an Arizona
corporation ("MMT"), and Monterey Homes-Tucson Corporation, an Arizona
corporation ("MHT"), under that certain Warrant Agreement, dated as of October
17, 1994, by and among Monterey Management, Inc., an Arizona corporation (as
predecessor to MMT with respect to such Warrant Agreement), Monterey Homes
Corporation, an Arizona corporation (as predecessor to MHT with respect to such
Warrant Agreement), and Norwest Bank, Minnesota, National Association, as
Warrant Agent, and further agrees to abide by and be subject to all of the terms
and conditions of the Warrant Agreement, as modified.
DATED this ____ day of ___________________ , 1996.
HOMEPLEX MORTGAGE INVESTMENTS
CORPORATION, a Maryland corporation
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
6
MONTEREY HOMES CORPORATION
WARRANT
Common Stock Purchase Warrant Certificate
Warrants to Purchase
No. W- Shares
----------------------- -----------------
THIS IS TO CERTIFY that, for value received ___________ or registered assigns,
is the registered holder ("Holder") of the number of Warrants ("Warrants") set
forth above, each of which entitles the holder to purchase, subject to the terms
and conditions set forth in the Warrant Agreement, which is hereby incorporated
herein and made a part hereof, and as hereinafter set forth, at any time on or
after October 17, 1994 and at or prior to the close of business on October 15,
2001, but not thereafter, one fully paid and non-assessable share of the common
stock, $.01 par value per share ("Common Stock"), of MONTEREY HOMES CORPORATION,
a Maryland corporation (the "Company"), or equivalent security of any successor
to it (the "Company"), at a purchase price of $4.0634, as adjusted, for a term
commencing on the date hereof and ending October 15, 2001 and to receive one or
more certificates for the Common Stock or equivalent securities so purchased,
upon satisfaction of one or more conditions precedent set forth herein and
presentation and surrender to NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION,
ATTN: Corporate Trust Department, Sixth Street and Marquette Ave., Minneapolis,
Minnesota 55479-0069 (the "Warrant Agent"), or its successor as Warrant Agent,
with the form of subscription duly executed, and accompanied by payment of the
purchase price of each share purchased, in U.S. dollars, either in cash or by
certified check or bank cashier's check, payable to the order of the Warrant
Agent. Fractional shares of the Company's Common Stock will not be issued upon
the exercise of the Warrants. For each Warrant exercised, an additional .2069
shares of the fully paid and non-assessable shares of the Common Stock of the
Company will be issued without the payment of any additional consideration.
The Company covenants and agrees that all shares of Common Stock
delivered upon the exercise of these Warrants will, upon delivery, be free from
all taxes, liens and charges with respect to the purchase thereof hereunder. The
Warrants shall not be exercisable in any jurisdiction where exercise would be
unlawful. The Company will use its best efforts to qualify the shares that may
be purchased upon exercise of these Warrants for sale in all jurisdictions where
holders of the Warrants reside.
The number of shares of Common Stock, or other equivalent equity
security, issuable upon the exercise of these Warrants and the purchase price
shall be subject to adjustment from time to time, in certain events, as set
forth in the Warrant Agreement, including certain sales of additional stock,
stock options, convertible securities, distribution of stock dividends, stock
splits, reclassifications or mergers.
<PAGE>
The Company agrees at all times to reserve or hold available, or cause
to reserve or hold available, a sufficient number or shares of its Common Stock,
or other equivalent equity security, to cover the number of shares, or other
equivalent equity security, issuable upon the exercise of these and all other
Warrants of like tenor then outstanding.
This Warrant Certificate does not entitle the holder hereof, either at
law or in equity, to any voting rights or other rights as a stockholder of the
Company, or to any other rights whatsoever except the rights expressly herein
set forth, and no dividend shall be payable or accrue in respect of these
Warrants or the interest represented hereby, or the shares that may be purchased
upon exercise hereof until or unless, and except to the extent that, these
Warrants shall be duly exercised.
This Warrant Certificate is exchangeable at any time prior to
expiration upon the surrender hereof by the registered holder to the Warrant
Agent for one or more new Warrant Certificates of like tenor and date
representing in the aggregate the right to purchase the number of shares that
may be purchased upon exercise hereof, each of such new Warrant Certificates to
represent the right to purchase such number of shares as may be designated by
the registered holder at the time of such surrender.
The Company may deem and treat the registered holder of this Warrant
Certificate at any time as the absolute owner hereof and the Warrants covered
hereby for all purposes and shall not be affected by any notice to the contrary.
The issuance of the Warrants covered by this Warrant Certificate is
subject to the terms of the Warrant Agreement which is available at the
principal corporate trust office of the Warrant Agent. The Warrant Agreement is
incorporated herein by reference and made a part hereof and reference is hereby
made to the Warrant Agreement for a full description of the rights, limitations
of rights, obligations, duties and immunities hereunder of the Warrant Agent,
the Company and the holders of the Warrants. A copy of the Warrant Agreement is
on file at the above mentioned office of the Warrant Agent.
This Warrant Certificate shall not be valid or obligatory for any
purpose unless countersigned by the Warrant Agent.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be executed by its duly authorized officers, and the corporate seal hereunto
affixed.
Dated:
--------------------------------
MONTEREY HOMES CORPORATION
By:
------------------------
ITS PRESIDENT
ATTEST:
- -----------------------------------
SECRETARY
This is one of the Warrants referred to in the within mentioned Warrant
Agreement.
Countersigned:
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
Warrant Agent
By:
-----------------------------------
Authorized Representative
<PAGE>
Form of Reverse Side of Certificate
The Warrants represented by this certificate are subject to
restrictions on Transfer or exercise for the purpose of the
Corporation's maintenance of the net operating loss carry-overs,
capital loss carry-overs and built-in losses to which the Corporation
is entitled pursuant to the Internal Revenue Code of 1986, as amended.
Subject to certain further restrictions and except as expressly
provided in the Corporation's Charter, no person may engage in any
Transfer that is with any other person if such Transfer would cause the
Ownership Interest Percentage of any person or Public Group 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. Any
attempted Transfer that is prohibited by the Corporation's Charter
shall be void ab initio, and all right with respect to the Prohibited
Interests shall remain the property of the person who initially
purported to Transfer the Prohibited Interests until such time as the
Prohibited Interests are resold as provided in the Corporation's
Charter. All capitalized terms in this legend have the meanings defined
in the Charter of the Corporation, as the same may be amended from time
to time, a copy of which, including the restrictions on transfer and
ownership, will be furnished to each holder of Warrants on request and
without charge. Requests for such a copy may be directed to the
Secretary of the Corporation at the Corporation's principal executive
office.
ABBREVIATIONS
The following abbreviations, when used in the inscription on the face
of this Bond, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT- . . . . .Custodian . . . . . . .
(Cust) (Minor)
under Uniform Gifts (Transfer) to Minors Act
. . . . . . . . . . . . . . . . . . . . . . . . . .
(State)
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of
survivorship and not as tenants
in common
Additional abbreviations may also be used though not in the above list.
</TABLE>
<PAGE>
ASSIGNMENT FORM
To assign this Warrant, fill in the form below:
I or we assign and transfer this Warrant 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
Warrant 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
or credit union with membership in an
approved signature guarantee medallion
program) pursuant to Rule 17Ad-15 of the
Securities Exchange Act of 1934.
<PAGE>
SUBSCRIPTION
(To be completed and signed only upon an exercise
of the Warrants in whole or in part)
TO: _______________________________________________
as Warrant Agent for Monterey Homes Corporation
The undersigned, the Holder of the attached Warrants, hereby
irrevocably elects to exercise the purchase right represented by the Warrants
for, and to purchase thereunder, ____________ Shares (as such terms are defined
in the Warrant dated October 17, 1994) from Monterey Homes Corporation (or other
securities or property), and herewith makes payment of $_______________ therefor
in cash or by certified or official bank check. The undersigned hereby requests
that the Certificate(s) for such securities be issued in the name(s) and
delivered to the address(es) as follows:
Name:___________________________________________________________________________
Address:________________________________________________________________________
Deliver to:_____________________________________________________________________
Address:________________________________________________________________________
If the foregoing Subscription evidences an exercise of the Warrants to
purchase fewer than all of the Shares to which the undersigned is entitled under
such Warrants, please issue a new Warrant, of like tenor, for the remaining
Shares or Warrants (or other securities or property) in the name(s), and deliver
the same to the address(es), as follows:
Name:___________________________________________________________________________
Address:________________________________________________________________________
DATED:________________________________ , 19____.
____________________________________________
(Name of Holder)
____________________________________________
(Signature of Holder or Authorized Signatory)
____________________________________________
(Social Security or Taxpayer Identification
Number of Holder)
Signature Guarantee:____________________________________________________________
By:____________________________________________
This 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.
EXHIBIT 5.1
June 20, 1997
Monterey Homes Corporation
6613 North Scottsdale Road
Suite 200
Scottsdale, Arizona 85250
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We have acted as counsel to Monterey Homes Corporation, a
Maryland corporation (the "Company"), in connection with its proposed public
offering of 212,398 Warrants to purchase 256,345 shares of Common Stock (the
"Warrant Shares"), $0.01 par value ("Warrants") pursuant to a Registration
Statement filed on Form S-1 on the date hereof ("Registration Statement").
In that connection, we have examined originals or copies of
such documents, corporate records and other instruments as we have deemed
necessary or appropriate for purposes of this opinion including the Charter, and
By-laws of the Company. We have assumed without independent verification the
genuineness of signatures, the authenticity of documents, and the conformity
with originals of copies.
Based on the foregoing, we are of the opinion that the
Warrants have been validly issued and that the Warrant Shares, when issued and
paid for in accordance with the terms of the Warrant Agreement filed as Exhibit
4.2 to the Registration Statement and of the Assumption Agreement filed as
Exhibit 4.3 to the Registration Statement, will be validly issued, fully paid
and non-assessable.
We hereby consent to the use of this opinion as an exhibit to
the Registration Statement and incorporation by reference into the Registration
Statement and to the reference to our firm under "Legal Matters" in the
Prospectus included in the Registration Statement.
By giving the foregoing consent, we do not admit that we come
within the category of persons whose consent is required under Section 7 of the
Securities Act of 1933.
Very truly yours,
Venable, Baetjer & Howard
EXHIBIT 10.9
AMENDMENT TO
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
STOCK OPTION PLAN
This Amendment (this "Amendment") to the Homeplex Mortgage Investments
Corporation (the "Company") Stock Option Plan dated July 27, 1988 (the "Plan"),
is made as of December 31, 1996.
WHEREAS, the Board of Directors of the Company believes that this
Amendment is in the best interest of the Company and the Board of Directors and
shareholders of the Company have authorized and duly adopted this Amendment in
accordance with the Plan.
NOW, THEREFORE, the Plan is hereby amended as follows:
1. Termination of Option.
Section 6(a) of the Plan is hereby amended to read in its
entirety as follows:
"Section 6. Termination of Employment or Directorship;
Assignability; Death
(a) Termination of Employment or Directorship. If any
optionholder ceases to be an employee or director of the
Company for a reason other than death, the optionholder (or
the optionholder's successors in the case of the
optionholder's death after the termination of the
optionholder's employment or directorship) may, within two
years after the termination of the later of the optionholder's
(i) employment or (ii) directorship, but in no event after the
option's stated expiration date, purchase some or all of the
shares with respect to which the optionholder was entitled to
exercise the option (and exercise the rights granted under the
Plan with respect to that option) on the date the
optionholder's employment or directorship terminated; provided
that (1) if the optionholder's employment or directorship is
terminated for dishonesty or other acts detrimental to the
Company's interests or for the optionholder's breach of any
employment contract with the Company, or (2) if after the
optionholder's employment or directorship is terminated, the
optionholder commits acts detrimental to the Company's
interests, then the option (and the rights granted under the
Plan with respect to that option) shall thereafter be void for
all purposes."
IN WITNESS WHEREOF, the undersigned, duly authorized officer of
Homeplex Mortgage Investments Corporation, has executed this Amendment to be
effective as of the date first set forth above.
HOMEPLEX MORTGAGE INVESTMENTS
CORPORATION
By: /s/ Jay R. Hoffman
-------------------------
Jay R. Hoffman, President
Consent of KPMG Peat Marwick LLP
The Board of Directors
Monterey Homes Corporation:
We consent to the use of our report included herein and to the reference to our
firm under the headings "Experts" and "Selected Financial and Operating Data" in
the prospectus.
KPMG Peat Marwick LLP
Phoenix, Arizona
June 19, 1997
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Experts" and
"Selected Financial and Operating Data" and to the use of our report dated
February 13, 1996, in the Registration Statement (Form S-1) and related
prospectus of Monterey Homes Corporation (formerly Homeplex Mortgage Investments
Corporation) for the registration of 212,398 warrants to purchase an aggregate
of 256,345 shares of common stock.
Ernst & Young LLP
Phoenix, Arizona
June 18, 1997
