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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________to__________
Commission File Number 1-9977
Meritage Corporation
(Exact Name of Registrant as Specified in its Charter)
Maryland 86-0611231
(State or Other Jurisdiction (IRS Employer Identification No.)
of Incorporation or Organization)
6613 North Scottsdale Road, Suite 200 85250
Scottsdale, Arizona (Zip Code)
(Address of Principal Executive Offices)
(480) 998-8700
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
At March 15, 2000 the aggregate market value of common stock held by
non-affiliates of the Registrant was $33,507,271. For purposes of this
computation, all executive officers and directors of the Registrant have been
deemed to be affiliates.
The number of shares outstanding of the Registrant's common stock on March 15,
2000 was 5,563,796.
DOCUMENTS INCORPORATED BY REFERENCE
Portions from the Registrant's Proxy Statement relating to the Annual Meeting of
Stockholders to be held on May 10, 2000 have been incorporated by reference into
Part III, Items 10, 11, 12 and 13.
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<PAGE>
TABLE OF CONTENTS
Page No
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PART I
Item 1. Business....................................................... 3
Item 2. Properties..................................................... 10
Item 3. Legal Proceedings.............................................. 10
Item 4. Submission of Matters to a Vote of Security Holders............ 10
PART II
Item 5. Market for the Registrant's Common Stock
and Related Stockholder Matters................................ 11
Item 6. Selected Financial Data........................................ 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..... 22
Item 8. Financial Statements and Supplementary Data.................... 22
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 39
PART III
Item 10. Directors and Executive Officers of the Registrant............. 39
Item 11. Executive Compensation......................................... 39
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................... 39
Item 13. Certain Relationships and Related Transactions................. 39
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.................................................. 40
SIGNATURES ...............................................................S-1
2
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PART I
ITEM 1. BUSINESS
HISTORY OF THE COMPANY
We design, construct and sell single family homes ranging from entry-level
to semi-custom luxury in three large and growing Sunbelt states; Texas, Arizona
and California. We have recently undergone significant growth and at December
31, 1999, were actively selling homes in 46 communities. We pursue a strategy of
diversifying our product mix and the geographic scope of our operations.
We were formed in 1988 as a real estate investment trust ("REIT") and
operated under the name of Homeplex Mortgage Investments Corporation. Homeplex
invested in mortgage-related assets and selected real estate loans. On December
31, 1996, the Company acquired by merger the homebuilding operations of various
entities under the Monterey Homes name (the "merger"). Following the merger the
Company focused on the business of homebuilding, and changed its name to
Monterey Homes Corporation. On July 1, 1997, as part of our strategy to further
diversify operations, we combined with Legacy Homes (the "combination"), a group
of entities with homebuilding operations in Texas. Legacy, in business since
1988, designs, builds and sells entry-level and move-up homes. In July 1998, we
acquired Sterling Communities, a homebuilder in Northern California. In
September 1998, with shareholder approval, Meritage Corporation became the new
corporate name. Operations continue in Texas under the Legacy Homes name, in
Arizona as Monterey Homes and Meritage Homes of Arizona, and in California as
Meritage Homes of Northern California.
BUSINESS STRATEGY
We seek to distinguish ourselves from other production homebuilders and to
respond rapidly to changing market conditions through a business strategy
focused on the following:
SUPERIOR DESIGN AND QUALITY. We believe we maximize customer satisfaction
by offering homes that are built with quality materials and craftsmanship,
exhibit distinctive design features and are situated in premium locations. We
believe that we generally offer higher caliber homes in their defined price
range or category than those built by our competitors.
PRODUCT BREADTH. We design our new homes to appeal to a wide variety of
consumers. In Texas, we target entry-level and move-up buyers, offering homes at
prices that reflect the production efficiencies of a high-volume tract builder.
In Arizona, we focus on the luxury market, which is characterized by unique
communities and distinctive luxury homes, and the move-up homebuyers' market.
Continued expansion into the first and second-time move-up segments of the
Arizona market reflects our desire to increase our share of the overall housing
market in the Phoenix and Tucson metropolitan areas. In California, our focus is
on quality first and second-time move-up homes. We believe this product breadth
and geographical diversity helps to reduce exposure to variable economic cycles.
HIGHEST LEVEL OF SERVICE. We are committed to achieving the highest level
of customer satisfaction as an integral part of our competitive strategy. During
the sales process our experienced sales personnel keep customers informed of
their home's construction progress. After delivery, our customer care
departments respond to any questions or warranty matters a customer may have.
CONSERVATIVE LAND ACQUISITION POLICY. We seek to maximize our return on
capital employed by practicing a conservative land acquisition policy that
minimizes risks associated with land investment. We accomplish this by:
* focusing on development sites where we expect to have less than a
three-year lot inventory;
* generally purchasing land subject to complete entitlement, including
zoning and utility services; and
* controlling lots on a non-recourse, rolling option basis where we have
the right, but not the obligation, to buy lots at predetermined prices
based on a takedown schedule that reflects anticipated home closings.
We generally do not speculate in raw land held for investment.
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COST MANAGEMENT. Throughout our history, we have focused on controlling
costs and minimizing overhead, and consider this a key factor in maintaining
profitability. Management seeks to reduce costs by:
* using subcontractors to carry out home construction and site
improvement on a fixed-price basis;
* obtaining favorable pricing from subcontractors through long-term
relationships and large volume jobs;
* reducing interest carry by minimizing our inventory of unsold or
speculative homes and shortening the home construction cycle;
* generally beginning construction on a home under contract only after a
satisfactory down payment and/or receipt of mortgage approval has been
received from the buyer;
* minimizing overhead by centralizing certain administrative activities;
and
* maintaining management information systems to allow the monitoring of
homebuilding production, scheduling and budgeting.
DECENTRALIZED OPERATING STRUCTURE WITH EXPERIENCED DIVISION MANAGERS. We
rely upon the expertise of divisional managers, each with significant experience
in the homebuilding industry, to serve the needs of our regional markets.
Corporate-level management provides centralized control for risk elements such
as land acquisition approval, financing, cash management, capital allocation and
risk management.
EXPANSION IN NEW AND EXISTING MARKETS. Depending on market conditions, we
may explore expansion opportunities in new or existing geographic areas where we
see an ability to exploit a competitive advantage. Expansion may take place
through strategic acquisitions of existing homebuilders, through start-up
operations or through internal growth.
MARKETS AND PRODUCTS
We operate in the Dallas/Fort Worth, Austin and Houston, Texas markets
using the Legacy Homes brand name, in the Phoenix and Tucson, Arizona markets as
Monterey Homes and Meritage Homes of Arizona and in the San Francisco Bay and
Sacramento, California markets as Meritage Homes of Northern California. We
believe that these areas represent attractive homebuilding markets with
opportunities for long-term growth. We also believe that our operations in
certain markets, such as Dallas/Fort Worth and Phoenix, are well established and
that we have developed a reputation for building distinctive quality homes
within the market segments served by these communities.
Our homes range from entry-level to semi-custom luxury, with base prices
ranging from $100,000 to $600,000. A summary of activity by market and product
type follows (dollars in thousands):
<TABLE>
<CAPTION>
Average Units in Dollar Value Number of
Number of Homes Closing Backlog at of Backlog at Home Sites Active
Closed in 1999 Price Year End Year End Remaining(1) Subdivisions
-------------- ----- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Texas - Move-up 835 $162.6 381 $ 67,197 1,936 19
Texas - Entry-level 300 130.4 185 26,786 886 6
Arizona - Luxury 196 419.8 127 54,179 592 7
Arizona - Move-up 204 189.4 89 18,699 1,199 7
California - Move-up 108 354.1 103 32,584 880 7
----- ------ ---- -------- ----- ---
Total Company 1,643 $203.3 885 $199,445 5,493 46
===== ====== ==== ======== ===== ===
</TABLE>
- ----------
(1) "Home Sites Remaining" is the number of homes that could be built both on
the remaining lots available for sale and land to be developed into lots as
estimated by management.
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LAND ACQUISITION AND DEVELOPMENT
We typically purchase land only after necessary entitlements have been
obtained so that development or construction may begin 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 ordinarily within the
developer's control. Even though entitlements are usually obtained before land
is purchased, we are still required to secure a variety of other governmental
approvals and permits during development. The process of obtaining such
approvals and permits can substantially delay the development process. For this
reason, we may consider purchasing unentitled property in the future when we can
do so in a manner consistent with our business strategy.
We select land for development based upon a variety of factors, including:
* internal and external demographic and marketing studies;
* project suitability, which is generally a development with fewer than
150 lots;
* suitability for development generally within a one to three year time
period from the beginning of the development process to the delivery
of the last home;
* financial review as to the feasibility of the proposed project,
including projected profit margins, return on capital employed, and
the capital payback period;
* the ability to secure governmental approvals and entitlements;
* results of environmental and legal due diligence;
* proximity to local traffic corridors and amenities; and
* management's judgment as to the real estate market, economic trends,
and experience in a particular market.
We occasionally purchase larger properties consisting of 200 to 500 lots or
more if the situation presents an attractive profit potential and acceptable
risk limitations.
We acquire land through purchases and rolling option contracts. Purchases
are financed through traditional bank financing or working capital. Rolling
options allow us to control lots and land through a third party who owns or buys
the property on which we plan to build homes. We enter into option contracts
with the third party to purchase finished lots as home construction begins.
These contracts are generally non-recourse and require non-refundable deposits
of 2% to 10% of the sales price. We acquire a majority of our land through
rolling option contracts.
Once we have acquired land, we generally initiate development through
contractual agreements with subcontractors. These activities include site
planning and engineering, as well as constructing road, sewer, water, utilities,
drainage, recreation facilities and other refinements. We often build homes in
master planned communities with home sites that are along or near a major
amenity, such as a golf course.
We develop a design and marketing concept for each project, which includes
determination of size, style and price range of homes, street layout, 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 our lot
costs for the project.
Occasionally we use partnerships or joint ventures to purchase and develop
land where these arrangements are necessary to acquire the property or appear to
be otherwise economically advantageous.
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The following table presents information regarding land owned or land under
contract or option by market as of December 31, 1999:
<TABLE>
<CAPTION>
Land Under Contract
Land Owned (1) or Option (1)
--------------------------------------- -----------------------------
Lots Under Lots Held for Lots Under
Finished Development Development Finished Development
Lots (Estimated) (Estimated) Lots (Estimated) Total
---- ----------- ----------- ---- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
TEXAS:
Dallas/Ft. Worth Area 501 568 340 267 250 1,926
Austin Area 129 -- -- 110 604 843
Houston Area 156 -- -- -- 160 316
----- ----- ----- ----- ----- -----
Total Texas 786 568 340 377 1,014 3,085
----- ----- ----- ----- ----- -----
ARIZONA:
Phoenix Area 88 223 43 177 673 1,204
Tucson Area 58 -- -- 175 358 591
----- ----- ----- ----- ----- -----
Total Arizona 146 223 43 352 1,031 1,795
----- ----- ----- ----- ----- -----
CALIFORNIA:
Sacramento Area 1 -- -- 199 53 253
San Francisco Bay Area -- 19 -- 83 480 582
----- ----- ----- ----- ----- -----
Total California 1 19 -- 282 533 835
----- ----- ----- ----- ----- -----
TOTAL COMPANY 933 810 383 1,011 2,578 5,715
===== ===== ===== ===== ===== =====
</TABLE>
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(1) Excludes lots with finished homes or homes under construction
CONSTRUCTION
We are the general contractor for our projects and typically hire
subcontractors on a project-by-project or reasonable geographic proximity basis
to complete construction at a fixed price. We usually enter into agreements with
subcontractors and materials suppliers after receiving competitive bids on an
individual basis. We obtain information from prospective subcontractors and
suppliers with respect to their financial condition and ability to perform their
agreements before formal bidding begins. Occasionally, we enter into longer-term
contracts with subcontractors and suppliers if management can obtain more
favorable terms. Our project managers and field superintendents, who coordinate
and supervise the activities of subcontractors and suppliers, subject the work
to quality and cost controls, and assure compliance with zoning and building
codes.
We specify that quality, durable materials be used in construction of our
homes and we do not maintain significant inventories of construction materials,
except for work in process materials for homes under construction. When
possible, management negotiates price and volume discounts with manufacturers
and suppliers on behalf of its subcontractors to take advantage of production
volume. Usually, access to our principal subcontracting trades, materials and
supplies is readily available in each of its markets. Prices for these goods and
services may fluctuate due to various factors, including supply and demand
shortages that may be beyond the control of our vendors. We believe that our
relationships with suppliers and subcontractors are good.
We generally build and sell homes in clusters or phases 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. A typical Meritage home is completed
within four to ten months from the start of construction, depending upon home
size and complexity. Schedules may vary depending on the availability of labor,
materials and supplies, product type, location and weather. Our homes are
usually designed to promote efficient use of space and materials, and to
minimize construction costs and time.
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MARKETING AND SALES
We believe that we have an established reputation for developing high
quality homes, which helps generate interest in each new project. We also use
advertising and other promotional activities, including magazine and newspaper
advertisements, brochures, direct mail, and the placement of strategically
located signs in the immediate areas of our developments.
We use furnished model homes as tools in demonstrating the competitive
advantages of our home designs and features to prospective homebuyers. We
generally employ or contract with interior designers who are responsible for
creating an attractive model home for each product line within a project. We
generally build between one and four model homes for each active community,
depending upon the number of homes to be built in the project and the products
to be offered. Occasionally we sell our model homes and lease them back from
buyers who purchased the homes for investment purposes or who do not intend to
move in immediately. A summary of model homes owned or leased at December 31,
1999 follows:
Model Homes Model Homes Monthly Lease Models Under
Owned Leased Back Amount Construction
----- ----------- ------ ------------
Texas 23 -- -- 3
Arizona 13 17 $ 41,600 10
California 20 1 3,500 --
--- --- -------- ---
Total 56 18 $ 45,100 13
=== === ======== ===
Our homes generally are sold by full-time, commissioned employees who
typically work from a sales office located in the model homes for each project.
Our goal is to ensure that the sales force has extensive knowledge of our
operating policies and housing products. To achieve this goal, we train our
sales personnel and conduct periodic meetings to update them on sales
techniques, competitive products in the area, financing availability,
construction schedules, marketing and advertising plans, and the available
product lines, pricing, options, and warranties offered. Sales personnel are
licensed real estate agents where required by law. Independent brokers also sell
our homes, and are usually paid a sales commission on the base price of the
home.
Occasionally we offer various sales incentives, such as landscaping and
certain interior home improvements, to attract buyers. The use and type of
incentives depends largely on economic and competitive market conditions.
BACKLOG
Most of our home sales are made under standard sales contracts signed
before construction of the home begins. The contracts require substantial cash
deposits and 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 "backlog". We do not recognize revenue on homes in
backlog until sales are closed, the buyer has made a minimum down payment and
other criteria for sale and profit recognition are met. We sometimes build homes
in a project before obtaining a sales contract, though these homes are excluded
from backlog until a sales contract is signed. We believe we will deliver almost
all homes in backlog at December 31, 1999 to customers during 2000.
Our backlog increased to 885 units with a value of $199.4 million at
December 31, 1999 from 688 units with a value of $145.3 million at December 31,
1998. These increases are primarily due to additional communities that opened
for sale in 1999, along with strong home sales.
CUSTOMER FINANCING
We attempt to help qualified homebuyers who require financing to obtain
loans from mortgage lenders that offer a variety of financing options. We
provide mortgage-banking services in our Dallas/Fort Worth markets through a
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related mortgage lending company, Texas Home Mortgage Corporation, which
originates loans on behalf of third party lenders. In Tucson we provide mortgage
services through MTH Mortgage Limited Partnership, a joint venture with an
independent mortgage banking company. In our other markets we use unaffiliated
preferred mortgage lenders. We may pay a portion of the closing costs and
discount mortgage points to assist homebuyers with financing. Since many
customers use long-term mortgage financing to purchase homes, adverse economic
conditions, unemployment increases and high mortgage interest rates may deter or
reduce the number of potential homebuyers.
CUSTOMER RELATIONS, QUALITY CONTROL AND WARRANTY PROGRAMS
Management believes that positive customer relations and an adherence to
stringent quality control standards are fundamental to continued success. We
believe that our commitment to buyer satisfaction and quality control have
significantly contributed to our reputation as a high quality builder.
A Meritage project manager or project superintendent, and a customer
relations representative generally oversee compliance with quality control
standards for each development. These representatives allocate responsibility
to:
* oversee home construction;
* oversee subcontractor and supplier performance;
* review the progress of each home and conduct formal inspections as
specific stages of construction are completed; and
* regularly update buyers on the progress their homes.
We generally provide a one-year limited warranty on workmanship and
building materials with each home. Subcontractors usually provide an indemnity
and a certificate of insurance before they begin work. Claims relating to
workmanship and materials are therefore usually the subcontractors' primary
responsibility. Reserves for future warranty costs are established based on
historical experience within each division or region, and are recorded when the
homes are delivered. Reserves range from 3/10 of one per cent to 3/4 of one
percent of a home's sale price. To date, these reserves have been sufficient to
cover warranty repairs.
COMPETITION AND MARKET FACTORS
The development and sale of residential property is a highly competitive
industry. We compete for sales in each of our markets with national, regional,
and local developers and homebuilders, existing home resales, and to a lesser
extent, condominiums and available rental housing. Some competitor homebuilders
have significantly greater financial resources and/or lower costs than we do.
Competition among both small and large residential homebuilders is based on a
number of interrelated factors, including location, reputation, amenities,
design, quality and price. We believe that we compare favorably to other
homebuilders in the markets in which we operate due to our:
* experience within our geographic markets which allows us to develop
and offer new products;
* ability to reflect and adapt to changing market conditions;
* ability, from a capital and resource perspective, to respond to market
conditions;
* ability to capitalize on opportunities to acquire land on favorable
terms; and
* reputation for outstanding service and quality products.
The homebuilding industry is cyclical and is affected by consumer
confidence levels, job availability, prevalent economic conditions in general,
and interest rates. Other factors affecting the homebuilding industry and demand
for new homes are changes in costs associated with home ownership such as
increases in property taxes and energy costs, changes in consumer preferences,
demographic trends, availability of and changes in mortgage financing programs,
and the availability and cost of land and building materials. Any slowing in new
home sales would increase competition among homebuilders in our market areas.
There is no assurance that we will be able to compete successfully against other
homebuilders in our current markets in a more competitive business environment
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resulting from a slowdown in home sales or that such increased competition will
not have a material adverse affect on our business and operating results.
GOVERNMENT REGULATIONS AND ENVIRONMENTAL MATTERS
We purchase most of our land with entitlements, providing for zoning and
utility services to project sites and giving us the right to obtain building
permits. Construction may begin almost immediately upon compliance with
specified conditions, which generally are within our control. The time needed to
obtain such approvals and permits affects the carrying costs of unimproved
property acquired for development and construction. 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 our development activities, though there is no assurance that these
and other restrictions will not adversely affect future operations.
Because most of our land is entitled, construction moratoriums generally
would only adversely affect us if they arose from health, safety, and welfare
issues, such as insufficient water or sewage facilities. Local and state
governments have broad discretion regarding the imposition of development fees
for projects under their jurisdictions. These fees are normally established when
we receive recorded maps and building permits. As we expand, we 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 future
operating markets.
We are also subject to a variety of local, state, and federal statutes,
ordinances, rules and regulations concerning the protection of health and the
environment. In some markets, we are subject to environmentally sensitive land
ordinances that mandate open space areas with public elements in housing
developments, and prevent development on hillsides, wetlands and other protected
areas. We must also comply with flood plain restrictions, desert wash areas,
native plant regulations, endangered species acts and view restrictions. These
and similar laws may result in delays, cause substantial compliance and other
costs, and prohibit or severely restrict development in certain environmentally
sensitive regions or areas. To date, compliance with such ordinances has not
materially affected our operations, though no assurance is given that such a
material adverse effect will not occur in the future.
We usually will condition our obligation to purchase property on, among
other things, an environmental review of the land. To date, we have not incurred
any unanticipated liabilities relating to the removal of unknown toxic wastes or
other environmental matters. However, there is no assurance that we will not
incur material liabilities in the future relating to toxic waste removal or
other environmental matters affecting land currently or previously owned.
BONDS AND OTHER OBLIGATIONS
We obtain letters of credit and performance, maintenance, and other bonds
in support of our related obligations with respect to the development of our
projects. The amount of these obligations outstanding at any time varies in
accordance with pending development activities. In the event the bonds or
letters are drawn upon, we would be obligated to reimburse the issuer of the
bond or letter of credit. At December 31, 1999 there were approximately $1.0
million in outstanding letters of credit and $16.3 million in performance bonds
for such purposes. We do not believe that any of these bonds or letters of
credit are likely to be drawn upon.
EMPLOYEES AND SUBCONTRACTORS
At December 31, 1999, we had 295 employees, including 68 in management and
administration, 101 in sales and marketing, and 126 in construction operations.
Our employees are not unionized, and we believe that employee relations are
good. We act solely as a general contractor and all construction operations are
conducted through project managers and field superintendents who manage third
party subcontractors. We use independent contractors for construction,
architectural and advertising services, and believe that our relations with
subcontractors and independent contractors are good.
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NET OPERATING LOSS CARRYFORWARD
By December 31, 1999, our federal income tax net operating loss (NOL)
carryforward was fully utilized. Income tax payments were reduced during the
periods the NOL carryforward was available and during that time income tax
payments consisted primarily of state income taxes and the federal alternative
minimum tax.
STOCK REPURCHASE PROGRAM
In May 1999, we announced a stock repurchase program in which our Board of
Directors approved the buyback of up to $6 million of outstanding Meritage
common stock. As of December 31, 1999, 186,000 shares had been repurchased for
an aggregate price of approximately $1.9 million.
MORTGAGE ASSETS ACQUIRED PRIOR TO MERGER
Prior to the merger, we acquired a number of mortgage assets, consisting of
mortgage interests (commonly known as "residuals") and mortgage instruments.
During 1998 and 1997, we sold the mortgage assets for a gain or generated
interest income from these assets prior to sale, of approximately $5.2 and $5.1
million, respectively.
ITEM 2. PROPERTIES
We lease the following office space:
City Square Annual
Footage Lease Rate Term Expiration
------- ---------- ---- ----------
Plano, Texas* 13,000 $179,500 5 years 5/15/02
Phoenix, Arizona* 11,600 242,000 5 years 8/30/04
Tucson, Arizona 2,800 58,000 2 years 10/31/00
Walnut Creek, California 2,700 50,500 2 years 7/14/00
Austin, Texas 1,500 28,400 3 years 4/30/02
Fort Worth, Texas 1,400 18,200 3 years 6/30/02
Houston, Texas 900 9,500 1 year 7/1/00
- ----------
* Leases are with companies owned beneficially either by one our Co-Chairmen
or by one of our Co-Chairmen and a Director. Management believes lease
rates are competitive with rates for comparable space in the area and terms
of the leases are similar to those we could obtain in an arm's length
transaction.
We also lease 18 model homes at a total monthly lease amount of $45,100.
The leases are for terms ranging from three months to 36 months, with various
renewal options.
ITEM 3. LEGAL PROCEEDINGS
We are involved in various routine legal proceedings incidental to our
business. Management believes that none of these matters, certain of which are
covered by insurance, will have a material adverse impact upon our financial
condition if decided adversely against us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of shareholders during the fourth
quarter of 1999.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
GENERAL
Our common stock is publicly traded on the New York Stock Exchange ("NYSE")
under the symbol "MTH". The high and low closing sales prices of the common
stock, as reported by the NYSE, follow:
1999 1998
----------------------- -----------------------
High Low High Low
--------- ---------- ---------- ---------
First Quarter $15 11/16 $11 $19 15/16 $12 7/16
Second Quarter $13 1/2 $10 15/16 $19 1/4 $15 5/8
Third Quarter $13 1/4 $10 11/16 $19 3/4 $12 1/16
Fourth Quarter $12 $ 9 15/16 $14 11/16 $ 9 11/16
On March 15, 2000, the closing sales price of the common stock as reported
by the NYSE was $10 13/16 per share. At that date, there were approximately 280
owners of record. There are approximately 2,500 beneficial owners of common
stock.
The transfer agent for our common stock is ChaseMellon Shareholder
Services, L.L.C., Overpeck Centre, 85 Challanger Road, Ridgefield Park, NJ
07660.
We did not declare cash dividends in 1999, 1998 or 1997, nor do we intend
to declare cash dividends in the foreseeable future. Earnings will be retained
to finance the growth of the business. Future cash dividends, if any, will
depend upon our financial condition, results of operations and capital
requirements, as well as other factors considered relevant by our board of
directors.
FACTORS THAT MAY AFFECT FUTURE STOCK PERFORMANCE
The performance of our common stock depends upon several factors, including
those listed below and in "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Factors That May Affect Future Results and
Financial Condition."
The market price of our common stock could be subject to significant
fluctuations in response to certain factors, such as variations in anticipated
or actual results of our operations or that of other homebuilding companies,
changes in conditions affecting the general economy, widespread industry trends
and analysts' reports, as well as other factors unrelated to our operating
results.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical consolidated financial
data for each of the years in the five-year period ended December 31, 1999. The
data for 1996 through 1999 are derived from our Consolidated Financial
Statements audited by KPMG LLP, independent auditors. The data for 1995 is
derived from the Consolidated Financial Statements audited by Ernst & Young LLP,
independent auditors. For additional information, see the Consolidated Financial
Statements included elsewhere in this Annual Report on Form 10-K. The following
table should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and the Results of Operations. These historical results may
not be indicative of future results.
11
<PAGE>
<TABLE>
<CAPTION>
Historical Consolidated Financial Data
Years Ended December 31,
(Dollars in Thousands, Except Per Share Data)
------------------------------------------------------------
1999 1998(3) 1997(4) 1996 1995
--------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Home and land sales revenue $ 341,786 $ 257,113 $ 149,630 N/A N/A
Cost of home and land sales (277,287) (205,188) (124,594)
--------- --------- ---------
Gross profit 64,499 51,925 25,036
Earnings from mortgage assets
and other income 2,065 5,982 5,435 $ 2,244 $ 3,564
Interest expense (6) (461) (165) (238) (868)
Commissions and other sales
costs and general and
administrative expenses (34,343) (24,925) (15,107) (1,684) (1,599)
Minority interest in net
income of consolidated
joint ventures -- (2,021) -- -- --
--------- --------- --------- -------- --------
Earnings before income taxes
and extraordinary loss 32,215 30,500 15,199 322 1,097
Income taxes(1) (13,270) (6,497) (962) (26) --
Extraordinary loss(2) -- -- -- (149) --
--------- --------- --------- -------- --------
Net earnings $ 18,945 $ 24,003 $ 14,237 $ 147 $ 1,097
========= ========= ========= ======== ========
Earnings per diluted share before effect of
extraordinary loss $ 3.14 $ 3.92 $ 2.68 $ .09 $ .34
Extraordinary loss per diluted share -- -- -- (.05) --
--------- --------- --------- -------- --------
Diluted earnings per share $ 3.14 $ 3.92 $ 2.68 $ .04 $ .34
========= ========= ========= ======== ========
Cash dividends per share (1) $ N/A $ N/A $ N/A $ .06 $ .09
========= ========= ========= ======== ========
1999 1998 1997 1996(5) 1995
--------- --------- --------- -------- --------
Balance Sheet Data:
Real estate under development $ 171,012 $ 104,759 $ 63,955 $ 35,991 $ --
Residual interests -- -- 1,422 3,909 5,457
Total assets 226,559 152,250 96,633 72,821 27,816
Notes payable 85,937 37,205 22,892 30,542 7,819
Total liabilities 136,148 79,971 50,268 45,876 9,368
Stockholders' equity 90,411 72,279 46,365 26,945 18,448
</TABLE>
- ----------
(1) Due to the use of our net operating loss carryforward, we paid limited
income taxes during 1997 and 1998 until the NOL was fully utilized. During
1995 and 1996 we qualified and elected to be treated as a REIT under
federal tax laws and we were not subject to federal income tax on that
portion of our taxable income that was distributed to stockholders in or
with respect to that year.
(2) Reflects extraordinary loss from early extinguishment of long-term debt.
(3) Includes the accounts of Meritage Homes of Northern California from July 1,
1998, the acquisition date.
(4) Includes the accounts of Legacy Homes from July 1, 1997, the combination
date.
(5) Reflects the merger consummated on December 31, 1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
The following discussion and analysis provides information regarding the
results of operations of Meritage and its subsidiaries for the years ended
December 31, 1999 and December 31, 1998. All material balances and transactions
between Meritage and its subsidiaries have been eliminated. Total results
include those of the California operations from July 1, 1998. In management's
opinion, the data reflects all adjustments, consisting of only normal recurring
adjustments, necessary to fairly present our financial position and results of
operations for the periods presented.
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<PAGE>
HOME SALES REVENUE
Home sales revenue is the product of the number of homes closed during the
period and the average sales price per home. Comparative 1999 and 1998 home
sales revenue follow (dollars in thousands):
Year Ended December 31, Dollar/unit Percentage
----------------------- Increase Increase
1999 1998 (Decrease) (Decrease)
-------- -------- ---------- ----------
Total
Dollars $334,007 $255,985 $ 78,022 31%
Homes closed 1,643 1,291 352 27%
Average sales price $ 203.3 $ 198.3 $ 5.0 3%
Texas
Dollars $174,850 $130,860 $ 43,990 34%
Homes closed 1,135 932 203 22%
Average sales price $ 154.1 $ 140.4 $ 13.7 10%
Arizona
Dollars $120,909 $105,942 $ 14,967 14%
Homes closed 400 317 83 26%
Average sales price $ 302.3 $ 334.2 $ (31.9) (10)%
California
Dollars $ 38,248 $ 19,183 $ 19,065 99%
Homes closed 108 42 66 157%
Average sales price $ 354.1 $ 456.7 $ (102.6) (23)%
The increase in revenue and number of homes closed in 1999 compared to 1998
resulted mainly from the inclusion of the California operations for the full
year and continued growth in our Texas and Arizona operations.
HOME SALES GROSS PROFIT
Gross profit equals home sales revenue, net of housing cost of sales, which
include developed lot costs, home 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. Comparative 1999 and 1998 home sales gross profit follows (dollars in
thousands):
Year Ended
December 31,
---------------- Dollar/percentage Percentage
1999 1998 Increase (Decrease) Increase (Decrease)
---- ---- ------------------- -----------------
Dollars $63,810 $51,576 $12,234 24%
Percent of home
sales revenue 19.1% 20.1% (1.0)% (5)%
The dollar increase in gross profit for the twelve months ended December
31, 1999 is attributable to the increase in number of homes closed due to the
inclusion of California operations for the full year, and continued growth in
our Texas and Arizona operations. The gross profit percentage decreased in 1999
due to somewhat lower profit margins in our Texas operations and a change in the
Arizona housing mix, reflecting a greater proportion of move-up home closings,
which typically have lower gross profit margins than our luxury homes.
EARNINGS FROM MORTGAGE ASSETS AND OTHER INCOME
All of our remaining mortgage securities were sold in 1998, causing the
1999 decrease in earnings from mortgage assets. Other income increased primarily
due to an increase in mortgage company income.
13
<PAGE>
COMMISSIONS AND OTHER SALES COSTS
Commissions and other sales costs, such as advertising and sales office
expenses, were approximately $19.2 million, or 5.8% of home sales revenue, in
1999, as compared to approximately $14.3 million, or 5.6% of home sales revenue
in 1998. A greater number of communities were operating in 1999 than in 1998,
which primarily caused the increase.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were approximately $15.1 million, or
4.4% of total revenue in 1999, as compared to approximately $10.6 million, or
4.1% of total revenue in 1998. Operating costs associated with our geographic
expansions primarily caused this increase.
MINORITY INTEREST
The minority interest recorded in 1998 is due to our acquisition of
Sterling Communities, which included two 50% owned limited partnership interests
which Meritage controlled. We recorded the minority interest partners' share of
net income as an expense. The limited partnerships' operations were concluded in
the fourth quarter of 1998.
INCOME TAXES
The increase in income taxes to $13.3 million for the year ended December
31, 1999 from $6.5 million in the prior year resulted from an increase in
pre-tax income and a higher effective tax rate. The lower 1998 effective tax
rate was caused by utilization of our net operating loss carryforward. In future
periods we expect to have an effective tax rate approximating the statutory
federal and state tax rates.
SALES CONTRACTS
Sales contracts for any period represent the number of homes ordered by
customers (net of homes canceled) multiplied by the average sales price per home
ordered. Comparative 1999 and 1998 sales contracts follow (dollars in
thousands):
Year Ended December 31, Dollar/unit Percentage
----------------------- Increase Increase
1999 1998 (Decrease) (Decrease)
--------- --------- ---------- ----------
Total
Dollars $388,158 $283,746 $104,412 37%
Homes ordered 1,840 1,466 374 26%
Average sales price $ 211.0 $ 193.6 $ 17.4 9%
Texas
Dollars $191,655 $166,020 $ 25,635 15%
Homes ordered 1,198 1,131 67 6%
Average sales price $ 160.0 $ 146.8 $ 13.2 9%
Arizona
Dollars $127,408 $115,375 $ 12,033 10%
Homes ordered 436 329 107 33%
Average sales price $ 292.2 $ 350.7 $ (58.5) (17)%
California
Dollars $ 69,095 $ 2,351 $ 66,744 *
Homes ordered 206 6 200 *
Average sales price $ 335.4 $ 391.8 $ (56.4) (14)%
- ----------
* Not meaningful
14
<PAGE>
We do not include sales contingent upon the sale of a customer's existing
home as a sales contract until the contingency is removed. Historically, we have
experienced a cancellation rate approximating 20% of gross sales. Total sales
contracts increased in 1999 compared to 1998 due to the expansion into
California, and continued growth in our Texas and Arizona operations.
NET SALES BACKLOG
Backlog represents net sales contracts that have not closed. Comparative
1999 and 1998 net sales backlog follows (dollars in thousands):
At December 31, Dollar/unit Percentage
----------------------- Increase Increase
1999 1998 (Decrease) (Decrease)
--------- --------- ---------- ----------
Total
Dollars $199,445 $145,294 $54,151 37%
Homes in backlog 885 688 197 29%
Average sales price $ 225.4 $ 211.2 $ 14.2 7%
Texas
Dollars $ 93,983 $ 77,178 $16,805 22%
Homes in backlog 566 503 63 13%
Average sales price $ 166.0 $ 153.4 $ 12.6 8%
Arizona
Dollars $ 72,878 $ 66,379 $ 6,499 10%
Homes in backlog 216 180 36 20%
Average sales price $ 337.4 $ 368.8 $ (31.4) (9)%
California
Dollars $ 32,584 $ 1,737 $30,847 *
Homes in backlog 103 5 98 *
Average sales price $ 316.3 $ 347.4 $ (31.1) (9)%
- ----------
* Not meaningful
Total dollar backlog increased 37% over the prior year due to a
corresponding increase in homes in backlog. Homes in backlog have increased 29%
over the prior year due mainly to the increase in net orders caused by expansion
into California and continued growth in our Texas and Arizona operations. Our
backlog also increased somewhat due to extended construction times, which caused
longer periods between the time sales contracts were taken and home deliveries
were made.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Total results for the comparison of the years ended December 31, 1998 and
1997 include those of the Texas operations from July 1, 1997 and of the
California operations from July 1, 1998. Texas 1997 results are pro forma in
that they are shown for the entire year, even though the Texas operations were
not acquired until July 1, 1997.
15
<PAGE>
HOME SALES REVENUE
Comparative 1998 and 1997 home sales revenue follow (dollars in thousands):
Year Ended December 31, Dollar/unit Percentage
----------------------- Increase Increase
1998 1997 (Decrease) (Decrease)
--------- --------- ---------- ----------
Total
Dollars $255,985 $149,385 $106,600 71%
Homes closed 1,291 644 647 100%
Average sales price $ 198.3 $ 232.0 $ (33.7) (15)%
Texas*
Dollars $130,860 $ 91,190 $ 39,670 44%
Homes closed 932 633 299 47%
Average sales price $ 140.4 $ 144.1 $ (3.7) (3)%
Arizona
Dollars $105,942 $ 97,922 $ 8,020 8%
Homes closed 317 284 33 12%
Average sales price $ 334.2 $ 344.8 $ (10.6) (3)%
California
Dollars $ 19,183 ** ** **
Homes closed 42 ** ** **
Average sales price $ 456.7 ** ** **
- ----------
* Full year 1997 Texas information includes pre-combination results and is
for comparative purposes only.
** Not meaningful
The increase in revenue and number of homes closed in 1998 compared to 1997
resulted mainly from the inclusion of the Texas operations for the full year.
The lower average sales price in 1997 is also due to sales in the Texas market,
where we focus on entry-level and move-up homes.
HOME SALES GROSS PROFIT
Comparative 1998 and 1997 home sales gross profit follows (dollars in
thousands):
Year Ended December 31,
----------------------- Dollar/percentage Percentage
1998 1997 Increase Increase
---- ---- -------- --------
Dollars $51,576 $25,016 $26,560 106%
Percent of home
sales revenue 20.1% 16.7% 3.4% 20%
The dollar increase in gross profit for the twelve months ended December
31, 1998 is attributable to the increase in number of homes closed due to the
inclusion of Texas operations for the full year, along with increased closings
in highly profitable Arizona communities. The gross profit margin increased in
1998 due to generally higher margins in Texas, the addition of the California
operations in the last half of the year and an increase in sales of more
profitable custom options and upgrades with respect to Arizona home closings.
EARNINGS FROM MORTGAGE ASSETS AND OTHER INCOME
The increase in earnings from mortgage assets primarily is due to gains
from the sales of our remaining mortgage securities in 1998. These gains
exceeded 1997 gains from residual sales by approximately $2.1 million. The
increase was somewhat offset by decreased residual interest earned in 1998.
The 1998 increase in other income primarily is due to an increase in
interest income on cash accounts and overnight investments. Texas operations
were included for the full tear in 1998, which also contributed to higher income
amounts.
16
<PAGE>
COMMISSIONS AND OTHER SALES COSTS
Commissions and other sales costs, such as advertising and sales office
expenses, were approximately $14.3 million, or 5.6% of home sales revenue, in
1998, as compared to approximately $8.3 million, also 5.6% of home sales
revenue, in 1997. Sales costs resulting from a greater number of operating
communities due to our expansions into Texas and California primarily caused the
dollar increase.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were approximately $10.6 million, or
4.1% of total revenue in 1998, as compared to approximately $6.8 million, or 4.6
% of total revenue in 1997. Operating costs associated with our Texas and
California expansions, including the amortization of goodwill, primarily caused
the increase.
MINORITY INTEREST
The increase in minority interest in 1998 is due to our acquisition of
Sterling Communities, which included two 50% owned limited partnership interests
which Meritage controls. We recorded the minority interest partners' share of
net income as an expense. The limited partnerships' operations were concluded in
the fourth quarter of 1998.
INCOME TAXES
The increase in income taxes to $6.5 million for the year ended December
31, 1998 from $962,000 in the prior year resulted from a significant increase in
pre-tax income and a higher effective tax rate. The lower 1997 effective tax
rate was caused by a larger reduction in the valuation allowance applicable to
deferred tax assets than occurred in 1998. In future periods we expect to have
an effective tax rate approximating the statutory federal and state tax rates.
SALES CONTRACTS
Comparative 1998 and 1997 sales contracts follow (dollars in
thousands):
Year Ended December 31, Dollar/unit Percentage
----------------------- Increase Increase
1998 1997 (Decrease) (Decrease)
--------- --------- ---------- ----------
Total
Dollars $283,746 $157,479 $126,267 80%
Homes ordered 1,466 693 773 112%
Average sales price $ 193.6 $ 227.2 $ ( 33.6) (15)%
Texas*
Dollars $166,020 $102,261 $ 63,759 62%
Homes ordered 1,131 740 391 53%
Average sales price $ 146.8 $ 138.2 $ 8.6 6%
Arizona
Dollars $115,375 $112,207 $ 3,168 3%
Homes ordered 329 332 (3) **
Average sales price $ 350.7 $ 338.0 $ 12.7 4%
California
Dollars $ 2,351 ** ** **
Homes ordered 6 ** ** **
Average sales price $ 391.8 ** ** **
- ----------
* Full year 1997 Texas information includes pre-combination results and is
for comparative purposes only.
** Not meaningful
17
<PAGE>
Total sales contracts increased in 1998 compared to 1997 due to the
expansion into Texas and California, and the economic strength of all of our
operating markets.
NET SALES BACKLOG
Comparative 1998 and 1997 net sales backlog follows (dollars in thousands):
At December 31,
----------------------- Dollar/unit Percentage
1998 1997 Increase Increase
--------- --------- ---------- ----------
Total
Dollars $145,294 $ 98,963 $46,331 47%
Homes in backlog 688 472 216 46%
Average sales price $ 211.2 $ 209.7 $ 1.5 *
Texas
Dollars $ 77,178 $ 42,018 $35,160 84%
Homes in backlog 503 304 199 65%
Average sales price $ 153.4 $ 138.2 $ 15.2 11%
Arizona
Dollars $ 66,379 $ 56,945 $ 9,434 17%
Homes in backlog 180 168 12 7%
Average sales price $ 368.8 $ 339.0 $ 29.8 9%
California
Dollars $ 1,737 * * *
Homes in backlog 5 * * *
Average sales price $ 347.4 * * *
- ----------
* Not meaningful
Total dollar backlog increased 47% over the prior year due to a
corresponding increase in homes in backlog. Homes in backlog have increased 46%
over the prior year due mainly to the increase in net orders caused by expansion
into Texas and California.
Arizona and Texas backlogs have increased due to the number of sales orders
taken in 1998, along with slight industry-wide construction delays. These delays
caused more closings to be pushed into the following year than usual.
LIQUIDITY AND CAPITAL RESOURCES
Our principal uses of working capital are land purchases, lot development
and home construction. We use a combination of borrowings and funds generated by
operations to meet our working capital requirements.
Cash flow for each of our communities depends on the status of the
development cycle, and can differ substantially from reported earnings. Early
stages of development or expansion require significant cash outlays for land
acquisitions, plat and other approvals, and construction of model homes, roads,
certain utilities, general landscaping and other amenities. Because these costs
are capitalized, income reported for financial statement purposes during those
early stages may significantly exceed cash flow. Later, cash flow can
significantly exceed earnings reported for financial statement purposes, as cost
of sales includes charges for substantial amounts of previously expended costs.
At December 31, 1999 we had short-term secured revolving construction loan
and acquisition and development facilities totaling $169.5 million of which
approximately $71 million was outstanding. An additional $35 million of
unborrowed funds supported by approved collateral were available under our
credit facilities at that date. Borrowings under the credit facilities are
subject to our inventory collateral position and a number of other conditions,
18
<PAGE>
including minimum net worth, debt to equity and debt coverage tests. We also
have $15 million outstanding in unsecured, senior subordinated notes due
September 15, 2005, which were issued in October 1998.
Management believes that the current borrowing capacity, cash on hand at
December 31, 1999 and anticipated cash flows from operations are sufficient to
meet liquidity needs for the foreseeable future. There is no assurance, however,
that future amounts available from our sources of liquidity will be sufficient
to meet future capital needs. The amount and types of indebtedness that we incur
may be limited by the terms of the indenture governing our senior subordinated
notes and credit agreements.
SEASONALITY
We historically have closed more homes 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 our semi-custom luxury and move-up products. Management expects this
seasonal trend to continue, though it may vary as operations continue to expand.
YEAR 2000 COMPLIANCE
We have assessed our homebuilding and corporate operations that use
significant information technology ("IT") systems and non-IT systems
(collectively, "business systems") for what was commonly referred to as the Year
2000 ("Y2K") issue. We experienced no business disruptions due to failures of
our business systems, nor did any of our suppliers or business partners. We have
converted to new versions of substantially all of our homebuilding database
systems, and believe that the IT system is Y2K compliant in all respects. We do
not anticipate further costs or potential disruptions associated with the Y2K
issue, however there is no assurance that there will be no unforeseen Y2K events
in the future.
The remediation and testing of our business systems cost approximately
$160,000. These costs were expensed in the period incurred and funded through
cash flows from operations. The financial impact was not material to our
financial position or results of operations.
NEW ACCOUNTING STANDARDS
In June, 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
which establishes standards for the accounting and reporting for derivative
instruments including certain derivative instruments embedded in other contracts
and hedging activities. This statement generally requires that all derivatives
are recognized as assets or liabilities in the balance sheet and measured at
fair value, and that recognition of gains and losses are required on hedging
instruments based on changes in fair value or the earnings effect of forecasted
transactions. As issued, SFAS No. 133 is effective for all fiscal quarters of
all fiscal years beginning after June 15, 1999. In June 1999, the FASB issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of SFAS No. 133", as an amendment to SFAS No.
133, which deferred the effective date of SFAS No. 133 until June 15, 2000. We
are currently evaluating the impact of SFAS No. 133.
In June 1999, the FASB issued FASB Interpretation No. 43, "Real Estate
Sales - an Interpretation of FASB Statement No. 66", which we have adopted. The
interpretation clarified that SFAS No. 66 applies to all sales of real estate,
including sales of real estate with property improvements or integral equipment,
entered into after June 30, 1999. This pronouncement has had no effect on our
accounting policies.
In August 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 99, "Materiality" which expresses the views of
the staff that exclusive reliance on certain quantitative benchmarks to assess
materiality in preparing financial statements is inappropriate since
misstatements are not immaterial simply because they fall beneath a numerical
threshold. In December 1999, the SEC issued SAB No. 101, "Revenue Recognition in
Financial Statements" which summarizes the staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
These pronouncements have had no effect on our accounting policies.
FACTORS THAT MAY AFFECT OUR FUTURE RESULTS AND FINANCIAL CONDITION
Future operating results and financial condition depend on our ability to
successfully design, develop, construct and sell homes that satisfy dynamic
customer demand patterns. Inherent in this process are factors that we must
successfully manage to achieve favorable future operating results and financial
condition. These operating and financial conditions, along with many other
factors, could affect the price of our common stock. Potential risks and
uncertainties that could affect future operating results and financial condition
could include the factors discussed below.
HOMEBUILDING INDUSTRY FACTORS. The homebuilding industry is cyclical and is
significantly affected by changes in economic and other conditions, such as
employment levels, availability of financing, interest rates, and consumer
confidence. Although management believes that many of our customers
(particularly purchasers of luxury and move-up homes) tend to be less
price-sensitive than generally is the case for other homebuilders, such
uncertainties could adversely affect our performance. Homebuilders are also
subject to various risks, many of which are outside their control, including
delays in construction schedules, cost overruns, changes in governmental
regulations, 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, the materials are subject to periodic price fluctuations.
There is no assurance that the occurrence or continuation of any of the above
items will not have a material adverse effect on our business.
The homebuilding industry is subject to the potential for significant
variability and fluctuations in real estate values, as evidenced by the changes
in real estate prices in recent years in Texas, Arizona and Northern California.
Although we believe that our projects are currently reflected on our balance
sheet at appropriate values, there is no assurance that write-downs of some or
19
<PAGE>
all of our projects will not occur if market conditions deteriorate, or that
such write-downs will not be material in amount.
FLUCTUATIONS IN OPERATING RESULTS. We historically have experienced, and
expect to continue to experience, variability in home sales and net earnings on
a quarterly basis. As a result of such variability, our historical performance
may not be a meaningful indicator of future results. Factors that contribute to
this variability include:
* timing of home deliveries and land sales;
* the ability to continue the acquisition of additional land or options
to acquire additional land on acceptable terms;
* conditions of the real estate market and the general economy in areas
where we operate;
* the cyclical nature of the homebuilding industry, changes in
prevailing interest rates and the availability of mortgage financing;
* costs or shortages of materials and labor; and
* delays in construction schedules due to strikes, adverse weather, acts
of God, and the availability of subcontractors or governmental
restrictions.
INTEREST RATES AND MORTGAGE FINANCING. We believe that many of our move-up
and luxury home customers have been less sensitive to interest rate fluctuations
than other homebuyers. However, most of our buyers finance their home purchase
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 affected adversely, home sales, gross margins and net income may
also be adversely impacted and the impact may be material. Our homebuilding
activities depend 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 Meritage home. Any limitations or
restrictions of financing availability could adversely affect home sales.
Changes in federal income tax laws may also affect demand for new homes. Various
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 our 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.
INFLATION. Meritage, as well as other homebuilders in the industry, may be
adversely affected during periods of high inflation, mainly because of higher
land and construction costs. Also, higher mortgage interest rates may
significantly affect the affordability of permanent mortgage financing to
prospective buyers. Inflation also increases our interest, material and labor
costs. We attempt to pass cost increases on to our customers through higher
selling prices. To date, inflation has not had a material adverse effect on our
results of operations; however, there is no assurance that inflation will not
have a material adverse effect on our future operating results.
COMPETITION. The single-family residential housing industry is highly
competitive. Homebuilders vie for desirable properties, financing, raw
materials, and skilled labor. We compete for residential home sales with other
developers and individual resales of existing homes. Competitors include large
homebuilding companies, some of which have greater financial resources than we
have, and smaller homebuilders, which may have lower costs. Competition is
expected to continue and become more intense, and there may be new entrants in
the markets in which we currently operate and in markets we may enter in the
future.
LACK OF GEOGRAPHIC DIVERSIFICATION. We have operations in Texas, Arizona
and Northern California. Failure to be more geographically diversified could
adversely impact us if the homebuilding business in our current markets should
decline, for there may not be a balancing opportunity in a healthier market in
other geographic regions.
20
<PAGE>
ADDITIONAL FINANCING; LIMITATIONS. The homebuilding industry is capital
intensive and requires significant up-front expenditures to acquire land and
begin development. Accordingly, we incur substantial indebtedness to finance our
homebuilding activities. At December 31, 1999, our debt totaled approximately
$85.9 million. We 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 securities offerings. Also, 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 we cannot obtain sufficient capital to fund our planned capital or
other expenditures, new projects may be delayed or abandoned, which could result
in a reduction in home sales and may adversely affect operating results. There
is no assurance that additional debt or equity financing will be available in
the future or on acceptable terms.
The terms and conditions of our current indebtedness limit the amount and
types of indebtedness that we can incur. We must comply with numerous operating
and financial maintenance covenants and there is no assurance that we will be
able to maintain compliance with these financial and other covenants. Failure to
comply with the covenants would result in default and resulting cross defaults
under our other indebtedness, and could result in an acceleration of all
indebtedness, which would have a material adverse affect on us.
GOVERNMENT REGULATIONS; ENVIRONMENTAL CONDITIONS. We are subject to local,
state, and federal statutes and rules regulating certain developmental matters,
as well as building and site design. We are subject to various fees and charges
of governmental authorities designed to defray the cost of providing certain
governmental services and improvements. We 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 ordinances, building
moratoriums, or similar government regulations that could be imposed in the
future due to health, safety, welfare, or environmental concerns. We must also
obtain licenses, permits, and approvals from government agencies to engage in
certain activities, the granting or receipt of which are beyond our control.
Meritage and its competitors are also 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 substantial compliance and
other costs, and may prohibit or severely restrict development in certain
environmentally sensitive regions or areas. Environmental regulations can also
have an adverse impact on the availability and price of certain raw materials
such as lumber.
RECENT AND FUTURE EXPANSION. In 1998, we expanded into the Northern
California market, and may continue to consider growth in other areas of the
country. The magnitude, timing and nature of any future expansion will depend on
a number of factors, including suitable acquisition candidates, the negotiation
of acceptable terms, our financial capabilities, and general economic and
business conditions. New acquisitions may result in the incurrence of additional
debt and/or amortization of expenses related to goodwill and intangible assets
that could adversely affect our profitability, or result in potentially dilutive
issuances of equity securities. Acquisitions also involve numerous risks,
including difficulties in the assimilation of the acquired company's operations,
the diversion of management's attention from other business concerns, risks of
entering markets in which we have had no or only limited direct experience and
the potential loss of key employees of the acquired company. There can be no
assurance that we will be able to expand into new markets on a profitable basis
or that we can successfully manage our expansion into California or any
additional markets.
DEPENDENCE ON KEY PERSONNEL. Our success is largely dependent on the
continuing services of certain key employees, and the ability to attract new
personnel required for our favorable development. We have entered into
employment agreements with various key officers, and loss of their services
could have a material adverse affect on our business.
21
<PAGE>
DEPENDENCE ON SUBCONTRACTORS. We conduct our business only as a general
contractor in connection with the design, development and construction of our
communities. Virtually all architectural and construction work is performed by
subcontractors. As a consequence, we are dependent upon the continued
availability and satisfactory performance by unaffiliated third parties for the
design and construction of our homes. There is no assurance that there will be
sufficient availability and satisfactory performance by unaffiliated third-party
subcontractors, and such a lack could have a material adverse affect on our
business.
SPECIAL NOTE OF CAUTION REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this annual report may constitute "forward-looking
statements" within the meaning of federal securities laws. Forward-looking
statements are based on management's beliefs, assumptions and expectations of
our future economic performance, taking into account the information currently
available to them. These statements are not statements of historical fact.
Forward-looking statements involve risks and uncertainties that may cause our
actual results, performance or financial condition to be materially different
from the expectations of future results, performance or financial condition
expressed or implied in any forward-looking statement.
When used in this annual report, the words "anticipate," "estimate,"
"expect," "objective," "projection," "forecast," "goal" or similar words are
intended to identify forward-looking statements. Management qualifies any
forward-looking statements entirely by these cautionary factors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not trade in derivative financial instruments and at December 31,
1999 had no significant financial instruments. We do have other financial
instruments in the form of notes payable and senior debt. Our lines of credit
and credit facilities are at variable interest rates and are subject to market
risk in the form of interest rate fluctuations. The interest rate on our senior
debt is at a fixed rate.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements as of December 31, 1999 and 1998 and
for each of the years in the three-year period ended December 31, 1999, together
with related notes and the report of KPMG LLP, independent auditors, are on the
following pages. Other required financial information is more fully described in
Item 14.
22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Meritage Corporation
We have audited the accompanying consolidated balance sheets of Meritage
Corporation and subsidiaries as of December 31, 1999 and 1998 and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion of these consolidated
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 financial position of Meritage
Corporation and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Phoenix, Arizona
February 4, 2000
23
<PAGE>
MERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------------
1999 1998
------------- -------------
ASSETS
Cash and cash equivalents $ 13,422,016 $ 12,386,806
Real estate under development 171,012,405 104,758,530
Deposits on real estate under
option or contract 15,699,609 7,338,406
Other receivables 1,643,187 2,460,966
Deferred tax asset 698,634 6,935,000
Goodwill 18,741,625 14,640,712
Property and equipment, net 4,040,134 2,566,163
Other assets 1,301,286 1,163,737
------------- -------------
Total Assets $ 226,558,896 $ 152,250,320
============= =============
LIABILITIES
Accounts payable and
accrued liabilities $ 41,950,761 $ 34,068,178
Home sale deposits 8,261,000 8,587,245
Notes payable 85,936,601 37,204,845
Minority interest in
consolidated joint ventures -- 110,922
------------- -------------
Total Liabilities 136,148,362 79,971,190
------------- -------------
STOCKHOLDERS' EQUITY
Common stock, par value
$.01 per share; 50,000,000
shares authorized; issued and
outstanding - 5,474,906 shares
at December 31, 1999, and 5,334,942
shares at December 31, 1998 54,749 53,349
Additional paid-in capital 100,406,745 99,319,669
Accumulated deficit (8,148,535) (27,093,888)
Less cost of shares held
in treasury (186,000 shares) (1,902,425) --
------------- -------------
Total Stockholders' Equity 90,410,534 72,279,130
------------- -------------
Total Liabilities and
Stockholders' Equity $ 226,558,896 $ 152,250,320
============= =============
See accompanying notes to consolidated financial statements
24
<PAGE>
MERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended December 31,
-----------------------------------------------
1999 1998 1997
------------- ------------- -------------
Home sales revenue $ 334,007,420 $ 255,984,499 $ 149,384,548
Land sales revenue 7,778,761 1,128,208 245,000
------------- ------------- -------------
341,786,181 257,112,707 149,629,548
Cost of home sales (270,197,356) (204,408,950) (124,368,782)
Cost of land sales (7,089,379) (778,457) (225,000)
------------- ------------- -------------
(277,286,735) (205,187,407) (124,593,782)
Home sales gross profit 63,810,064 51,575,549 25,015,766
Land sales gross profit 689,382 349,751 20,000
------------- ------------- -------------
64,499,446 51,925,300 25,035,766
Commissions and other sales
costs (19,243,248) (14,292,152) (8,294,028)
General and administrative
expense (15,099,457) (10,632,212) (6,812,171)
Interest expense (6,383) (461,475) (165,173)
Other income, net 2,064,399 750,950 346,271
Earnings from mortgage assets -- 5,230,549 5,088,693
Minority interest in net
income of consolidated
joint ventures -- (2,021,230) --
------------- ------------- -------------
Earnings before income taxes 32,214,757 30,499,730 15,199,358
Income taxes (13,269,404) (6,496,943) (961,916)
------------- ------------- -------------
Net earnings $ 18,945,353 $ 24,002,787 $ 14,237,442
============= ============= =============
Basic earnings per share $ 3.49 $ 4.51 $ 2.93
============= ============= =============
Diluted earnings per share $ 3.14 $ 3.92 $ 2.68
============= ============= =============
See accompanying notes to consolidated financial statements
25
<PAGE>
MERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Additional
Number of Common Paid-in Accumulated Treasury
Shares Stock Capital Deficit Stock Total
------ ----- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 4,580,611 $ 45,806 $ 92,643,658 $(65,334,117) $ (410,283) $ 26,945,064
Net earnings -- -- -- 14,237,442 -- 14,237,442
Exercise of stock options 8,162 81 118,510 -- -- 118,591
Shares issued in connection with
the Legacy combination 666,667 6,667 3,393,335 -- -- 3,400,002
Stock option and contingent stock
compensation expense -- -- 1,664,081 -- -- 1,664,081
--------- -------- ------------ ------------ ----------- ------------
Balance at December 31, 1997 5,255,440 52,554 97,819,584 (51,096,675) (410,283) 46,365,180
Net earnings -- -- -- 24,002,787 -- 24,002,787
Exercise of stock options 43,660 437 513,135 -- -- 513,572
Contingent and warrant shares
issued 88,888 888 (888) -- -- --
Stock option and contingent stock
compensation expenses -- -- 1,397,591 -- -- 1,397,591
Retirement of treasury stock (53,046) (530) (409,753) -- 410,283 --
--------- -------- ------------ ------------ ----------- ------------
Balance at December 31, 1998 5,334,942 53,349 99,319,669 (27,093,888) -- 72,279,130
Net earnings -- -- -- 18,945,353 -- 18,945,353
Exercise of stock options 51,076 511 494,650 -- -- 495,161
Contingent shares issued 88,888 889 (889) -- -- --
Stock option and contingent stock
compensation expenses -- -- 593,315 -- -- 593,315
Purchase of treasury stock -- -- -- -- (1,902,425) (1,902,425)
--------- -------- ------------ ------------ ----------- ------------
Balance at December 31, 1999 5,474,906 $ 54,749 $100,406,745 $ (8,148,535) $(1,902,425) $ 90,410,534
========= ======== ============ ============ =========== ============
</TABLE>
See accompanying notes to consolidated financial statements
26
<PAGE>
MERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1999 1998 1997
------------- ------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 18,945,353 $ 24,002,787 $ 14,237,442
Adjustments to reconcile net earnings
to net depreciation and amortization 2,528,346 1,637,474 376,916
Minority interest in net income of
consolidated joint ventures -- 2,021,230 --
Deferred tax expense 6,236,366 4,969,000 --
Stock option compensation expense 593,315 1,397,591 1,664,081
Gain on sales of residual interests -- (5,180,046) (3,067,829)
Increase in real estate under development (66,253,875) (32,045,609) (10,575,738)
Increase in deposits on real estate under
option or contract (8,361,203) (3,577,986) (1,712,139)
(Increase) decrease in other receivables
and other assets 680,230 (1,775,151) 2,313,632
Increase in accounts payable and accrued
liabilities 9,570,526 4,375,102 2,974,442
Increase (decrease) in home sale deposits (326,245) 1,809,629 465,409
------------- ------------- ------------
Net cash provided by (used in) operating
activities (36,387,187) (2,365,979) 6,676,216
------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in merger/acquisition -- 785,403 1,306,998
Cash paid for merger/acquisition (6,966,890) (9,744,607) (1,952,857)
Purchases of property and equipment (2,935,205) (1,568,642) (174,257)
Principal payments received on real
estate loans -- -- 2,124,544
Real estate loans funded -- -- (428,272)
Decrease in short term investments -- -- 4,696,495
Proceeds from sales of residual interest -- 6,600,000 5,500,000
------------- ------------- ------------
Net cash provided by (used in)
investing activities (9,902,095) (3,927,846) 11,072,651
------------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings 273,824,450 174,445,708 67,900,899
Repayment of borrowings (225,092,694) (164,524,041) (92,896,553)
Purchase of treasury shares (1,902,425) -- --
Stock options exercised 495,161 513,572 118,591
Dividends paid -- -- (194,330)
------------- ------------- ------------
Net cash provided by (used in)
financing activities 47,324,492 10,435,239 (25,071,393)
------------- ------------- ------------
Net increase (decrease) in cash and
cash equivalents 1,035,210 4,141,414 (7,322,526)
Cash and cash equivalents at beginning
of year 12,386,806 8,245,392 15,567,918
------------- ------------- ------------
Cash and cash equivalents at end of year $ 13,422,016 $ 12,386,806 $ 8,245,392
============= ============= ============
Supplemental information:
Cash paid for interest $ 5,872,607 $ 3,996,771 $ 3,801,764
Cash paid for income taxes $ 5,422,500 $ 2,332,604 $ 49,871
</TABLE>
See accompanying notes to consolidated financial statements
27
<PAGE>
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
BUSINESS. Meritage Corporation develops, constructs and sells new high quality,
single-family homes in the semi-custom luxury, move-up and entry-level markets.
We were formed in 1988 as a real estate investment trust ("REIT") that
invested in mortgage-related assets and real estate loans. On December 31, 1996,
the Company acquired by merger the homebuilding operations of various entities
operating under the Monterey Homes name, and has phased out the mortgage-related
operations. Monterey has been building homes in Arizona for over 14 years,
specializing in move-up and semi-custom luxury homes.
As part of our strategy to diversify operations, on July 1, 1997, we
combined with Legacy Homes, a group of entities with homebuilding operations in
Texas. Legacy has been in business since 1988, and designs, builds and sells
entry-level and move-up homes. On July 1, 1998 we acquired Sterling Communities,
now Meritage Homes of Northern California, which has homebuilding operations in
the San Francisco Bay and Sacramento metropolitan areas, and designs, builds and
sells move-up homes. In September 1998, with shareholder approval, Meritage
Corporation became the new corporate name.
BASIS OF PRESENTATION. Consolidated financial statements include the accounts of
Meritage Corporation and its subsidiaries. Intercompany balances and
transactions have been eliminated in consolidation and certain prior period
amounts have been reclassified to be consistent with current financial statement
presentation. Results include the operations of Legacy from July 1, 1997 and of
Meritage Homes of Northern California from July 1, 1998.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS. We consider short-term investments with an initial
maturity of three months or less to be cash equivalents. Amounts in transit from
title companies for home closings of approximately $1,568,000 and $6,254,000 are
included in cash as of December 31, 1999 and 1998, respectively.
REAL ESTATE UNDER DEVELOPMENT. Amounts are carried at cost unless such costs
would not be recovered from the cash flows generated by future disposition. In
this case, amounts are carried at estimated fair value less disposal costs.
Costs capitalized include direct construction costs for homes, development
period interest and certain common costs that benefit the entire community.
Common costs are allocated on a community-by-community basis to residential lots
based on the number of lots to be built in the community, which approximates the
relative sales value method.
Deposits paid related to options and contracts to purchase land are
capitalized and classified as deposits on real estate under option or contract
until the related land is purchased. The deposits are then transferred to real
estate under development.
COST OF HOME SALES. Cost of sales includes land acquisition and development
costs, direct home construction costs, development period interest and closing
costs, and an allocation of common costs.
REVENUE RECOGNITION. Revenues and profits from sales of residential real estate
and related activities are recognized when closings have occurred and the buyer
has made a minimum down payment and other criteria for sale and profit
recognition are satisfied.
28
<PAGE>
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
PROPERTY AND EQUIPMENT. We state property and equipment at cost less accumulated
depreciation. Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets, which range from three to seven years.
Accumulated depreciation was approximately $3,503,000 and $2,862,000 at December
31, 1999 and 1998, respectively. Maintenance and repair costs are expensed as
incurred.
GOODWILL. Goodwill represents the excess of purchase price over fair value of
net assets acquired and is being amortized on a straight-line basis over a
20-year period. Accumulated amortization was approximately $1,771,700 at
December 31, 1999 and $704,600 at December 31, 1998. Management periodically
evaluates the businesses to which the goodwill relates to insure the carrying
value of goodwill has not been impaired. The amount of goodwill impairment, if
any, is measured based on projected discounted future operating cash flows using
a discount rate reflecting our average cost of funds. No goodwill impairment was
recorded in the accompanying statements of earnings.
RESIDUAL INTERESTS. Prior to year-end 1998, we owned residual interests in
collateralized mortgage obligations (CMOs) and in mortgage participation
certificates (MPCs) (collectively residual interests). We used the prospective
net level yield method, in which interest is recorded at cost and amortized over
the life of the related CMO or MPC issuance, to account for the residual
interests. All residual interests were sold in 1997 and 1998.
INCOME TAXES. We account for income taxes in accordance with Statement of
Financial Accounting Standards (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 basis. Deferred tax assets and
liabilities are measured using the enacted tax rates expected to apply to
taxable income in future years and are subsequently adjusted for changes in the
rates. The effect on deferred tax assets and liabilities of a change in tax
rates is a charge or credit to deferred tax expense in the period of enactment.
EARNINGS PER SHARE. Basic earnings per share are computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in our earnings. We adopted SFAS No. 128, "Earnings Per
Share" in 1997.
USE OF ESTIMATES. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions relating to amounts reported in the financial statements and
accompanying notes. Actual results could differ materially from these estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying amounts of our short-term
financial instruments are reasonable approximations of fair value. Our notes
payable carry interest rates that are variable and/or comparable to current
market rates based on the nature of the loans, their terms and remaining
maturity, and therefore are stated at approximate fair value. Considerable
judgment is required in interpreting market data to develop estimates of fair
value. Accordingly, these fair value estimates are subjective and not
necessarily indicative of the amounts we would pay or receive in actual market
transactions.
29
<PAGE>
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
STOCK OPTION PLANS. We have elected to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion (APB) No. 25 as allowed by SFAS No. 123 "Accounting for Stock-Based
Compensation". As such, compensation expense would be recorded on the date of
the grant only if the market price of the stock underlying the grant was greater
than the exercise price. The pro forma disclosures that are required by SFAS No.
123 are presented in Note 6.
SEGMENT INFORMATION. The FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments for an Enterprise and Related Information"
in June 1997. FASB No. 131 establishes standards for the way that public
companies report selected information about operating segments in financial
reports issued to stockholders. We have adopted the provisions of FASB No. 131,
which caused no significant impact on our definitions of our operating segments
and related disclosures.
NOTE 3 - REAL ESTATE UNDER DEVELOPMENT AND CAPITALIZED INTEREST
The components of real estate under development at December 31 follow (in
thousands):
1999 1998
---- ----
Homes under contract, in production $ 71,987 $ 44,186
Finished lots and lots under development 63,610 43,508
Land held for development 3,618 3,050
Model homes and homes held for resale 31,797 14,015
-------- --------
$171,012 $104,759
======== ========
We capitalize certain interest costs during development and construction.
Capitalized interest is allocated to real estate under development and charged
to cost of home sales when the homes are delivered. Summaries of interest
capitalized and interest expensed follow (in thousands):
Year Ended December 31,
------------------------
1999 1998
---------- ----------
Beginning unamortized capitalized interest $ 1,982 $ 1,890
Interest capitalized 7,025 3,711
Amortized cost of home sales (5,036) (3,619)
---------- ----------
Ending unamortized capitalized interest $ 3,971 $ 1,982
========= =========
Interest incurred $ 7,031 $ 4,172
Interest capitalized (7,025) (3,711)
---------- ----------
Interest expense $ 6 $ 461
========= =========
30
<PAGE>
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 4 - NOTES PAYABLE
Notes payable at December 31 consist of the following (in thousands):
1999 1998
------- -------
$70 million bank construction line of credit,
interest payable monthly approximating prime (8.5%
at December 31, 1999) or LIBOR (30 day LIBOR
5.832% at December 31, 1999), plus 1.75% payable
at December 31, 2001, secured by first deeds of
trust on real estate $37,411 $ 7,955
$80 million bank construction line of credit,
interest payable monthly approximating prime or
LIBOR plus 2.25%, payable at the earlier of close
of escrow, maturity date of individual homes
within the line or July 31, 2000, secured by first
deeds of trust on real estate 26,104 10,925
$15 million unsecured bank revolving line of
credit, interest payable monthly at prime,
maturing on January 17, 2000 6,000 --
Acquisition and development credit facilities
totaling $4.5 million, interest payable monthly,
ranging from prime to prime plus .25%; payable at the
earlier of funding of construction financing or
the maturity date of the individual projects,
secured by first deeds of trust on real estate 1,396 2,407
Senior unsecured notes, maturing September 15,
2005, annual interest of 9.1% payable quarterly,
principal payable in three equal installments on
September 15, 2003, 2004 and 2005 15,000 15,000
Other 26 918
------- -------
Total $85,937 $37,205
======= =======
The bank credit facilities and senior subordinated notes contain covenants
which require certain levels of tangible net worth, the maintenance of certain
minimum financial ratios, place limitations on the payment of dividends and
limit incurrence of indebtedness, asset dispositions and creations of liens,
among other items. As of December 31, 1999 and throughout the year, we were in
compliance with these covenants.
On October 2, 1998, we issued $15,000,000 in 9.1% Senior Unsecured Notes due
September 1, 2005 in a private placement to accredited investors under Section
4(2) of the Securities Act. Warburg Dillon Read and Dain Rauscher Wessels were
the underwriters of the issue and were paid a fee of 2.75% of the face amounts
of the notes. The notes were sold at par to four entities controlled by
Massachusetts Mutual Life Insurance Company. The proceeds of the issue were used
to pay down existing indebtedness.
31
<PAGE>
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Scheduled maturities of notes payable as of December 31, 1999 follow (in
thousands):
Year Ended
December 31,
------------
2000 $33,526
2001 37,411
2002 --
2003 5,000
2004 5,000
Thereafter 5,000
-------
$85,937
=======
NOTE 5 - EARNINGS PER SHARE
A summary of the reconciliation from basic earnings per share to diluted
earnings per share for the years ended December 31, 1999, 1998 and 1997 follows.
(in thousands, except per share amounts):
1999 1998 1997
------- ------- -------
Net earnings $18,945 $24,003 $14,237
Basic EPS - Weighted average
shares outstanding 5,431 5,317 4,864
------- ------- -------
Basic earnings per share $ 3.49 $ 4.51 $ 2.93
======= ======= =======
Basic EPS - Weighted average
shares outstanding 5,431 5,317 4,864
Effect of dilutive securities:
Contingent shares and warrants 89 158 114
Stock options 512 641 330
------- ------- -------
Dilutive EPS - Weighted average
shares outstanding 6,032 6,116 5,308
------- ------- -------
Diluted earnings per share $ 3.14 $ 3.92 $ 2.68
======= ======= =======
Antidilutive stock options not
included in diluted EPS 279 59 4
======= ======= =======
NOTE 6 - STOCK OPTIONS AND CONTINGENT STOCK
Our Board of Directors administers our stock option plans. The plans
provide for stock option grants to key personnel and directors, and provide a
means of performance-based compensation in order to attract and retain qualified
employees.
32
<PAGE>
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
We apply APB Opinion No. 25 and related interpretations in accounting for
our plans. Under APB 25, if the exercise price of the Company's stock options is
equal to the market price of the underlying stock on the date of the grant, no
compensation expense is recognized.
Had compensation cost for these plans been determined consistent with SFAS
123, our net earnings and earnings per share would have been reduced to the
following pro forma amounts (in thousands, except for per share amounts):
1999 1998 1997
---- ---- ----
Net earnings As reported $18,945 $24,003 $14,237
Pro forma 18,472 23,573 13,892
Basic earnings per share As reported 3.49 4.51 2.93
Pro forma 3.40 4.43 2.86
Diluted earnings per share As reported 3.14 3.92 2.68
Pro forma 3.06 3.85 2.62
The per share weighted average fair values of stock options granted during
1999, 1998 and 1997 were $7.81, $9.91 and $4.58, respectively, on the dates of
grant using the Black-Scholes pricing model based on the following weighted
average assumptions:
1999 1998 1997
---- ---- ----
Expected dividend yield 0% .5% 1.2%
Risk-free interest rate 4.76% 5.75% 6.00%
Expected volatility 52% 51% 43%
Expected life (in years) 6 7 5
THE MERITAGE PLAN
Our shareholders approved a new stock option plan at our 1997 Annual
Meeting. The plan authorizes grants of incentive stock options and non-qualified
stock options to our executives, directors, employees and consultants. A total
of 225,000 shares of Meritage common stock were reserved for issuance upon
exercise of stock options granted under this plan, with an additional 250,000
shares added to the reserve by vote of the shareholders at our 1998 Annual
Meeting. The options vest over periods from two to five years, are based on
continued employment, and expire five to ten years after the date of grant.
THE PRIOR PLAN
The 1988 Homeplex Mortgage Investments Corporation Stock Option Plan (the
prior plan) was in effect at the time of the merger. No new grants have been
issued under this plan since the merger, and 62,726 option shares were
outstanding under this plan at December 31, 1999. Accounts payable and accrued
liabilities in the accompanying 1999 and 1998 balance sheets include
approximately $253,200 and $524,800, respectively, related to options granted
under the prior plan. This liability will remain on the consolidated balance
sheets until the options are exercised, canceled or expire.
33
<PAGE>
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
OTHER OPTIONS
In connection with the merger and Legacy combination, Mssrs. Hilton, Landon
and Cleverly each received 166,667 non-qualified stock options that vest over
three years. The exercise price of the options is $5.25 per share, which was
negotiated at the time of the transactions. Mr. Hilton's and Mr. Cleverly's
options expire in December 2002 and Mr. Landon's expire in June 2003.
A current member of our board of directors who served as our president and
chairman prior to the merger holds 250,000 non-qualified stock options. The
options were granted in exchange for the director forgoing his annual salary and
bonus, and were approved by shareholders at the 1996 Annual Meeting. These
options are fully vested, have an exercise price of $ 4.50 per share and expire
on December 21, 2000.
SUMMARY OF STOCK OPTION ACTIVITY:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- -------------------- ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
---------- ------ ---------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of year 1,028,302 $ 6.25 1,041,480 $ 5.86 732,975 $ 5.78
Options granted 264,500 14.74 57,500 16.54 150,000 7.16
Merger/combination options granted -- -- -- -- 166,667 5.25
Options exercised (51,076) 7.08 (43,660) 10.04 (8,162) 9.36
Options canceled (68,500) 14.39 (27,018) 7.22 -- --
---------- ------ --------- ----- --------- -----
Options outstanding at end of year 1,173,226 $ 7.65 1,028,302 $ 6.25 1,041,480 $ 5.86
========== ====== ========= ====== ========= ======
Options exercisable at end of year 801,669 613,579 515,090
Price range of options exercised $5.62-$11.25 $4.50-$11.25 $4.37-$6.38
Price range of options outstanding $4.50-$17.63 $4.50-$17.63 $3.62-$13.32
Total shares reserved at December 31 1,386,583 1,525,547 1,383,146
STOCK OPTIONS OUTSTANDING AT DECEMBER 31, 1999 WERE:
Options Outstanding Options Exercisable
---------------------------------------- ----------------------
Weighted Weighted
Weighted Average Average Average
Remaining Exercise Exercise
Range of Exercise Prices Options Contractual Life Price Options Price
- ------------------------ ------- ---------------- ----- ------- -----
$ 4.50 - $ 6.38 815,944 2.6 years $ 5.02 724,387 $ 4.98
$ 8.50 - $12.50 97,066 4.3 9.88 63,566 10.42
$13.37 - $17.63 260,216 6.0 15.06 13,716 16.33
--------- --------- -------- ------- ------
1,173,226 3.5 years $ 7.65 801,669 $ 5.61
========= ========= ======== ======= ======
</TABLE>
34
<PAGE>
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONTINGENT SHARES
In connection with the merger, 266,666 shares of contingent stock were
reserved for equal issuance to Mr. Hilton and Mr. Cleverly on the first, second
and third anniversaries of the transaction. The requirements for the release of
the contingent stock were met and Mr. Hilton and Mr. Cleverly were each issued
44,444 shares of common stock subsequent to the first, second and third
anniversaries of the merger.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
We are involved in legal proceedings and claims that arise in the ordinary
course of business. Management believes the amount of ultimate liability with
respect to these actions will not materially affect our financial statements
taken as a whole.
Also in the normal course of business, we provide standby letters of credit
and performance bonds issued to third parties to secure performance under
various contracts. At December 31, 1999 outstanding letters of credit were $1.0
million and performance bonds were $16.3 million.
We lease office facilities, model homes and equipment under various
operating lease agreements. Approximate future minimum lease payments for
noncancellable operating leases as of December 31, 1999 are as follows:
Year Ending
December 31
-----------
2000 $1,111,498
2001 768,987
2002 381,560
2003 291,882
2004 and thereafter --
----------
$2,553,927
==========
Rental expense was approximately $1,113,000 in 1999, $1,074,900 in 1998,
and $1,185,400 in 1997. Included in these amounts are $415,000 in 1999, $380,000
in 1998 and $274,000 in 1997 related to office facilities leased from companies
owned beneficially either by one of our Co-Chairmen or by a Co-Chairman and a
Director.
NOTE 8 - MERGERS/COMBINATIONS/ACQUISITIONS
LEGACY HOMES
On May 29, 1997 we signed a definitive agreement to acquire the
homebuilding and related mortgage service business of Legacy Homes, Ltd. and its
affiliates. The transaction was effective on July 1, 1997. Legacy Homes has been
building entry-level and move-up homes in Texas since 1988 and is headquartered
in the Dallas/Fort Worth metropolitan area.
Consideration consisted of approximately $1.5 million in cash, 666,667
shares of Meritage common stock valued at $3.4 million and $370,000 of
transaction costs. We used the purchase method of accounting and the purchase
price was allocated among our net assets based on their estimated fair market
value at the transaction date. Goodwill of approximately $1.5 million was
recorded, which is being amortized over 20 years. Provisions also were made to
pay additional consideration not to exceed $15 million, based on our earnings.
Additional consideration was approximately $5.2 million in 1999, $7.0 million in
1998 and $2.8 million in 1997, and was paid subsequent to each year-end. These
amounts are recorded as goodwill and are being be amortized over 20 years.
35
<PAGE>
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
STERLING COMMUNITIES
On June 15, 1998, we signed a definitive agreement with Sterling
Communities, S.H. Capital, Inc., Sterling Financial Investments, Inc., Steve
Hafener and W. Leon Pyle (together, the Sterling Entities), to acquire
substantially all of the assets of Sterling Communities. The transaction was
effective as of July 1, 1998. Assets acquired principally consist of real
property and other residential homebuilding assets located in the San Francisco
Bay and Sacramento areas of California. Operations of the Sterling Entities
continue under the name Meritage Homes of Northern California.
Consideration paid for the assets and stock acquired, and various
liabilities assumed, consisted of $6.9 million in cash and additional
consideration to be paid for up to four years after the transaction date. We
used the purchase method of accounting and the purchase price was allocated
among our net assets based on their estimated fair market value at the
transaction date. Goodwill of approximately $2.2 million was recorded, which is
being amortized over 20 years. The additional consideration will be equal to 20%
of the pre-tax income of our California division and will be expensed as earned.
The following unaudited pro forma information presents a summary of
consolidated results of operations as if the Legacy combination and Sterling
acquisition had occurred at January 1, 1997, 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 occurred had the combination been in effect
on the date indicated (in thousands except per share data).
Years Ended December 31,
------------------------
(Unaudited)
1998 1997
---- ----
Home sales revenue $274,754 $ 220,852
Net earnings $ 24,949 $ 19,835
Basic earnings per share $ 4.69 $ 3.82
Diluted earnings per share $ 4.08 $ 3.49
NOTE 9 - INCOME TAXES
Components of income tax expense are (in thousands):
1999 1998 1997
---- ---- ----
Current taxes:
Federal $ 5,748 $ 561 $222
State 1,285 967 740
------- ------ ----
7,033 1,528 962
------- ------ ----
Deferred taxes:
Federal 6,121 4,587 --
State 115 382 --
------- ------ ----
6,236 4,969 --
------- ------ ----
Total $13,269 $6,497 $962
======= ====== ====
36
<PAGE>
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Deferred tax assets and liabilities have been recognized in the
consolidated balance sheets due to the following temporary differences and
carryforwards (in thousands):
12/31/99 12/31/98
-------- --------
Net operating loss carryforward $ -- $ 4,360
Warranty reserve 311 67
Real estate and fixed asset basis differences 374 509
Stock options 282 --
Deductible merger/acquisition costs -- 1,163
Alternative minimum tax credit -- 782
Sale/leaseback gain deferred 154 --
Other 102 54
------- ----------
1,223 6,935
Deductible merger/acquisition costs (524) --
------- ----------
Net deferred tax asset $ 699 $ 6,935
======= ==========
Management believes it is more likely than not that the net deferred tax
asset will be realized.
RECONCILIATION OF EFFECTIVE INCOME TAX EXPENSE:
Income taxes differ for the years ended December 31, 1999, 1998 and 1997
from the amounts computed using the federal statutory income tax rate as a
result of the following (in thousands):
1999 1998 1997
-------- -------- -------
Expected taxes at current federal
statutory income tax rate $ 10,953 $ 10,678 $ 5,320
State income taxes 890 967 740
Utilization of NOL -- (5,709) (5,320)
Alternative minimum tax -- 561 222
Non-deductible merger/acquisition costs 1,565 -- --
Other (139) -- --
-------- -------- -------
Income tax expense $ 13,269 $ 6,497 $ 962
======== ======== =======
37
<PAGE>
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 10 - SELECTED QUARTERLY FINANCIAL DATA SUMMARY (UNAUDITED)
<TABLE>
<CAPTION>
Home Sales Basic Earnings Diluted Earnings
Revenue Net Earnings Per Share Per Share
------- ------------ --------- ---------
(in thousands, except per share amounts)
1999 - THREE MONTHS ENDED:
<S> <C> <C> <C> <C>
March 31 $ 51,306 $2,325 $ .43 $ .38
June 30 76,647 4,541 .83 .75
September 30 76,786 4,027 .74 .67
December 31 129,268 8,052 1.50 1.37
1998 - THREE MONTHS ENDED:
March 31 $ 36,513 $5,452 $1.03 $ .90
June 30 55,608 6,696 1.26 1.10
September 30 68,417 4,268 .80 .70
December 31 95,446 7,587 1.42 1.28
</TABLE>
NOTE 11 - SEGMENT INFORMATION
We classify our operations into three primary geographic segments: Texas,
Arizona and California. These segments generate revenues through the sales of
homes to external customers. We are not dependent on any one major customer.
Operational information relating to the different business segments
follows. Information has been included for the Texas operations from July 1,
1997, the combination date, and for the California operations from July 1, 1998,
the acquisition date. Certain information has not been included by segment due
to the immateriality of the amount to the segment or in total. We evaluate
segment performance based on several factors, of which the primary financial
measure is earnings before interest and taxes (EBIT). The accounting policies of
the business segments are the same as those described in Notes 1 and 2. There
are no significant transactions between segments.
(in thousands )
------------------------------------
1999 1998 1997
--------- -------- --------
HOME SALES REVENUE:
Texas $ 174,850 $130,860 $ 51,463
Arizona 120,909 105,942 97,922
California 38,248 19,183 --
--------- -------- --------
Total $ 334,007 $255,985 $149,385
========= ======== ========
EBIT:
Texas $ 22,652 $ 18,300 $ 7,059
Arizona 14,515 12,918 9,744
California 4,185 1,858 --
Corporate and other (4,094) 1,504 350
--------- -------- --------
Total $ 37,258 $ 34,580 $ 17,153
========= ======== ========
38
<PAGE>
AMORTIZATION OF CAPITALIZED INTEREST:
Texas $ 1,758 $ 1,143 $ 392
Arizona 2,777 2,410 1,397
California 501 66 --
--------- -------- --------
Total $ 5,036 $ 3,619 $ 1,789
========= ======== ========
ASSETS AT YEAR END:
Texas $ 97,832 $ 64,448 $ 32,702
Arizona 77,195 58,758 47,867
California 43,773 12,321 --
Corporate and other 7,759 16,723 16,065
--------- -------- --------
Total $ 226,559 $152,250 $ 96,634
========= ======== ========
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding this item is included under the captions "Election of
Directors," "Director and Officer Information," and "Section 16(a) Beneficial
Ownership Reporting Compliance" in our Notice and Proxy Statement relating to
our 2000 Annual Meeting of Stockholders and is incorporated by reference into
this Form 10-K Report. With the exception of the foregoing information and other
information specifically incorporated by reference into this Form 10-K Report,
our 2000 Proxy Statement is not being filed as a part of this report.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is included under the captions "Executive
Compensation," "Compensation Committee Interlocks and Insider Participation,"
"Director Compensation" and "Employment Agreements" in our 2000 Proxy Statement
and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is included under the caption "Security
Ownership of Principal Stockholders and Management" in our 2000 Proxy Statement
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is included under the caption "Certain
Transactions and Relationships" and "Compensation Committee Interlocks and
Insider Participation" in our 2000 Proxy Statement and is incorporated herein by
reference.
39
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page or
Method of Filing
----------------
(a) FINANCIAL STATEMENTS AND SCHEDULES
(i) Financial Statements
(1) Report of KPMG LLP Page 23
(2) Consolidated Financial Statements and Notes to Page 24
Consolidated Financial Statements of the Company,
including Consolidated Balance Sheets as of
December 31, 1999 and 1998 and related
Consolidated Statements of Earnings, Stockholders'
Equity and Cash Flows for each of the years in the
three-year period ended December 31, 1999
(ii) Financial Statement Schedules Schedules have been
omitted because of the absence of conditions under
which they are required or because the required
material information is included in the Consolidated
Financial Statements or Notes to the Consolidated
Financial Statements included herein.
(b) REPORTS ON FORM 8-K
We filed no reports on Form 8-K in the fourth quarter of 1999.
(c) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description Page or Method of Filing
- ------ ----------- ------------------------
<S> <C> <C>
2.1 Agreement and Plan of Reorganization, dated as of Incorporated by reference to
September 13, 1996, by and among Homeplex, the Exhibit 2 of Form S-4 2.1
Monterey Merging Companies and the Monterey Registration Statement No. 333-15937
Stockholders ("S-4 #333-15937").
2.2 Agreement of Purchase and Sale of Assets, dated Incorporated by reference to
as of May 20, 1997, by and among Monterey, Legacy Exhibit 2 of Form 8-K/A dated
Homes, Ltd., Legacy Enterprises, Inc., and John June 18, 1997.
and Eleanor Landon
2.3 Agreement of Purchase and Sale of Assets, dated Incorporated by reference to
as of June 15, 1998, by and among the Company, Exhibit 2.2 of Form 10-Q.
Sterling Communities, S.H. Capital, Inc., Sterling
Financial Investments, Inc. Steve Hafener, and W.
Leon Pyle
3.1 Restated Articles of Incorporation of the Incorporated by reference to
Company Exhibit 3.2 of Form 10-Q.
3.2 Amendment to Articles of Incorporation Incorporated by reference to
Exhibit 3.1 of Form 10-Q.
3.3 Amended and Restated Bylaws of the Company Incorporated by reference to
Exhibit 3.3 of Form S-3.
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Page or Method of Filing
- ------ ----------- ------------------------
<S> <C> <C>
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, 1994 Incorporated by reference to Exhibit
among Monterey and the Warrant Agent 4.2 of Registration Statement No.
333-29737, filed on June 20, 1997.
4.3 Assumption Agreement dated as of December 31, Incorporated by reference to Exhibit
1996 modifying the Warrant Agreement in certain 4.3 of Registration Statement No.
respects, and relating to the assumption of the 333-29737, filed on June 20, 1997.
Warrant Agreement by the Company and certain
other matters
4.4 Specimen Warrant Certificate Incorporated by reference to Exhibit
4.4 of Registration Statement No.
333-29737, filed on June 20, 1997.
4.5 Note Purchase Agreement Incorporated by reference to
Exhibit 4.1 of Form 10-Q for the
quarterly period ended September 30, 1998.
10.1 $70 Million Borrowing Base Loan Agreement by and Filed herewith.
among the Company, Norwest Bank, Arizona, N.A.
and California Bank and Trust, Dated as of
September 15, 1999
10.2 $15 Million Credit Agreement by and among Incorporated by reference to
Meritage Corporation and California Bank and Exhibit 10.23 of Form 10-Q.
Trust, Dated as of September 15, 1999
10.3 Modification to Guaranty Federal Bank Loan, Incorporated by reference to
Dated as of May 19, 1998 Exhibit 10.1 of Form 10-Q.
10.4 Modification to Guaranty Federal Bank Loan, Filed herewith.
Dated as of July 31, 1999
10.5 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").
10.6 Amendment to Stock Option Plan * Incorporated by reference to Exhibit 10(e
of 1995 Form 10-K.
10.7 Amendment to Stock Option Plan dated Incorporated by reference to Exhibit
December 31, 1996* 10.9 of Registration Statement No.
333-29737, filed on June 20, 1997.
10.8 Meritage Corporation Stock Option Plan Incorporated by reference to Exhibit 10.9
to the Form 10-K for the year ended
December 31, 1996.
10.9 Meritage Corporation 1997 Stock Option Plan* Incorporated by reference to Exhibit 4.1
of Registration Statement No. 333-37859,
filed on October 14, 1997.
10.10 Employment Agreement between the Company and Incorporated by reference to Exhibit 10.10
William W. Cleverly* to the Form 10-K for the year ended
December 31, 1996.
10.11 Separation and Consulting Agreement between the Incorporated by reference to Exhibit C
Company and William W. Cleverly* of the Form 8-K filed on March 23, 1999.
10.12 Employment Agreement between the Company and Incorporated by reference to Exhibit 10.11
Steven J. Hilton* to the Form 10-K for the year ended
December 31, 1996.
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Page or Method of Filing
- ------ ----------- ------------------------
<S> <C> <C>
10.13 Employment Agreement between the Company Incorporated by reference to Exhibit C
and John R. Landon* of the Form 8-K filed on June 18, 1997.
10.14 Stock Option Agreement between the Company Incorporated by reference to Exhibit 10.12
and William W. Cleverly* of the Form 10-K for the year ended
December 31, 1996.
10.15 Stock Option Agreement between the Company Incorporated by reference to Exhibit 10.13
and Steven J. Hilton* to the Form 10-K for the year ended
December 31, 1996.
10.16 Stock Option Agreement between the Company Incorporated by reference to Exhibit C
and John R. Landon* of the Form 8-K filed on June 18, 1997.
10.17 Registration Rights Agreement between the Incorporated by reference to Exhibit 10.14
Company and William W. Cleverly* to the Form 10-K for the year ended
December 31, 1996.
10.18 Registration Rights Agreement between the Incorporated by reference to Exhibit 10.15
Company and Steven J. Hilton* to the Form to the Form 10-K for the year ended
December 31, 1996.
10.19 Registration Rights Agreement between the Incorporated by reference to Exhibit C
Company and John R. Landon* of the Form 8-K filed on June 18, 1997.
10.20 Escrow and Contingent Stock Agreement Incorporated by reference to Exhibit 10.16
of the Form 10-K for the year ended
December 31, 1996.
10.21 Amended and Restated Employment Agreement Incorporated by reference to Exhibit 10(g)
and Addendum between the Company and of the 1995 Form 10-K.
Alan D. Hamberlin*
10.22 Stock Option Agreement between the Company Incorporated by reference to Exhibit 10(h)
and Alan D. Hamberlin* of the 1995 Form 10-K.
10.23 Agreement regarding sale of residual Incorporated by reference to Exhibit 10.24
interests between the Company and to the Form to the Form 10-K for the year ended
PaineWebber December 31, 1996.
10.24 Employment Agreement between the Company Incorporated by reference to Exhibit 10.2
and Larry W. Seay* of Form 10-Q for the quarterly period
ended June 30, 1998.
10.25 Employment Agreement between the Company Filed herewith.
Steven Hafener*
10.26 Amendment to Employment Agreement between Filed herewith.
the Company and Steven Hafener*
23 Consent of KPMG LLP Filed herewith.
24 Powers of Attorney See signature page.
27 Financial Data Schedules Filed herewith.
</TABLE>
- --------
*Indicates a management contract or compensation plan.
42
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly cause this report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, this 23rd
day of March 2000.
MERITAGE CORPORATION,
a Maryland Corporation
By /s/ Steven J. Hilton
----------------------------------------
Steven J. Hilton
CO-CHAIRMAN AND CHIEF EXECUTIVE OFFICER
By /s/ John R. Landon
----------------------------------------
John R. Landon
CO-CHAIRMAN AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Steven J. Hilton, John R. Landon 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
Form 10-K Annual Report, and to file the same, with all exhibits thereto and
other documents in connection therewith 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 of things 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 these requirements of the Securities Exchange Act of 1934, the
following persons on behalf of the registrant and in the capacities and on the
dates indicated have signed this report on Form 10-K below:
Signature Title Date
--------- ----- ----
/s/ Steven J. Hilton Co-Chairman and March 23, 2000
- ----------------------- Chief Executive Officer
Steven J. Hilton
/s/ John R. Landon Co-Chairman and March 23, 2000
- ----------------------- Chief Executive Officer
John R. Landon
/s/ Larry W. Seay Chief Financial Officer, Vice March 23, 2000
- ----------------------- President-Finance, Secretary and
Larry W. Seay Treasurer (Principal Financial
and Accounting Officer)
/s/ William W. Cleverly Director March 23, 2000
- -----------------------
William W. Cleverly
/s/ Alan D. Hamberlin Director March 23, 2000
- -----------------------
Alan D. Hamberlin
/s/ Raymond Oppel Director March 23, 2000
- -----------------------
Raymond Oppel
/s/ Robert G. Sarver Director March 23, 2000
- -----------------------
Robert G. Sarver
/s/ C. Timothy White Director March 23, 2000
- -----------------------
C. Timothy White
S-1
================================================================================
LOAN AGREEMENT
(BORROWING BASE)
BY AND AMONG
MONTEREY HOMES CONSTRUCTION, INC., AN ARIZONA CORPORATION,
MONTEREY HOMES ARIZONA, INC., AN ARIZONA CORPORATION,
CHANDLER 110, LLC, AN ARIZONA LIMITED LIABILITY COMPANY, AND
MERITAGE HOMES OF NORTHERN CALIFORNIA, INC.,
A CALIFORNIA CORPORATION
SEVERALLY AND COLLECTIVELY, BORROWER
THE BANKS NAMED HEREIN
NORWEST BANK ARIZONA, NATIONAL ASSOCIATION,
A NATIONAL BANKING ASSOCIATION
ADMINISTRATIVE AGENT AND ISSUING BANK
CALIFORNIA BANK & TRUST, A CALIFORNIA BANKING CORPORATION
DOCUMENTATION AND SYNDICATION AGENT
DATED AS OF
DECEMBER 29, 1999
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
----
SECTION 1. RECITALS........................................................... 1
SECTION 2. DEFINITIONS........................................................ 1
2.1 Definitions...................................................... 1
2.2 Terms Generally.................................................. 18
SECTION 3. LOAN COMMITMENT................................................... 18
3.1 Commitment....................................................... 18
3.2 Advances......................................................... 19
3.3 Notes; Repayment of Loan......................................... 19
3.4 Interest on Loan................................................. 20
3.5 Notice of Advances............................................... 20
3.6 Default Interest................................................. 21
3.7 Conversion and Continuation of Advances.......................... 21
3.8 Prepayment....................................................... 22
3.9 Payments......................................................... 22
3.10 Reserve Requirements; Change in Circumstances.................... 23
3.11 Change in Legality............................................... 25
3.12 Redeployment Loss................................................ 25
3.13 Taxes............................................................ 26
3.14 Termination or Assignment of Commitments Under Certain
Circumstances.................................................... 29
3.15 Conversion Date.................................................. 29
3.16 Advances During Conversion Period................................ 30
3.17 Mandatory Prepayments............................................ 30
3.18 Existing Loan.................................................... 30
SECTION 4. ADVANCES.......................................................... 30
4.1 Method for Advances.............................................. 30
4.2 Purpose of Advances.............................................. 31
4.3 Determination of Amount of Advances.............................. 31
SECTION 5. BORROWING BASE CALCULATIONS....................................... 31
5.1 Determination of Available Commitment............................ 31
5.2 Determination of Collateral Value................................ 31
(a) Entitled Land................................................ 31
(b) Lots Under Development....................................... 31
(c) Finished Lots................................................ 31
(d) Units........................................................ 31
5.3 Limitation on Adjustments........................................ 32
-i-
<PAGE>
Page
----
5.4 Maximum Allowed Advance.......................................... 32
(a) Entitled Land................................................ 32
(b) Lots Under Development....................................... 32
(c) Finished Lots................................................ 32
(d) Units........................................................ 32
5.5 Adjustments and Limitations...................................... 33
(a) Maximum Term - Entitled Land................................. 33
(b) Maximum Term - Lots Under Development........................ 33
(c) Maximum Term - Finished Lots................................. 33
(d) Maximum Term - Units......................................... 33
(e) Conversion of Presold Units and Spec Units................... 34
(f) Unit Ineligibility........................................... 34
5.6 Occurrence of Certain Events..................................... 34
(a) Foreclosure, Etc............................................. 34
(b) Environmental Matters........................................ 34
(c) Damage/Destruction........................................... 34
(d) Condemnation................................................. 35
5.7 Determinations................................................... 35
5.8 Further Limitations on Collateral Values......................... 35
(a) Collateral Value Limit on Availability for all
Entitled Land, Lots Under Development and
Finished Lots................................................ 35
(b) Collateral Value Limit on Availability for all
Spec Units and Model Units................................... 35
(c) Inventory Limit for Spec Units and Model Units............... 35
(d) Inventory Limit for Unsold Finished Lots and
Unsold Lots Under Development................................ 35
(e) Subdivision Size Limitation.................................. 35
(f) Purchase Money Debt Limitation............................... 36
(g) Commercial Entitled Land..................................... 36
5.9 Collateral Inventory Report, Collateral Certificate,
and Borrowing Base Report........................................ 36
(a) Collateral Inventory Report.................................. 36
(b) Collateral Certificate....................................... 37
(c) Form of Report and Certificate............................... 37
(d) Borrowing Base Report........................................ 37
SECTION 6. LETTERS OF CREDIT................................................. 38
6.1 Issuance of Letters of Credit.................................... 38
6.2 Issuance Procedure for Letters of Credit......................... 39
6.3 Letter of Credit Fees and Costs.................................. 39
6.4 Disbursements.................................................... 39
6.5 Reimbursement Obligations of Borrower............................ 40
6.6 Nature of Reimbursement Obligations.............................. 40
6.7 Banks Obligation................................................. 41
6.8 Certain Requirements as to Letters of Credit..................... 41
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6.9 Risk Participations, Drawings, and Reimbursements................ 42
6.10 Role of the Issuing Bank......................................... 42
6.11 Cash Collateral Upon Event of Default............................ 43
SECTION 7. RELEASES.......................................................... 43
7.1 Release of Collateral Request of Borrower....................... 43
7.2 Other Releases................................................... 44
SECTION 8. FEES.............................................................. 44
8.1 Facility Fee..................................................... 45
8.2 Agency Fee....................................................... 45
8.3 Letter of Credit Fee............................................. 45
8.4 Attorneys' Costs, Expenses, and Fees............................. 45
8.5 Appraisal Fees, Title Insurance Premium, and Other Costs,
Expenses, and Fees............................................... 45
SECTION 9. SECURITY.......................................................... 45
9.1 Security......................................................... 45
SECTION 10. CONDITIONS PRECEDENT FOR EFFECTIVENESS OF
AGREEMENT......................................................... 46
10.1 Documents........................................................ 46
10.2 Co-Lender Agreement.............................................. 47
10.3 Insurance Policies............................................... 47
10.4 Payment of Costs, Expenses, and Fees............................. 47
10.5 Legal Opinion.................................................... 47
10.6 Representations True............................................. 47
10.7 No Defaults...................................................... 47
SECTION 11. CONDITIONS PRECEDENT TO APPROVAL OF SUBDIVISIONS................. 47
11.1 Plat or Survey................................................... 48
11.2 Preliminary Title Report......................................... 48
11.3 Deed of Trust/Modification to Deed of Trust...................... 48
11.4 Environmental Questionnaire...................................... 48
11.5 Environmental Assessment......................................... 48
11.6 Title Insurance.................................................. 48
11.7 Flood Zone....................................................... 49
11.8 Soils Tests...................................................... 49
11.9 Insurance Policies............................................... 49
11.10 Assessments, Charges, and Taxes.................................. 49
11.11 Contracts........................................................ 49
11.12 Projections...................................................... 49
11.13 Payment of Costs, Expenses, and Fees............................. 50
11.14 Other Actions by Borrower........................................ 50
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11.15 Representations True............................................. 50
11.16 No Defaults...................................................... 50
SECTION 12. CONDITIONS PRECEDENT TO APPROVAL OF ENTITLED
LAND.............................................................. 50
12.1 Approved Subdivision............................................. 50
12.2 Fee Title........................................................ 50
12.3 Documents........................................................ 50
(a) Appraisal.................................................... 50
(b) Other Items.................................................. 51
12.4 Payment of Costs, Expenses, and Fees............................. 51
12.5 Other Actions by Borrower........................................ 51
12.6 Representations True............................................. 51
12.7 No Defaults...................................................... 51
12.8 Limitations...................................................... 51
SECTION 13. CONDITIONS PRECEDENT TO APPROVAL OF LOTS UNDER
DEVELOPMENT...................................................... 51
13.1 Approved Subdivision............................................. 52
13.2 Fee Title........................................................ 52
13.3 Documents........................................................ 52
(a) Appraisal.................................................... 52
(b) Budget....................................................... 52
(c) Plans and Specifications..................................... 52
(d) Construction................................................. 52
(e) Other Items.................................................. 52
13.4 Payment of Costs, Expenses, and Fees............................. 52
13.5 Other Actions by Borrower........................................ 53
13.6 Representations True............................................. 53
13.7 No Defaults...................................................... 53
13.8 Limitations...................................................... 53
SECTION 14. ADDITIONAL CONDITIONS PRECEDENT TO THE
INCLUSION OF EACH FINISHED LOT IN THE BORROWING
BASE............................................................. 53
14.1 Approved Subdivision............................................. 53
14.2 Fee Title........................................................ 53
14.3 Plat............................................................. 53
14.4 Documents........................................................ 53
(a) Appraisal.................................................... 54
(b) Improvements................................................. 54
(c) Other Items.................................................. 54
14.5 Payment of Costs, Expenses, and Fees............................. 54
14.6 Other Actions by Borrower........................................ 54
14.7 Representations True............................................. 54
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14.8 No Defaults...................................................... 54
14.9 Limitations...................................................... 54
SECTION 15. ADDITIONAL CONDITIONS PRECEDENT TO THE
INCLUSION OF EACH UNIT IN THE BORROWING BASE..................... 54
15.1 Approved Subdivision............................................. 55
15.2 Fee Title........................................................ 55
15.3 Plat............................................................. 55
15.4 Documents........................................................ 55
(a) Appraisal.................................................... 55
(b) Budget....................................................... 55
(c) Plans and Specifications..................................... 55
(d) Purchase Contract............................................ 55
(e) Public Reports............................................... 55
(f) Other Items.................................................. 55
15.5 Payment of Costs, Expenses, and Fees............................. 56
15.6 Other Actions by Borrower........................................ 56
15.7 Representations True............................................. 56
15.8 No Defaults...................................................... 56
15.9 Limitations...................................................... 56
SECTION 16. ADDITIONAL CONDITIONS PRECEDENT TO ADVANCES...................... 56
16.1 Representations and Warranties Accurate.......................... 56
16.2 Defaults......................................................... 56
16.3 Draw Request..................................................... 56
16.4 Approvals and Inspections by Governmental Authorities............ 56
16.5 Payment of Costs, Expenses, and Fees............................. 56
SECTION 17. REPRESENTATIONS AND WARRANTIES................................... 57
17.1 Recitals and Statements.......................................... 57
17.2 Organization; Powers; Etc........................................ 57
17.3 Authorization; Etc............................................... 57
17.4 Enforceability................................................... 58
17.5 Litigation....................................................... 58
17.6 Federal Reserve Regulations...................................... 58
17.7 Investment Company Act........................................... 58
17.8 Public Utility Holding Company Act............................... 58
17.9 No Breach........................................................ 58
17.10 Financial Statements True........................................ 59
17.11 Significant Debt Agreements...................................... 59
17.12 ERISA............................................................ 59
17.13 Solvent.......................................................... 59
17.14 Liens............................................................ 59
17.15 Licenses......................................................... 59
17.16 Filing of Taxes.................................................. 59
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17.17 Budgets and Plans and Specifications............................. 60
17.18 Affirmation...................................................... 60
SECTION 18. AFFIRMATIVE COVENANTS............................................ 60
18.1 Corporate, Limited Liability Company, or Partnership Existence... 60
18.2 Books and Records; Access By Administrative Agent................ 60
18.3 Information and Statements....................................... 60
(a) Consolidating and Consolidated Quarterly Statements of the
Meritage Group............................................... 60
(b) Consolidating and Consolidated Annual Statements of the
Meritage Group............................................... 61
(c) Closing Report............................................... 61
(d) Sales Reports and Inventory Reports.......................... 62
(e) Collateral Inventory Report and Collateral Certificate....... 62
(f) Certificate of Compliance.................................... 62
(g) Other Items and Information.................................. 62
18.4 Law; Judgments; Material Agreements; Approvals and Permits....... 62
18.5 Taxes and Other Indebtedness..................................... 63
18.6 Assets and Property.............................................. 63
18.7 Insurance........................................................ 63
(a) Property..................................................... 63
(b) Liability.................................................... 63
(c) Flood........................................................ 64
(d) Workman's Compensation....................................... 64
(e) Additional Insurance......................................... 64
(f) Other........................................................ 64
(g) Evidence..................................................... 65
18.8 ERISA............................................................ 65
18.9 Appraisals....................................................... 65
18.10 Commencement and Completion...................................... 65
18.11 Title Insurance.................................................. 66
18.12 Rights of Inspection; Correction of Defects; Agency.............. 66
18.13 Miscellaneous.................................................... 67
18.14 Verification of Costs............................................ 67
18.15 Cross-Collateralization.......................................... 67
18.16 Administrative Agent's Inspector(s).............................. 67
18.17 Further Assurances............................................... 67
18.18 Costs and Expenses of Borrower's Performance of Covenants and
Satisfaction of Conditions....................................... 68
18.19 Payment of Release Price......................................... 68
18.20 Construction and Sales Records................................... 68
18.21 Guarantees....................................................... 68
18.22 Services......................................................... 68
18.23 CC&Rs............................................................ 69
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SECTION 19. NEGATIVE COVENANTS............................................... 69
19.1 Change in Control or Management.................................. 69
19.2 Amendments to Organizational Documents........................... 69
19.3 Financial Covenants.............................................. 69
(a) Minimum Liquidity............................................ 69
(b) Maximum Leverage............................................. 69
(c) Minimum Fixed Charge Coverage................................ 69
(d) Minimum Adjusted Tangible Net Worth.......................... 69
(e) Guaranties................................................... 70
19.4 Mergers, Consolidations, Sales of Assets......................... 70
19.5 Business of Borrower............................................. 70
19.6 ERISA Liabilities................................................ 70
19.7 Dissolution or Liquidation....................................... 70
19.8 Joint Ventures................................................... 70
SECTION 20. INSPECTION BY ADMINISTRATIVE AGENT............................... 70
20.1 Enter Property................................................... 70
20.2 No Duty to Inspect............................................... 71
SECTION 21. WAIVER........................................................... 71
21.1 Waiver........................................................... 71
21.2 Delay............................................................ 71
SECTION 22. DEFAULT.......................................................... 71
22.1 Event of Default................................................. 71
22.2 Remedies......................................................... 73
22.3 Enforcement Costs................................................ 74
SECTION 23. ACTION UPON AGREEMENT............................................ 74
23.1 No Third Party Beneficiaries..................................... 74
23.2 Integration...................................................... 74
23.3 Modifications.................................................... 74
23.4 No Joint Venture................................................. 75
SECTION 24. GENERAL.......................................................... 75
24.1 Waiver of Guaranty and Suretyship Defenses....................... 75
24.2 Survival......................................................... 76
24.3 Discretionary Rights............................................. 76
24.4 Indemnity........................................................ 76
24.5 Joint and Several................................................ 76
24.6 Time of Essence.................................................. 76
24.7 Notices.......................................................... 76
24.8 Payment of Costs................................................. 77
24.9 Choice of Law.................................................... 77
24.10 Successors....................................................... 77
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24.11 Headings......................................................... 78
24.12 Participations and Assignments................................... 78
24.13 Severability..................................................... 78
24.14 Arbitration Provisions........................................... 78
(a) Arbitration.................................................. 78
(b) Motion Practice.............................................. 79
(c) Discovery.................................................... 79
(d) Payment of Arbitration Costs and Fees........................ 80
24.15 JURY WAIVER...................................................... 80
SCHEDULE 3.1 Commitments of Banks
SCHEDULE 24.1 Joint Borrower Provisions
EXHIBIT "A" Promissory Note
EXHIBIT "B-1" Deed of Trust (Arizona)
EXHIBIT "B-2" Deed of Trust (California)
EXHIBIT "C-1" Modification of Deed of Trust (Arizona)
EXHIBIT "C-2" Modification of Deed of Trust (California)
EXHIBIT "D" Guarantee
EXHIBIT "E" Collateral Certificate
EXHIBIT "F" Proposed Initial Approved Subdivisions
EXHIBIT "G" Construction Schedule
EXHIBIT "H" Sample Collateral Inventory Report
EXHIBIT "I" Sample Sales and Inventory Reports
EXHIBIT "J" Sample Project Proforma
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LOAN AGREEMENT
(Borrowing Base)
BY THIS AGREEMENT (together with any amendments or modifications, the
"Agreement") made and entered into as of the 29th day of December, 1999, by and
among MONTEREY HOMES CONSTRUCTION, INC., an Arizona corporation ("MHC"),
MONTEREY HOMES ARIZONA, INC., an Arizona corporation ("MHA"), CHANDLER 110, LLC,
an Arizona limited liability company ("Chandler"), and MERITAGE HOMES OF
NORTHERN CALIFORNIA, INC., a California corporation ("MHNC") (MHC, MHA, Chandler
and MHNC are sometimes hereinafter severally and collectively called
"Borrower"), the banks and financial institutions that are parties to this
Agreement from time to time (the "Banks"), NORWEST BANK ARIZONA, NATIONAL
ASSOCIATION, a national banking association, as administrative agent for the
Banks (in such capacity, the "Administrative Agent") and as Issuing Bank (as
hereinafter defined), and CALIFORNIA BANK & TRUST, a California banking
corporation, as documentation and syndication agent for the Banks (in such
capacity, the "Documentation and Syndication Agent"), for and in consideration
of the recitals and mutual promises contained herein, confirm and agree as
follows:
SECTION 1. RECITALS
1.1 Borrower has applied to the Banks for a revolving line of credit loan
facility in the aggregate amount of SEVENTY MILLION AND NO/100 DOLLARS
($70,000,000.00) (the "Loan") against which Borrower may, from time to time
during the term hereof, make draws, repay all or part of the same and then draw
additional sums, subject to the terms, conditions and provisions set forth
herein, for the purpose of financing the acquisition and development of entitled
land, lots under development, improved single family residential lots and the
construction of single family residential units within subdivisions located in
the metropolitan areas of Phoenix, Tucson, Sacramento and San Francisco, and
other Northern California metropolitan areas, and approved by Administrative
Agent pursuant to the terms hereof.
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SECTION 2. DEFINITIONS
2.1 DEFINITIONS. Unless otherwise defined herein, the following terms shall
have the following meanings:
"ACQUISITION COST" means the actual purchase price paid by Borrower to
acquire the Entitled Land or Lots in question, excluding any lot premiums.
"ADJUSTED TANGIBLE NET WORTH" means, as of any date of determination, the
amount of consolidated Owners' Equity of the Meritage Group as shown on its
consolidated balance sheet, plus Subordinated Debt, minus the Net Book Value
(after deducting reserves applicable thereto) of all assets classified as
intangible assets under GAAP, including, without limitation, goodwill,
trademarks, trade names, service marks, copyrights, patents, licenses, permits,
covenants not to compete, and rights related thereto.
"ADMINISTRATIVE AGENT" shall have the meaning assigned to such term in the
Preamble, and any assign or successor thereto.
"ADVANCE" means a disbursement of the proceeds of the Loan.
"AGENCY FEE" means the Agency Fee set forth in a side letter between
Borrower and Administrative Agent of even date herewith.
"AGREEMENT" means this Loan Agreement, as it may be amended, modified,
extended, renewed, restated, or supplemented from time to time.
"APPLICABLE INTEREST RATE," with respect to a given Advance, shall mean the
interest rate in effect for that Advance.
"APPRAISAL" means, as the context requires, an appraisal of the Entitled
Land, Lots Under Development, Finished Lots or Units that constitute the
Borrowing Base which sets forth the Appraised Value and which is (i) ordered by
Administrative Agent, (ii) prepared by an appraiser satisfactory to
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Administrative Agent, (iii) in compliance with all federal and state standards
for appraisals, (iv) reviewed by Administrative Agent, and (v) in form and
substance satisfactory to Administrative Agent in its sole and absolute
discretion.
"APPRAISED VALUE" means:
(a) With respect to Entitled Land, the market value for such Entitled
Land on a bulk "as is" value basis as set forth in the Appraisal.
(b) With respect to Lots Under Development, the market value for such
Lots Under Development on a bulk "as complete" value basis, as set forth in
the Appraisal.
(c) With respect to Finished Lots, the market value for the Lots on a
bulk "as complete" value basis, as set forth in the Appraisal or, if such
Finished Lots are purchased under an option agreement (but not to exceed 25
Finished Lots per Subdivision at any one time), the retail value of the
Finished Lots as set forth in the Appraisal of the applicable Units.
(d) With respect to Units, the value of a Unit and a typical Lot,
without lot premiums, options, and upgrades, as set forth in the Appraisal.
"APPROVALS AND PERMITS" means each and all approvals, authorizations,
bonds, consents, certificates, franchises, licenses, permits, registrations,
qualifications, entitlements and other actions and rights granted by or filings
with any Person necessary, or appropriate for acquisition and development of
Entitled Land, Lots Under Development or Finished Lots, for construction of
Units and Improvements, for the sale of Units and Finished Lots, for occupancy,
ownership, and use by Borrower and other Persons of the Entitled Land, Lots
Under Development, Finished Lots or Units, or otherwise for the conduct of, or
in connection with, the business and operations of Borrower.
"APPROVED SUBDIVISION" means a Subdivision that has been approved as
provided in Section 11. Subject to the satisfaction of the conditions set forth
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in Section 11, the parties intend to include the Subdivisions listed on EXHIBIT
"F" as the initial Approved Subdivisions under the Loan.
"AVAILABLE COMMITMENT" means, at any time, the lower of:
(a) The Commitment Amount; or
(b) The Collateral Value of the Borrowing Base, as reflected in the
most recent Borrowing Base Report,
LESS in either case any remargining payment required pursuant to Section 3.17
but not yet paid.
"BANK" and "BANKS" shall have the meaning assigned to such terms in the
Preamble.
"BOARD" shall mean the Board of Governors of the Federal Reserve System of
the United States.
"BORROWER": See initial paragraph hereof.
"BORROWING BASE" means the Entitled Land, Lots Under Development, Finished
Lots and Units that meet the requirements of this Agreement for inclusion in the
Borrowing Base and that are included in a Borrowing Base Report from time to
time prior to the Termination Date.
"BORROWING BASE REPORT" means a report, prepared by Administrative Agent
setting forth the Collateral then constituting the Borrowing Base, the
Collateral Value of the Borrowing Base, and certain other information as
required by this Agreement, in the format prescribed by Administrative Agent
from time to time.
"BUDGET" means the amount allocated by Borrower to the hard and soft costs
associated with the construction of Improvements or each Unit (which shall
include an estimate for options and upgrades that shall not exceed thirty
percent (30%) of the base hard and soft costs for such Improvements).
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"BUSINESS DAY" shall mean any day (other than a day which is a Saturday,
Sunday or legal holiday in the State of Arizona) on which commercial banks are
open for business in Phoenix, Arizona; PROVIDED, HOWEVER, that, when used in
connection with a LIBOR Advance, the term "Business Day" shall exclude any day
on which banks are not open for dealings in dollar deposits in the London
interbank market.
"CB&T FACILITY" means that revolving line of credit from California Bank &
Trust, a California banking corporation, to Meritage pursuant to that Credit
Agreement dated September 17, 1999, by and between California Bank & Trust as
administrative agent for the banks from time to time parties thereto and as
issuing bank, and Meritage as borrower.
"CALENDAR MONTH" shall mean the twelve (12) calendar months of the year.
Any payment or obligation that is due or required to be performed within a
specified number of Calendar Months shall become due on the day in the last of
such specified number of Calendar Months that corresponds numerically to the
date on which such payment or obligation was incurred or commenced, provided,
however, that with respect to any obligation that is incurred or commences on
the 29th, 30th, or 31st day of any Calendar Month and if the Calendar Month in
which such payment or obligation would otherwise be due does not have a
numerically corresponding date, such payment or obligation shall become due on
the first day of the next succeeding Calendar Month.
"CAPITALIZED LEASE" of a Person means any lease of property by such Person
as lessee which would be capitalized on a balance sheet of such Person prepared
in accordance with GAAP.
"CAPITALIZED LEASE OBLIGATIONS" of a Person means the amount of the
obligations of such Person under Capitalized Leases which would be shown as a
liability on a balance sheet of such Person prepared in accordance with GAAP.
"CHANGE IN CONTROL" means the occurrence or existence of either of the
following events or conditions without the prior written consent of
Administrative Agent, if different than the state of affairs as of the closing
of the Loan:
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(a) the acquisition by any Person or two or more Persons acting in
concert of "beneficial ownership" (within the meaning of Rule 13d-3
promulgated by the SEC under the Securities Exchange Act of 1934, as
amended, or as otherwise specified under the provisions of this Agreement)
of securities of any member of the Meritage Group having more than 50% of
the ordinary voting power for the election of directors; or
(b) the acquisition by any Person or two or more Persons acting in
concert of Control of any member of the Meritage Group.
"CO-LENDER AGREEMENT" shall mean that Co-Lender Agreement of even date
herewith, by and among the Administrative Agent, the Co-Agent and the Banks, as
it may be amended, modified, supplemented, restated or replaced from time to
time.
"COLLATERAL" means the property, interests in property, and rights to
property securing any or all Obligations from time to time.
"COLLATERAL CERTIFICATE" means the certificate of Borrower, in form and
substance satisfactory to Administrative Agent and containing such
certifications as Administrative Agent may require, setting forth the
information required by Section 5.9.
"COLLATERAL INVENTORY REPORT" means the report prepared by Borrower as
required by Section 5.9.
"COLLATERAL VALUE" means, from time to time, the amounts determined in
accordance with Section 5.2.
"COMMITMENT" shall mean, with respect to each Bank, the commitment of such
Bank as set forth in Schedule 3.1, as such Bank's Commitment may be modified
from time to time pursuant to the terms hereof. Each Bank's Commitment shall
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fully, automatically and permanently terminate on the Termination Date.
"COMMITMENT AMOUNT" means the lesser of (i) the aggregate amount of the
Banks' Commitment as set forth on Schedule 3.1, and (ii) the amount of
$70,000,000.00, as the same may be reduced from time to time pursuant to Section
3.15.
"COMPLETION PERCENTAGE" means:
(a) For any Unit, the current percentage of construction completed as
reflected in each Borrowing Base Report and/or Collateral Inventory Report,
based upon the Construction Schedule attached hereto as EXHIBIT "G" and the
Budget for that Unit; and
(b) For Lots Under Development, the current percentage of completion
of Improvements in an Approved Subdivision as determined by Administrative
Agent based on its review of the current Borrowing Base Report and/or
Collateral Inventory Report and inspections of the Collateral made pursuant
to this Agreement.
"CONSOLIDATED NET INCOME" means, for any period, the combined Net Income
(or loss) of the Meritage Group for such period (taken as a cumulative whole),
as determined in accordance with GAAP, after eliminating all offsetting debits
and credits between or among the Meritage Group and all other items required to
be eliminated in the course of the preparation of consolidated financial
statements of the Meritage Group in accordance with GAAP.
"CONTINGENT OBLIGATION" of a Person means any agreement, undertaking or
arrangement by which such Person assumes, guarantees, endorses, contingently
agrees to purchase or provide funds for the payment of, or otherwise becomes or
is contingently liable upon, the obligation or liability of any other Person, or
agrees to maintain the net worth or working capital or other financial condition
of any other Person, or otherwise assures any creditor of such other Person
against loss, including, without limitation, any comfort letter, operating
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agreement, take-or-pay contract and reimbursement agreements with financial
institutions (including the Banks) relating to letters of credit issued by such
financial institutions for the account of such Person.
"CONTROL" when used with respect to any Person means the power, directly or
indirectly, to direct the management policies of such Person, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"CONTROLLED GROUP" means, severally and collectively, the members of the
group controlling, controlled by and/or in common control of Borrower, within
the meaning of Section 4001(b) of ERISA.
"CONVERSION DATE" means December 29, 2001; provided, however, that the
Banks may, in the Banks' sole and absolute discretion, extend the Conversion
Date pursuant to Section 3.15.
"CONVERSION PERIOD" means the period of time following the Conversion Date
during which the Commitment Amount is reduced from time to time pursuant to
Section 3.15.
"DEED OF TRUST" and "DEEDS OF TRUST" mean, respectively, each and all Deeds
of Trust, Assignments of Rent, Security Agreements and Fixture Filings, in each
case securing the Note and the other Obligations, each being substantially in
the form of EXHIBIT "B-1" for Subdivisions located in Arizona and EXHIBIT "B-2"
for Subdivisions located in California, granted from time to time by Borrower,
as trustor, for the benefit of Administrative Agent, as beneficiary, as the same
may be amended from time to time by a Modification of Deed of Trust in
substantially the form of EXHIBIT "C-1" for Subdivisions located in Arizona and
EXHIBIT "C-2" for Subdivisions located in California, to encumber additional
real property, and as the same may be amended, modified, extended, renewed,
restated, or supplemented from time to time. Deed of Trust shall also mean an
Existing Deed of Trust as modified by the Modification of Existing Deeds of
Trust.
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"DEFAULT RATE" shall mean a rate per annum (computed as provided in Section
3.7) equal to the Applicable Interest Rate plus three percent (3%) and changing
in conformity with each change in the Applicable Interest Rate.
"DISBURSEMENT": See Section 6.4 hereof.
"DOCUMENTATION AND SYNDICATION AGENT" shall have the meaning assigned to
such term in the Preamble. The Documentation and Syndication Agent shall have no
rights, duties or responsibilities under the Loan Documents beyond those of a
Bank.
"DOLLARS" or "$" shall mean lawful money of the United States of America.
"DRAW REQUEST" means a completed, written request in a form acceptable to
or specified by Administrative Agent from Borrower to Administrative Agent for
an Advance, together with such other documents and information as Administrative
Agent may require or specify from time to time.
"EBITDA" means, for any period, an amount equal to (a) Consolidated Net
Income for such period, plus (b) gross accrued interest expense of the Meritage
Group on a consolidated basis (other than capitalized interest) during such
period, plus (c) accruals for federal, state and local income taxes attributable
to such Consolidated Net Income, plus (d) depreciation and amortization expense
of the Meritage Group on a consolidated basis during such period. EBITDA shall
be adjusted to add back any non-cash writedowns.
"ELIGIBILITY DATE" means:
(a) With respect to Entitled Land, the date on which such Entitled
Land is first included in the Borrowing Base as Entitled Land in a
Borrowing Base Report.
(b) With respect to Lots Under Development, the date on which the
Entitled Land is first included in the Borrowing Base as Lots Under
Development in a Borrowing Base Report;
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(c) With respect to Finished Lots, the date on which such Lots are
first included in the Borrowing Base as Finished Lots in a Borrowing Base
Report; and
(d) With respect to each Unit, the date on which that Unit is first
included in the Borrowing Base as a Unit in a Borrowing Base Report, and
regardless of whether periods exist during which such Unit is not included
in the Borrowing Base.
"ENTITLED LAND" means land located in a Subdivision with respect to which
all of the following is correct:
(a) Borrower has received a vested zoning classification that is
consistent with Borrower's actual and proposed use of such land;
(b) A preliminary subdivision plat or tentative map has been completed
and has been approved by all applicable Governmental Authorities; and
(c) Borrower has satisfied the other conditions precedent set forth in
Section 12.
"ENVIRONMENTAL AGREEMENT" and "ENVIRONMENTAL AGREEMENTS" means,
respectively, each and all Environmental Indemnity Agreements in form and
substance satisfactory to Administrative Agent, executed by Borrower and
Guarantors from time to time, for the benefit of Administrative Agent and the
Banks, and relating to the Collateral, as the same may be amended, modified,
extended, renewed, restated, or supplemented from time to time.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
the same may be amended from time to time.
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"ERISA AFFILIATE" shall mean any trade or business (whether or not
incorporated) that is a member of a group of which the Borrower is a member and
which is treated as a single employer under Section 414 of the Code.
"ERISA LIABILITIES" shall mean at any time the minimum liability with
respect to Plans that would be required to be reflected at such time as a
liability on the consolidated balance sheet of the Borrower under GAAP.
"EURODOLLAR LENDING OFFICE," with respect to any Bank (or transferee) or
the Administrative Agent, shall mean such office or branch as such Bank (or
transferee) or the Agent has designated to the Borrower herein in Schedule 3.1
as the office or branch of such Bank (or transferee) or the Administrative Agent
which shall constitute the Lending Office thereof for LIBOR Advances.
"EVENT OF DEFAULT" has the meaning specified in Paragraph 19.1 and the
other Loan Documents.
"EXISTING DEEDS OF TRUST" means the deeds of trust executed by Borrower
securing payment of the Existing Loans.
"EXISTING LOANS" means those loans to Borrower in a principal amount not to
exceed $80,000,000.00 pursuant to that Credit Agreement dated December 20, 1996,
as amended, by and among Borrower, Administrative Agent, as agent, and the
lenders named therein.
"FACILITY FEE": See Section 8.1 hereof.
"FEES" shall mean the Facility Fee, the Agency Fee, the Letter of Credit
Fee and all other fees and charges, if any (other than interest), payable
hereunder or otherwise payable in connection with the Loan.
"FINANCIAL COVENANTS" means the financial covenants described in Section
19.3.
"FINISHED LOT(S)" means any Lot in an Approved Subdivision for which
substantially all Improvements for such Subdivision have been completed and that
has satisfied the requirements in Section 14 for inclusion in the Borrowing
Base.
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"GAAP" means generally accepted accounting principles consistently applied.
"GOVERNMENTAL AUTHORITY" means any government, any court, and any agency,
authority, body, bureau, department, or instrumentality of any government.
"GUARANTEE" means each Continuing Guarantee substantially in the form
attached hereto as EXHIBIT "D".
"GUARANTOR" or "GUARANTORS" means Meritage and all of its direct or
indirect wholly owned Subsidiaries now or hereinafter existing that are not
Borrower, including, without limitation, MTH - TEXAS GP, INC., an Arizona
corporation, MTH - TEXAS LP, INC., an Arizona corporation, LEGACY/MONTEREY HOMES
L.P., an Arizona limited partnership and TEXAS HOME MORTGAGE CORPORATION, a
Texas corporation.
"HILTON" means Steven J. Hilton.
"IMPROVEMENT CONSTRUCTION COSTS" means the aggregate "hard" and "soft"
costs to plan, design, and construct the applicable Improvements as set forth in
the applicable Budget; PROVIDED, HOWEVER, that with respect to Finished Lots,
the Improvement Construction Costs shall be the lesser of (a) the amount of
"hard" costs and "soft" costs to plan, design, and construct the Improvements as
set forth in the applicable Budget or (b) the amount of such costs actually
incurred by Borrower to plan, design, and construct such Improvements.
"IMPROVEMENTS" means offsite improvements which may exist or which are to
be constructed (including, without limitation, curbs, grading, landscape,
sprinklers, storm and sanitary sewers, paving, sidewalks, and utilities)
necessary to make the land suitable for the construction of single family homes
and any common area improvements which may exist or which are to be constructed,
together with the associated fixtures and other tangible personal property
located or used in or on land on which such improvements are constructed.
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"INDEBTEDNESS" of a Person means such Person's (i) secured and unsecured
obligations for borrowed money, (ii) obligations representing the deferred
purchase price of property or services, (iii) obligations, whether or not
assumed, secured by Liens or payable out of the proceeds or production from
property now or hereafter owned or acquired by such Person, (iv) obligations
which are evidenced by notes, acceptances, or other instruments, (v) Capitalized
Lease Obligations, (vi) guarantees, and (vii) reimbursement obligations for
letters of credit. With respect to Borrower, Indebtedness includes, without
limitation, all obligations under the Loan.
"INTEREST PERIOD" shall mean as to any LIBOR Advance, the period commencing
on the date of such Advance and ending the day preceding the numerically
corresponding day (or, if there is no numerically corresponding day, on the last
day) in the calendar month that is 1, 2 or 3 months thereafter, as the Borrower
may elect, or, if earlier, on the Termination Date; PROVIDED, HOWEVER, that if
any Interest Period would end on a day other than a Business Day, such Interest
Period shall be extended to the next succeeding Business Day unless such next
succeeding Business Day would fall in the next calendar month, in which case
such Interest Period shall end on the next preceding Business Day. Interest
shall accrue from and include the first day of an Interest Period and include
the last day of such Interest Period.
"ISSUANCE DATE" means the date on which a Letter of Credit is delivered to
the beneficiary thereof.
"ISSUANCE REQUEST" means a request for a Letter of Credit duly executed by
Borrower in a form satisfactory to the Issuing Bank.
"ISSUE" means, with respect to any Letter of Credit, to issue or, by
amendment or otherwise, to extend the expiry of, or to renew or increase or
decrease the amount of, such Letter of Credit; and the terms "ISSUED," "ISSUING"
and "ISSUANCE" have corresponding meanings.
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"ISSUING BANK" means Administrative Agent in its capacity as issuer of one
or more Letters of Credit hereunder, together with any successor or replacement
Letter of Credit issuer arising under this Agreement.
"LC BORROWING" means an extension of credit resulting from a drawing under
any Letter of Credit which shall not have been reimbursed on the day after the
date when made nor converted into a Variable Rate Advance.
"LC OBLIGATIONS" means at any time the sum of (a) the Outstanding LC
Balance under the Loan, plus (b) the amount of all unreimbursed drawings under
all Letters of Credit, including all outstanding LC Borrowings.
"LAND ALLOCATION" means, with respect to each Lot Under Development, the
Maximum Allowed Advance for the Lot, if such Lot was a Finished Lot, less the
hard and soft costs of construction of the Improvements on such Lot as set forth
in the applicable Budget.
"LANDON" means John R. Landon.
"LENDING OFFICE," with respect to any Bank or any transferee of the Loan or
the Administrative Agent, shall mean such office or branch as such Bank or such
transferee or the Agent has designated to the Borrower herein as the office or
branch of that Bank or such transferee or the Administrative Agent from which
Loan is to be made.
"LETTER OF CREDIT" means a letter of credit, either as a standby financial
or a performance letter of credit, issued by the Issuing Bank for the account of
Borrower pursuant to Section 6 hereof.
"LETTER OF CREDIT FEE": See Section 6.3(a) hereof.
"LIABILITIES" of a Person means all items included in the liability section
of a balance sheet of that person prepared in accordance with GAAP applied as of
the date of calculation LESS accounts payable less than 60 days old arising in
the ordinary course of such Person's business payable on terms customary in the
trade, accrued liabilities and buyer deposits. Without limiting the generality
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of the foregoing, the term "Liabilities" shall include: (i) all Indebtedness
secured by any mortgage, lien, pledge, security interest, charge or encumbrance
upon or in property owned by that Person, to the extent attributable to that
Person's interest in the property, even though that Person has not assumed or
become liable for the payment of the Indebtedness; and (ii) the aggregate amount
of the reserves established on the books of that Person in respect of contingent
Liabilities and other contingencies (except reserves which are properly treated
as deductions from assets) and in any event shall include with respect to the
Borrower the outstanding amount of the Loan.
"LIBOR RATE" shall mean, with respect to any LIBOR Advance for any Interest
Period, an interest rate per annum (rounded upwards, if necessary, at the third
decimal place) equal to the offered rate for U.S. Dollar deposits of not less
than $1,000,000.00 for a period of time equal to each Interest Period as of
11:00 A.M. City of London, England time two London Business Days prior to the
first date of each Interest Period as shown on the display designated as
"British Bankers Assoc. Interest Settlement Rates" on the Telerate System
("Telerate"), Page 3750 or Page 3740, or such other page or pages as may replace
such pages on Telerate for the purpose of displaying such rate; provided,
however, that if such rate is not available on Telerate then such offered rate
shall be otherwise independently determined by the Administrative Agent from an
alternate, substantially similar independent source available to the
Administrative Agent or shall be calculated by the Administrative Agent by a
substantially similar methodology as that theretofore used to determine such
offered rate in Telerate. "London Business Day" means any day other than a
Saturday, Sunday or a day on which banking institutions are generally authorized
or obligated by law or executive order to close in the City of London, England.
"LIBOR ADVANCE" shall mean an Advance bearing interest at a rate determined
by reference to the LIBOR Rate.
"LIBOR MARGIN" shall mean one and three-quarters percent (1.75%) per annum.
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"LIEN" means any lien (statutory or other), mortgage (including, without
limitation, purchase money mortgages), pledge, hypothecation, assignment,
deposit arrangement, encumbrance or preference, priority or other security
agreement or preferential arrangement of any kind or nature whatsoever
[including, without limitation, the interest of a vendor or lessor under any
conditional sale, Capitalized Lease or other title retention agreement and
contractual obligations for payment of marketing, advertising and promotion (in
excess of 10% of the estimated sales price of the applicable Unit) and deferred
lot premiums (in excess of 25% of the estimated sales price of the applicable
Unit)], but specifically excluding ad valorem real estate taxes, assessments,
community facilities district and other similar improvement lien assessments not
yet delinquent.
"LIQUIDITY" means available unrestricted cash and cash equivalents,
unrestricted investments with federally insured institutions and available
undrawn funds under the Loan.
"LOAN" has the meaning specified in Section 1.1.
"LOAN BALANCE" means the sum of (i) with respect to the Loan on any date,
the aggregate outstanding principal amount thereof, after giving effect to any
borrowings and prepayments or repayments of Advances occurring on such date;
plus (ii) with respect to any outstanding LC Obligations on any date, the
aggregate amount of such LC Obligations on such date, after giving effect to any
Issuances of Letters of Credit occurring on such date and any other changes in
the aggregate amount of the LC Obligations as of such date, including changes
occurring as a result of any reimbursements of outstanding unpaid drawings under
any Letters of Credit or any reductions in the maximum amount available for
drawing under Letters of Credit taking effect on such date.
"LOAN DOCUMENTS" means this Agreement, the Note, the Deeds of Trust, the
Environmental Agreements, the Guarantees, and any other agreements, documents,
or instruments evidencing, guarantying, securing, or otherwise relating to the
Note, as such agreements, documents, and instruments may be amended, modified,
extended, renewed, or supplemented from time to time.
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"LOAN PARTY" means Borrower and each Guarantor that from time to time is or
becomes obligated under any Loan Document.
"LOT" means an individual lot designated on the final subdivision plat or
filing for each Subdivision.
"LOTS UNDER DEVELOPMENT" means Entitled Land with respect to which Borrower
has commenced construction of the Improvements and has satisfied the conditions
precedent in Section 13 but which does not yet constitute Finished Lots.
"MARGIN STOCK" shall have the meaning given such term under Regulation U.
"MATERIAL ADVERSE CHANGE" means any change in the assets, business,
financial condition, operations, prospects, or results of operations of any
party or any other event or condition that in the reasonable opinion of
Administrative Agent (i) could affect the likelihood of performance by Borrower
or Guarantors of any of the Obligations, (ii) could affect the ability of
Borrower or Guarantors to perform any of the Obligations, (iii) could affect the
legality, validity, or binding nature of any of the Obligations or any lien or
encumbrance securing any of the Obligations, or (iv) could affect the priority
of any lien or encumbrance securing any of the Obligations.
"MAXIMUM ALLOWED ADVANCE" has the meaning set forth in Section 5.4.
"MERITAGE" means MERITAGE CORPORATION, a Maryland corporation.
"MERITAGE GROUP" means Meritage and all parties reporting on a consolidated
basis with Meritage in accordance with GAAP.
"MINIMUM AMOUNT" as to a LIBOR Advance shall mean $5,000,000.00, with
increments of $1,000,000.00 thereafter.
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"MODEL UNIT" means a Unit constructed and furnished initially for
inspection by prospective purchasers that is not intended to be sold until all
or substantially all of the other Units in the Subdivision are sold.
"MODIFICATION OF EXISTING DEEDS OF TRUST" means one or more Modifications
of Existing Deeds of Trust executed by Borrower, modifying the Existing Deeds of
Trust to secure repayment of the Loan, all in form and substance satisfactory to
Administrative Agent.
"MULTIEMPLOYER PLAN" shall mean a multiemployer plan as defined in Section
4001(a)(3) of ERISA to which the Borrower or any ERISA Affiliate (other than one
considered an ERISA Affiliate only pursuant to subsection (m) or (o) of Section
414 of the Code) is making or accruing an obligation to make contributions, or
has within any of the preceding five plan years made or accrued an obligation to
make contributions.
"NET SALES PROCEEDS" means the gross sales price of a Unit set forth in the
Purchase Contract therefor, less (i) customary tax prorations, (ii) ordinary and
customary real estate brokerage commissions paid to outside brokers, (iii)
reasonable and customary escrow fees, closing costs and title insurance, (iv)
any landscape or pool holdbacks, and (v) any lot premium revenue sharing to be
disbursed to the lot developer.
"NET BOOK VALUE" means, with respect to an asset owned by a member of the
Meritage Group, the gross investment of that member of the Meritage Group in the
asset, less all reserves (including loss reserves and reserves for depreciation)
attributable to that asset, all determined in accordance with GAAP.
"NET INCOME" means, for any period, after-tax consolidated net income from
continuing operations, less any extraordinary income, non-operating income
(except interest income) or non- cash income recorded by such Person as
determined in accordance with GAAP and less any income in the aggregate in
excess of 20% of Net Income from mortgage Subsidiaries or title company, escrow
agent or title underwriter Subsidiaries.
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"1934 ACT" shall mean the United States Securities Exchange Act of 1934, as
amended.
"NON-RECOURSE DEBT" means Indebtedness of Borrower or any Guarantor
incurred to acquire property for use in the ordinary course of business of
Borrower or such Guarantor for which Borrower and/or such Guarantor is not
personally liable and recourse is limited to specific collateral.
"NOTE" and "NOTES" shall mean, severally and collectively, promissory notes
of the Borrower executed and delivered as provided in Section 3.3(a) as such
notes might be amended, modified, extended and restated from time to time.
"OBLIGATIONS" means the obligations of Borrower and Guarantors under the
Loan Documents.
"OUTSTANDING LC BALANCE" in effect at any time means the maximum aggregate
amount available to be drawn at such time under all outstanding Letters of
Credit, the determination of such maximum amount to assume compliance with all
conditions for a Disbursement.
"OWNER'S EQUITY" means such Person's total assets minus total Liabilities,
each as determined in accordance with GAAP.
"PBGC" shall mean the Pension Benefit Guaranty Corporation referred to and
defined in ERISA.
"PERMITTED EXCEPTIONS" has the meaning specified in the Deed of Trust.
"PERSON" means a natural person, a partnership, a joint venture, an
unincorporated association, a corporation, a limited liability company, a trust,
any other legal entity, or any Governmental Authority.
"PLAN" shall mean any pension plan (other than a Multiemployer Plan) that
is (i) a qualified plan under Section 401(a) of the Code, (ii) subject to the
provisions of Title IV of ERISA or Section 412 of the Code, and (iii) maintained
for employees of the Borrower or any ERISA Affiliate.
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"PLANS AND SPECIFICATIONS" means (A) with respect to Lots Under Development
and Finished Lots, the plans and specifications for construction of the
applicable Improvements that have been prepared by an architect or engineer,
together with any amendments or modifications to those plans and specifications,
and (B) with respect to Units, the plans and specifications for construction of
a particular type of Unit that have been prepared by an architect.
"PRIME RATE" shall mean the interest rate per annum designated by Norwest
Bank Arizona, National Association, a national banking association, or its
successors, as its "Prime Rate," as publicly announced by that bank from time to
time as a means of pricing credit extensions to some customers and is neither
tied to any external interest rate or index nor necessarily the lowest rate of
interest charged by that bank at any given time for any particular class of
customer or credit extension.
"PRESOLD UNIT" means a Unit that is subject to a Purchase Contract.
"PRODUCT LINE" means a group of Units which, in the ordinary course of
Borrower's business, are marketed together under a common plan based upon the
type of Unit constructed and the price of such Units.
"PROJECT" means all of the Entitled Land, Lots Under Development, Finished
Lots and Units that are owned by Borrower and are encumbered by a Deed of Trust
from time to time.
"PRO RATA SHARE" with respect to any individual Bank, or Pro Rata Shares
with respect to all of the Banks, as the case may be, means the applicable
percentage or percentages of the Commitment assigned to each of the Banks as set
forth on Schedule 3.1 hereto or in the Co-Lender Agreement, as applicable.
"PURCHASE CONTRACT" means a bona fide written agreement between Borrower
and a third Person purchaser for sale in the ordinary course of Borrower's
business of any Unit and the related Lot, contingent solely on the sale of the
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purchaser's existing residence, and such agreement is accompanied by a
non-refundable cash earnest money deposit or down payment in an amount not less
than two percent (2%) of the purchase price and such purchaser has been
pre-qualified for permanent mortgage financing by a financial institution in the
business of making residential mortgage loans (or in lieu of such
pre-qualification, a non-refundable cash earnest money deposit or down payment
in an amount not less than twenty percent (20%) of the purchase price).
"RECLASSIFICATION ADJUSTMENT" means, for any Unit reclassified as to type
pursuant to any provision of this Agreement, a change in the Maximum Allowed
Advance for such Unit to that applicable to the type of Unit as so reclassified.
"REDEPLOYMENT LOSS" shall have the meaning assigned to such term in Section
3.12.
"REGULATION D" shall mean Regulation D of the Board as from time to time in
effect and all official rulings and interpretations thereunder or thereof.
"REGULATION G" shall mean Regulation G of the Board as from time to time in
effect and all official rulings and interpretations thereunder or thereof.
"REGULATION T" shall mean Regulation T of the Board as from time to time in
effect and all official rulings and interpretations thereunder or thereof.
"REGULATION U" shall mean Regulation U of the Board as from time to time in
effect and all official rulings and interpretations thereunder or thereof.
"REGULATION X" shall mean Regulation X of the Board as from time to time in
effect and all official rulings and interpretations thereunder or thereof.
"REPORTABLE EVENT" shall mean any reportable event as defined in Section
4043(b) of ERISA or the regulations issued thereunder with respect to a Plan
(other than a Plan maintained by an ERISA Affiliate which is considered an ERISA
Affiliate only pursuant to subsection (m) or (o) of Section 414 of the Code).
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"REQUIREMENTS" means any and all obligations, other terms and conditions,
requirements, and restrictions in effect now or in the future by which Borrower
or any or all of the Project is bound or which are otherwise applicable to any
or all of the Project, construction of any Improvements or Units, or occupancy,
operation, ownership, or use of the Project (including, without limitation, such
obligations, other terms and conditions, restrictions, and requirements imposed
by: (i) any law, ordinance, regulation, or rule (federal, state, or local); (ii)
any Approvals and Permits; (iii) any Permitted Exceptions; (iv) any condition,
covenant, restriction, easement, right-of-way, or reservation applicable to the
Project; (iv) any insurance policies; (v) any other agreement, document, or
instrument to which Borrower is a party or by which Borrower or any or all of
the Project or the business or operations of Borrower is bound; or (vi) any
judgment, order, or decree of any arbitrator, other private adjudicator, or
Governmental Authority to which Borrower is a party or by which Borrower or any
of the Project is bound.
"SEC" shall mean the United States Securities and Exchange Commission.
"SIGNIFICANT DEBT AGREEMENT" means all documents, instruments and
agreements executed by any member of the Meritage Group, evidencing, securing or
ensuring any Indebtedness of any member of the Meritage Group or any guaranty,
in each case in excess of $5,000,000 in outstanding principal (or principal
equivalent) amount, including, without limitation, that $80,000,000.00 line of
credit from Guaranty Federal FSB to Legacy/Monterey Homes L.P. and any
refinancings thereof, but excluding any Indebtedness that is Non-Recourse Debt.
"SPEC UNIT" means a Unit constructed for the purpose of addition to
Borrower's inventory of Units and not subject to a Purchase Contract. A Unit
that is not a Presold Unit or a Model Unit shall be deemed a Spec Unit.
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"STATED AMOUNT" of a Letter of Credit means the stated amount as stated in
the Letter of Credit.
"STATED EXPIRY DATE" of a Letter of Credit means the Stated Expiry Date as
stated in the Letter of Credit.
"SUBORDINATED DEBT" of a Person means any Indebtedness of that Person which
by its terms is subordinated, in form and substance and in a manner satisfactory
to Administrative Agent in lien and right of payment to the prior payment in
full of the Loan.
"SUBDIVISION" means each single family residential project (or with respect
to commercial Entitled Land, a commercial project) owned by Borrower
differentiated by location and/or product type and Lot size, located in the
metropolitan areas of Phoenix, Tucson, Sacramento and San Francisco and other
Northern California metropolitan areas, which have been approved by
Administrative Agent or for which Borrower is requesting approval. A Subdivision
may include one or more portions or phases of such a project.
"SUBSIDIARIES" of a Person means (i) any corporation of which more than 50%
of the outstanding securities having ordinary voting power shall at the time be
owned or controlled, directly or indirectly, by such Person, by one or more of
such Person's Subsidiaries, or by such Person and one or more of its
Subsidiaries, or (ii) any partnership, association, limited liability company,
joint venture or similar business organization of which more than 50% of the
ownership interests having ordinary voting power shall at the time be owned or
controlled, directly or indirectly, by such Person, by one or more of such
Person's Subsidiaries, or by such Person and one or more of its Subsidiaries.
"TERMINATION" shall mean the payment in full of the principal amount of all
Loans, all accrued interest thereon and all Fees with respect thereto, coupled
with termination of all obligations (if any) of all of the Banks to advance
funds or extend credit to or for the benefit of Borrower pursuant to this
Agreement.
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"TERMINATION DATE" means the date that is twenty-four (24) Calendar Months
after the Conversion Date.
"TITLE COMPANY" means one or more title insurance companies and any
reinsurers or co- insurers required by Administrative Agent issuing the Title
Policies required herein, which companies, reinsurers, and co-insurers shall be
satisfactory to Administrative Agent in its reasonable discretion.
"TITLE POLICY" and "TITLE POLICIES" mean, respectively, each and all title
insurance policies and endorsements thereto and reinsurance or co-insurance
agreements and endorsements described in this Agreement insuring the Deeds of
Trust.
"TOTAL COST" means the sum of the Acquisition Cost and the Improvement
Construction Costs.
"TYPE," when used in respect of any Advance, shall refer to the rate by
reference to which interest on such Advance is determined. For purposes hereof,
"rate" shall mean the LIBOR Rate or the Variable Rate.
"UNIT" means a detached single-family residential dwelling constructed or
to be constructed on a Finished Lot.
"UNIT COST" for a particular Unit means the typical hard costs for material
and labor and typical soft costs to construct the base Unit (including options
and upgrades up to a maximum of 30% of the base hard and soft costs of such
Unit), plus the Acquisition Cost of the applicable Lot.
"UNMATURED EVENT OF DEFAULT" means any condition or event that with notice,
passage of time, or both would be an Event of Default.
"VARIABLE RATE" shall mean the Prime Rate in effect from time to time. The
Variable Rate shall change from time to time on the effective date of, and in
conformity with, changes in the Prime Rate.
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"VARIABLE RATE ADVANCE" shall mean an Advance bearing interest at a rate
determined by reference to the Variable Rate.
2.2 TERMS GENERALLY.
(a) The definitions in Section 2.1 shall apply equally to both the
singular and plural forms of the terms defined.
(b) Whenever the context may require, any pronoun shall include the
corresponding masculine, feminine and neuter forms.
(c) All references herein to Articles, Sections, Paragraphs, Exhibits
and Schedules shall be deemed references to Articles, Sections and
Paragraphs of, and Exhibits and Schedules to, this Agreement unless the
context shall otherwise require.
(d) Except as otherwise expressly provided herein, all terms of an
accounting or financial nature shall be construed in accordance with GAAP,
as in effect from time to time.
SECTION 3. LOAN COMMITMENT
3.1 COMMITMENT. Each Bank agrees, severally but not jointly, to loan to or
for the benefit of Borrower, and Borrower shall be entitled to draw upon and
borrow, in the manner and upon the terms and conditions contained in this
Agreement, an amount that shall not exceed that Bank's Pro Rata Share of the
Available Commitment. Subject to the terms and conditions set forth in this
Agreement, each Bank is providing to Borrower its Commitment, against which a
Bank shall fund its Pro Rata Share of each Advance to be made to Borrower,
repaid by Borrower, and readvanced to Borrower, as Borrower may request, and the
Issuing Bank shall issue such Letters of Credit as Borrower shall request, which
may be terminated or repaid by Borrower and reissued, provided that (i) there is
no Event of Default under any provision of this Agreement, (ii) no Advance shall
be made or Letter of Credit issued that would exceed the Available Commitment,
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(iii) the Loan Balance shall not exceed the Available Commitment, (iv) no Bank
shall be obligated under any circumstances to fund an Advance in excess of that
Bank's Pro Rata Share of the requested Advance, (v) the aggregate amount of a
Bank's funding of the Loan Balance and participations in Letters of Credit at
any one time outstanding shall not exceed its Pro Rata Share of the Available
Commitment, and (vi) no Letter of Credit shall be issued with a Stated Expiry
Date later than the Termination Date. The Banks shall not be obligated to fund
their Pro Rata Share of any Advance if, after giving effect thereto, any of the
foregoing limitations would be exceeded.
3.2 ADVANCES.
(a) Each Advance shall be a single LIBOR Advance or a single Variable
Rate Advance, as Borrower may request. Advances of more than one Type may
be outstanding at the same time; PROVIDED, HOWEVER, that (i) Borrower shall
not be entitled to request a LIBOR Advance which, if made, would result in
an aggregate of more than three (3) separate LIBOR Advances being
outstanding collectively under the Loan at any one time, (ii) Borrower
shall not be entitled to request a LIBOR Advance which, if made, would
result in an aggregate of more than seventy-five percent (75%) of the
outstanding principal balance of the Loan consisting of LIBOR Advances at
the time such LIBOR Advance is made, and (iii) each LIBOR Advance shall be
in a principal amount which is not less than the Minimum Amount. For
purposes of the foregoing, LIBOR Advances having different Interest
Periods, regardless of whether they commence on the same date, shall be
considered separate LIBOR Advances.
(b) Each Advance shall be made by the Banks ratably in accordance with
their Pro Rata Share of the Available Commitment; PROVIDED, HOWEVER, that
the failure of any Bank to make any Advance shall not in itself relieve any
other Bank of its obligation to lend hereunder (it being understood,
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however, that no Bank shall be responsible for the failure of any other
Bank to make any Advance required to be made by such other Bank) and any
Event of Default that occurs as a result of such failure shall be deemed to
have been irrevocably waived by the Banks.
3.3 NOTES; REPAYMENT OF LOAN.
(a) The Loan made by each Bank shall be evidenced by a Note, duly
completed and executed on behalf of Borrower, dated the date of said Bank's
Commitment, in substantially the form of EXHIBIT "A" hereto, payable to the
order of such Bank in a principal amount equal to said Bank's Commitment.
Each Note shall bear interest from the date thereof on the outstanding
principal balance thereof as set forth in Section 3.4. Each Bank may (and
is hereby authorized by Borrower, at said Bank's discretion, to) endorse on
a schedule attached to the Note held by such Bank (or on a continuation of
such schedule attached to each such Note and made a part thereof), or
otherwise to record in such Bank's internal records, an appropriate
notation evidencing the date and amount of each Advance of such Bank, each
payment or prepayment of principal of any such Advance and the other
information provided for on such schedule; PROVIDED, HOWEVER, that the
failure of any Bank to make such a notation or any error therein shall not
in any manner affect the obligation of Borrower to repay the Loan in
accordance with the terms of the relevant Note.
(b) All unpaid and accrued interest shall be due and payable on the
first day of each and every month commencing with the first month after the
date hereof.
(c) The entire unpaid principal balance, all accrued and unpaid
interest and all other amounts due and payable under the Notes shall be due
and payable in full on the Termination Date.
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3.4 INTEREST ON LOAN.
(a) Subject to the provisions of Sections 3.6 and 3.7, each LIBOR
Advance shall bear interest (computed on the basis of the actual number of
days elapsed over a year of 360 days) at a rate per annum equal to, the
LIBOR Rate for the Interest Period in effect for such LIBOR Advance plus
the LIBOR Margin. The LIBOR Rate for each Interest Period shall be
determined by Administrative Agent in accordance with the provisions of
this Agreement, and such determination shall be conclusive absent manifest
error. Administrative Agent shall promptly advise Borrower and each Bank of
such LIBOR Rate.
(b) Subject to the provisions of Sections 3.6 and 3.7, each Variable
Rate Advance shall bear interest (computed on the basis of the actual
number of days elapsed over a year of 360 days, as the case may be) at a
rate per annum equal to the Variable Rate. The Variable Rate shall be
determined by Administrative Agent in accordance with the provisions of
this Agreement, and such determination shall be conclusive absent manifest
error. Administrative Agent shall promptly advise Borrower and each Bank of
such Variable Rate.
3.5 NOTICE OF ADVANCES. In order to request an Advance, Borrower shall, in
addition to any other requirements contained herein, give to Administrative
Agent written or telecopy notice (or telephone notice promptly confirmed in
writing or by telecopy) (an "Advance Notice"), (a) in the case of a LIBOR
Advance, not later than 9:00 a.m., Arizona time, three Business Days before a
proposed Advance and (b) in the case of a Variable Rate Advance, not later than
9:00 a.m., Arizona time, on the same Business Day of a proposed Advance. Each
Advance Notice shall be irrevocable, shall in each case specify (i) whether the
Advance then being requested is to be a LIBOR Advance or a Variable Rate
Advance; (ii) the date of such Advance (which shall be a Business Day) and the
amount thereof; (iii) if such Advance is to be a LIBOR Advance, the Interest
Period with respect thereto; and (iv) if such Advance is to refinance all or any
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part of any outstanding Advance, the identity and amount of such Advance that
Borrower requests to be refinanced; and shall be accompanied by a Disbursement
Request. If no election as to the Type of Advance, or if no Interest Period with
respect to any LIBOR Advance, is specified in any Advance Notice, then the
requested Advance shall be a Variable Rate Advance. Subject to Section 3.7, if
Borrower shall not have given notice in accordance with this Section of its
election to refinance a LIBOR Advance prior to the end of the Interest Period in
effect for such Advance, then Borrower (unless such Advance is repaid at the end
of such Interest Period) shall be deemed to have given notice of an election to
refinance such Advance with a Variable Rate Advance.
3.6 DEFAULT INTEREST. If Borrower shall default in the payment of the
principal of or interest on the Loan or any other amount becoming due hereunder,
whether by scheduled maturity, notice of prepayment, acceleration or otherwise,
Borrower shall on demand from time to time pay interest, to the extent permitted
by law, on such defaulted amount up to but not including the date of actual
payment (after as well as before judgment) at the Default Rate.
3.7 CONVERSION AND CONTINUATION OF ADVANCES. Borrower shall have the right
at any time upon prior irrevocable notice to Administrative Agent (i) not later
than 9:00 a.m., Arizona time, two Business Days prior to conversion, to convert
any LIBOR Advance into a Variable Rate Advance, (ii) not later than 9:00 a.m.,
Arizona time, three (3) Business Days prior to conversion or continuation, to
convert any Variable Rate Advance into a LIBOR Advance or to continue any LIBOR
Advance as a LIBOR Advance for an additional Interest Period, and (iii) not
later than 9:00 a.m., Arizona time, three (3) Business Days prior to conversion,
to convert the Interest Period with respect to any LIBOR Advance to another
permissible Interest Period, subject in each case to the following:
(a) If less than all the outstanding principal amount of any Advance
shall be converted or continued as a LIBOR Advance, the aggregate principal
amount of such Advance converted or continued shall be not less than the
Minimum Amount;
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(b) Any LIOR Advance may be converted only at the end of the Interest
Period applicable thereto;
(c) Any portion of an Advance maturing or required to be repaid in
less than one month may not be converted into or continued as a LIBOR
Advance;
(d) Any portion of a LIBOR Advance which cannot be continued as a
LIBOR Advance by reason of clauses (b) and (c) above shall be automatically
converted at the end of the Interest Period in effect for such Advance into
a Variable Rate Advance; and
(e) Each conversion or continuation shall be made pro rata among the
Banks in accordance with the respective principal amounts of the converted
or continued Advances.
Each notice pursuant to this Section shall be irrevocable and shall refer
to this Agreement and specify (i) the identity and amount of the Advance that
Borrower requests be converted or continued, (ii) whether such Advance is to be
converted to or continued as a LIBOR Advance or a Variable Rate Advance, (iii)
if such notice requests a conversion, the date of such conversion (which shall
be a Business Day) and (iv) if such Advance is to be converted to or continued
as a LIBOR Advance, the Interest Period with respect thereto. If no Interest
Period is specified in any such notice with respect to any conversion to or
continuation as a LIBOR Advance, Borrower shall be deemed to have selected an
Interest Period of one month's duration. Administrative Agent shall advise the
other Banks of any notice given pursuant to this Section and of each Bank's
portion of any converted or continued Advance. If Borrower shall not have given
notice in accordance with this Section to continue any LIBOR Advance into a
subsequent Interest Period (and shall not otherwise have given notice in
accordance with this Section to convert such Advance), such Advance shall, at
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the end of the Interest Period applicable thereto (unless repaid pursuant to the
terms hereof), automatically be continued as a Variable Rate Advance.
3.8 PREPAYMENT.
(a) Borrower shall have the right at any time and from time to time to
prepay any Variable Rate Advance without prior notice.
(b) Borrower shall have the right at any time and from time to time to
prepay any LIBOR Advance, in whole or in part, upon written or telecopy
notice (or telephone notice promptly confirmed by written or telecopy
notice) to Administrative Agent three (3) Business Days in advance;
PROVIDED, HOWEVER, that each partial prepayment shall be in an amount which
is not less than the Minimum Amount.
(c) Each notice of prepayment of a LIBOR Advance shall specify the
prepayment date and the principal amount of each LIBOR Advance (or portion
thereof) to be prepaid, shall be irrevocable and shall commit Borrower to
prepay such LIBOR Advance (or portion thereof) by the amount stated therein
on the date stated therein. All prepayments of LIBOR Advances under this
Section shall be subject to Section 3.12 but otherwise without premium or
penalty.
3.9 PAYMENTS.
(a) Borrower shall make each payment (including without
limitation principal of or interest on any Advance or any Fees or
other amounts) hereunder and under any other Loan Document no later
than 11:00 a.m., Arizona time, on the date when due in Dollars to
Administrative Agent at its offices at 100 West Washington, 11th
Floor, Phoenix, Arizona 85003, Attention: Regional Real Estate Group,
MAC S4101-110, in immediately available funds or at such other
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location as Administrative Agent may notify Borrower in writing at
least three (3) Business Days prior to such payment. Borrower agrees
that Administrative Agent may electronically debit an account
designated by Borrower in a separate written agreement with
Administrative Agent, for each such payment. Any payment received by
Administrative Agent after 11:00 a.m., Arizona time, other than a
payment made by electronic debit, shall be deemed to have been
received by Administrative Agent on the next Business Day.
(b) Whenever any payment (including without limitation principal
of or interest on any Advance or any Fees or other amounts) hereunder
or under any other Loan Document shall become due, or otherwise would
occur, on a day that is not a Business Day, such payment may be made
on the next succeeding Business Day, and such extension of time shall
in such case be included in the computation of interest or Fees, if
applicable.
3.10 RESERVE REQUIREMENTS; CHANGE IN CIRCUMSTANCES.
(a) If any Bank shall have determined that the adoption after the
date hereof of any law, rule, regulation or guideline regarding
capital adequacy, or any change after the date hereof in any of the
foregoing or in the interpretation or administration of any of the
foregoing by any Governmental Authority, central bank or comparable
agency charged with the interpretation or administration thereof, or
compliance by any Bank (or any Lending Office of such Bank) or any
Bank's holding company with any request or directive promulgated after
the date hereof regarding capital adequacy (whether or not having the
force of law) of any such Governmental Authority, central bank or
comparable agency, has or would have the effect of reducing the rate
of return on such Bank's capital or on the capital of such Bank's
holding company, if any, as a consequence of this Agreement or the
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Loan made by such Bank to a level below that which such Bank or such
Bank's holding company could have achieved but for such adoption,
change or compliance (taking into consideration such Bank's policies
and the policies of such Bank's holding company with respect to
capital adequacy and any change to the Variable Rate or the LIBOR Rate
as a result of any such adoption change or compliance) by an amount
deemed by such Bank in good faith to be material, then from time to
time Borrower shall pay to such Bank such additional amount or amounts
as will compensate such Bank or such Bank's holding company for any
such reduction suffered.
(b) Notwithstanding any other provision herein, if after the date
of this Agreement any change in applicable law or regulation (either
by way of changes in existing laws or regulations or the adoption of
new laws or regulations) or in the interpretation or administration
thereof by any Governmental Authority charged with the interpretation
or administration thereof (whether or not having the force of law)
shall change the basis of taxation of payments to any Bank of the
principal of or interest on any LIBOR Advance made by such Bank, Fees
or other amounts payable hereunder (other than changes in respect of
taxes imposed on the net income of such Bank), or shall impose, modify
or deem applicable any reserve, special deposit or similar requirement
against assets of, deposits with or for the account of or credit
extended by such Bank, including without limitation any reserve
requirement that may be applicable to "eurocurrency liabilities" under
and as defined in Regulation D, or shall impose on such Bank or the
London interbank market any other condition affecting this Agreement
or any LIBOR Advance made by such Bank, and the result of any of the
foregoing shall be to increase the cost to such Bank of making or
maintaining any LIBOR Advance or to reduce the amount of any sum
received or receivable by such Bank hereunder or under the Notes (in
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respect of LIBOR Advance only), whether of principal, interest or
otherwise, by an amount deemed by such Bank in good faith to be
material, then, Borrower will pay to such Bank such additional amount
or amounts as will compensate such Bank for such additional costs
incurred or reduction suffered.
(c) A certificate of a Bank, setting forth such amount or amounts
as shall be necessary to compensate such Bank or its holding company
as specified in paragraph (a) or (b) above, as the case may be, and
setting forth in reasonable detail the manner in which such amount or
amounts have been determined, shall be delivered to Borrower and shall
be conclusive absent manifest error. Borrower shall pay each Bank the
amount shown as due on any such certificate delivered by it within
thirty (30) days after its receipt of the same.
(d) Except as otherwise provided herein, failure on the part of
any Bank to demand compensation for any increased costs or reduction
in amounts received or receivable with respect to any period shall not
constitute a waiver of said Bank's right to demand compensation with
respect to such period or any other period. The protection of this
Section shall be available to any Bank regardless of any possible
contention of the invalidity or inapplicability of the law, rule,
regulation, guideline or other change or condition which shall have
occurred or been imposed, provided that if such Bank is compensated
for such increased costs or reduction by any Governmental Authority or
third party in the event such invalidity or inapplicability is finally
determined, then such Bank shall return to Borrower the respective
compensation paid by Borrower, up to the lesser of such amount as is
received by such Bank or such amount as was paid by Borrower.
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(e) Without prejudice to the survival of any other agreement
contained herein, the agreements and obligations contained in this
Section shall survive Termination, provided that Borrower shall have
no further obligation to the Banks under this Section unless a
certificate setting forth the amount of such obligation shall have
been delivered by the Banks pursuant to paragraph (c) above within
ninety (90) calendar days after the last event required for
Termination to occur.
(f) Each Bank or Administrative Agent on behalf of the Banks
shall give notification to Borrower of any event or prospective event
which will give rise to the operation of paragraphs (a), (b) or (d) of
this Section, such notification to be sent within thirty (30) days of
the date of the public promulgation of the effective date of any such
law, rule, regulation, guidelines or change therein.
3.11 CHANGE IN LEGALITY.
(a) Notwithstanding any other provision herein, if after the date
of this Agreement any change in any law or regulation or in the
interpretation thereof by any Governmental Authority charged with the
administration or interpretation thereof shall make it unlawful for
any Bank to make or maintain any LIBOR Advance or to give effect to
its obligations as contemplated hereby with respect to any LIBOR
Advance, then by written notice to Borrower setting forth in
reasonable detail the relevant circumstances and the effect thereof,
such Bank may:
(i) declare that LIBOR Advances will not thereafter be made
by such Bank hereunder, whereupon any request by Borrower for a
LIBOR Advance shall be deemed a request to such Bank for a
Variable Rate Advance unless such declaration shall be
subsequently withdrawn (but such request shall be for a LIBOR
Advance as to the other Banks); and
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(ii) require that all outstanding LIBOR Advances made by it
be converted to Variable Rate Advances, in which event all such
LIBOR Advances shall be automatically converted to Variable Rate
Advances as of the effective date of such notice as provided in
paragraph (b) below.
In the event any Bank shall exercise its rights under (i) or (ii) above, all
payments and prepayments of principal which would otherwise have been applied to
repay the LIBOR Advances that would have been made by such Bank or the converted
LIBOR Advances of such Bank shall instead be applied to repay the Variable Rate
Advances made by such Bank in lieu of, or resulting from the conversion of, such
LIBOR Advances.
(b) For purposes of this Section, a notice to Borrower by any Bank
shall be effective as to each LIBOR Advance, if lawful, on the last day of
the Interest Period currently applicable to such LIBOR Advance; in all
other cases such notice shall be effective on the date of receipt by
Borrower.
(c) Each Bank shall use its best efforts to give prompt notification
to Borrower of any event or prospective event which will give rise to the
operation of paragraph (a) of this Section.
3.12 REDEPLOYMENT LOSS. Borrower may prepay all or any portion of the
principal amount of the Loans bearing interest at a LIBOR Rate, provided that if
Borrower makes any such prepayment other than on the last day of an Interest
Period (except pursuant to Section 3.14(a)(ii)), Borrower (a) with such
prepayment, shall pay all accrued interest on the principal amount prepaid
(unless less than all of the principal amount of the Loan is being prepaid, in
which case such interest shall be due and payable on the next scheduled interest
payment date), (b) with such prepayment, shall pay an administrative fee of
$250.00 to each Bank, and (c) on demand, shall reimburse the Banks and hold the
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Banks harmless from all losses and expenses incurred by the Banks as a result of
such prepayment (the "Redeployment Loss"), including, without limitation, any
losses and expenses arising from the liquidation or reemployment of deposits
acquired to fund or maintain the principal amount prepaid. Such reimbursement
shall be calculated as though each Bank funded the principal amount prepaid
through the purchase of U.S. Dollar deposits in the London, England interbank
market having a maturity corresponding to such Interest Period and bearing an
interest rate equal to the LIBOR Rate for such Interest Period, whether in fact
that is the case or not. Each Bank's determination of the amount of such
reimbursement shall be conclusive in the absence of manifest error.
3.13 TAXES.
(a) All payments by Borrower under this Agreement shall be made
without setoff or counterclaim and in such amounts as may be necessary in
order that all such payments after deduction or withholding for or on
account of any present or future taxes, levies, imposts, duties,
withholdings or other charges of whatsoever nature and all liabilities with
respect thereto, other than any taxes on or measured by the gross or net
income of a Bank pursuant to (i) the income and/or franchise tax laws of
the jurisdictions in which such Bank is incorporated or organized or in
which the principal office of such Bank or the branch that is a party to
this Agreement of that Bank is located, and (ii) the income and/or
franchise tax laws of the jurisdictions in which the Lending Office or the
Eurodollar Lending Office of that Bank are then located (all such
nonexcluded taxes, levies, imposts, duties, withholdings and liabilities
being hereinafter referred to as "Taxes"), shall not be less than the
amounts otherwise specified to be paid by Borrower to or for the account of
Administrative Agent or Bank (or any transferee or assignee (each, a
"Transferee")) under this Agreement. Upon request of Borrower in writing,
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each Bank shall designate a different Lending Office or Eurodollar Lending
Office, as the case may be, if such designation will avoid the imposition
of Taxes and if such designation will not, in the sole judgment of such
Bank, be otherwise disadvantageous to such Bank. With respect to each
deduction or withholding for or on account of any Taxes of Administrative
Agent or any Bank (or Transferee), Borrower shall promptly (and in any
event not later than 45 days thereafter) furnish to such Agent or Bank (or
Transferee) a receipt evidencing payment thereof.
(b) In addition, Borrower agrees to pay any present or future stamp or
documentary taxes or any other excise or property taxes, charges or similar
levies which arise from any payment made hereunder or from the execution,
delivery or registration of, or otherwise with respect to, this Agreement
or any other Loan Document (hereinafter referred to as "Stamp Taxes"). Each
Bank that is organized outside the United States represents and warrants
that as of the closing date, it is not aware of any Stamp Tax imposed by
the jurisdiction in which it is incorporated that applies to this Agreement
or any payment made to such Bank hereunder.
(c) Borrower will indemnify each Bank (or Transferee) and
Administrative Agent for the full amount of Taxes and Stamp Taxes
(including without limitation any Taxes or Stamp Taxes imposed by any
jurisdiction on amounts payable under this Section) paid by such Bank (or
Transferee) or Administrative Agent, as the case may be, and any liability
(including without limitation penalties, interest and expenses) arising
therefrom or with respect thereto, whether or not such Taxes or Stamp Taxes
were correctly or legally asserted by the relevant taxing authority or
other Governmental Authority. Such indemnification shall be made within 30
days after the date any Bank (or Transferee) or Administrative Agent, as
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the case may be, makes written demand therefor. If a Bank, as the result of
any Tax with respect to which Borrower is required to make a payment
pursuant to this Section shall realize a tax credit or refund in its
country or other jurisdiction of incorporation or organization or in the
jurisdiction in which its principal office or Lending Office or Eurodollar
Lending Office is then located, which tax credit or refund would not have
been realized but for Borrower's payment of such Tax, such Bank shall pay
to Borrower an amount equal to such tax credit or refund (to the extent of
amounts that have been paid by Borrower under this Section with respect to
such credit or refund) net of all out-of-pocket expenses of such Bank;
PROVIDED that Borrower, upon the request of the Bank, agrees to return such
credit or refund (plus penalties, interest or other charges) to such Bank
in the event such Bank is required to repay such credit or refund to the
relevant taxing authority. Any amount required to be calculated pursuant to
this Section shall be calculated in good faith by the Bank (or Transferee)
or Administrative Agent, and such calculation shall be conclusive and
binding upon the parties hereto absent manifest error. In the event
Borrower is required to make any payment pursuant to this Section to a
Bank, such Bank shall promptly and in a timely manner take all such actions
as may be reasonably available to it to pursue any possible tax credit or
refund of such payment.
(d) Without prejudice to the survival of any other agreement contained
herein, the agreements and obligations contained in this Section shall
survive Termination, provided that Borrower shall have no further
obligation to the Banks under this Section unless a certificate setting
forth the amount of such obligation shall have been delivered by the Banks
to Borrower within ninety (90) calendar days after the occurrence of the
last event to occur required for the Termination to occur.
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(e) Each Bank (or Transferee) that is organized outside the United
States (i) on or before the date it becomes a party to this Agreement and
(ii) with respect to each Lending Office or Eurodollar Lending Office
located outside the United States of such Bank (or Transferee), on or
before the date such office or branch becomes a Lending Office or
Eurodollar Lending Office, shall deliver to Borrower and Administrative
Agent such certificates, documents or other evidence, as required by the
Code or Treasury Regulations issued pursuant thereto, including Internal
Revenue Service Form 1001 and W-8 or any successor form or Form 4224 or any
successor form, properly completed and duly executed by such Bank (or
Transferee) establishing that payments received hereunder are (i) not
subject to withholding under the Code because such payment is effectively
connected with the conduct by such Bank (or Transferee) of a trade or
business in the United States in which case such Bank or Transferee shall
deliver to Borrower Internal Revenue Service Form 4224 or any successor
form or (ii) totally exempt from United States Federal withholding tax
under a provision of an applicable tax treaty. In addition, each such Bank
(or Transferee) shall, if legally able to do so, thereafter deliver such
certificates, documents or other evidence from time to time establishing
that payments received hereunder are not subject to such withholding upon
receipt of a written request therefor from Borrower or Administrative
Agent. Unless Borrower and Administrative Agent have received forms or
other documents satisfactory to them indicating that payments hereunder or
under the Notes are not subject to United States Federal withholding tax,
Borrower or Administrative Agent shall withhold such taxes from such
payments at the applicable statutory rate.
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(f) Borrower shall not be required to pay any additional amounts to
any Bank (or Transferee) or Administrative Agent in respect to United
States Federal withholding tax pursuant to paragraph (a) above if the
obligation to pay such additional amounts would not have arisen but for a
failure by such Bank (or Transferee) or Administrative Agent to deliver the
certificates, documents or other evidence specified in the preceding
paragraph (e) unless such failure is attributable to (i) a change in
applicable law, regulation or official interpretation thereof or (ii) an
amendment or modification to or a revocation of any applicable tax treaty
or a change in official position regarding the application or
interpretation thereof, in each case on or after the date such Bank (or
Transferee) or Administrative Agent becomes a party to this Agreement (or,
if applicable, on or after the date a Lending Office or Eurodollar Lending
Office of such Bank (or Transferee) or Agent became a Lending Office or
Eurodollar Lending Office hereunder).
(g) Nothing contained in this Section shall require any Bank (or
Transferee) or Administrative Agent to make available any of its tax
returns (or any other information relating to its taxes) which it deems to
be confidential.
(h) Each Bank or Administrative Agent on behalf of the Banks shall
give notification to Borrower of any event or prospective event which will
give rise to the operation of paragraphs (a), (b) or (c) of this Section,
such notification to be sent within thirty (30) days of the date of the
public promulgation of the effective date of any such Taxes or Stamp Taxes.
3.14 TERMINATION OR ASSIGNMENT OF COMMITMENTS UNDER CERTAIN CIRCUMSTANCES.
(a) If any Bank (or Transferee) or Administrative Agent claims any
additional amounts payable pursuant to Section 3.10 or Section 3.13 or
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exercises its rights under Section 3.11, it shall (consistent with legal
and regulatory restrictions) (i) promptly notify Borrower (through
Administrative Agent) of the circumstances giving rise to such additional
amounts or the exercise of such rights and (ii) file any certificate or
document requested by Borrower or change the jurisdiction of its applicable
Lending Office or take any other action if the making of such a filing or
change or the taking of such action would avoid the need for or reduce the
amount of any such additional amounts which may thereafter accrue or avoid
the circumstances giving rise to such exercise and would not, in the sole
determination of such Bank (or Transferee), be otherwise disadvantageous to
such Bank (or Transferee).
(b) In the event that any Bank shall have delivered a notice or
certificate pursuant to Sections 3.10 or 3.11, or Borrower shall be
required to make additional payments to any Bank under Section 3.13,
Borrower shall have the right, at its option and own expense, upon notice
to such Bank and Administrative Agent, (i) in the case of Sections 3.10,
3.11 or 3.13 only, to terminate the Commitments of such Bank or (ii) in all
cases described in this Section, to require such Bank to transfer and
assign without recourse (in accordance with and subject to the restrictions
contained herein and in the Co-Lender Agreement) all its interests, rights
and obligations under this Agreement to another financial institution
reasonably acceptable to Administrative Agent which shall assume such
obligations; PROVIDED that (i) no such termination or assignment shall
conflict with any law, rule or regulation or order of any Governmental
Authority and (ii) Borrower or the assignee, as the case may be, shall pay
to the affected Bank in immediately available funds on the date of such
termination or assignment the principal of and interest accrued to the date
of payment on the Loans made by it hereunder and all other amounts accrued
for its account or owed to it hereunder, including without limitation
amounts payable and owed to it pursuant to Sections 3.10, 3.11 and 3.12.
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(c) Each Bank represents and warrants to Borrower that as of the date
hereof it is not aware of any claims available to it under Sections 3.10,
3.11 or 3.13 or any circumstances which it has determined will enable it to
make any such claims.
3.15 CONVERSION DATE. Upon each anniversary date of this Agreement, the
Banks may, at the request of Borrower, in the Bank's sole and absolute
discretion, extend the Conversion Date for a period of twelve (12) months, upon
such terms and conditions as the Banks may require, in their sole and absolute
discretion, and with such changes to this Agreement or the terms and conditions
herein as the Banks may require, in their sole and absolute discretion. From and
after the Conversion Date, the Loan shall cease to be a revolving line of credit
and the Commitment Amount shall be automatically reduced on the last day of the
third Calendar Month in the Conversion Period and on the last day of each third
Calendar Month thereafter, with the amount of each such reduction to be equal to
one-eighth of the Commitment Amount in effect as of the day prior to
commencement of the Conversion Period.
3.16 ADVANCES DURING CONVERSION PERIOD. Borrower may continue to request
Advances during the Conversion Period. Such Advances may be made by
Administrative Agent to the terms and conditions of this Agreement. During the
Conversion Period, Issuing Bank shall have no obligation to issue Letters of
Credit and Administrative Agent shall have no obligation to approve any
additional Collateral in the Borrowing Base. During the Conversion Period,
Advances shall only be available with respect to Entitled Land, Lots Under
Development, Finished Lots and Units in Approved Subdivisions which constitute
the Borrowing Base on such date.
3.17 MANDATORY PREPAYMENTS. If for any reason at any time the Loan Balance
exceeds the Available Commitment, Borrower shall immediately upon receipt of
notice from Administrative Agent, make a payment to Administrative Agent in an
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amount equal to the sum of (i) such excess principal, and (ii) accrued and
unpaid interest thereon. Administrative Agent, in its sole discretion, may
suspend the commitment to make any further Advances until Administrative Agent
shall have received such payment.
3.18 EXISTING LOAN. The Loan is intended to amend, restate and replace the
Existing Loan. Upon the satisfaction of the conditions precedent set forth
herein for the inclusion in the Borrowing Base of Entitled Loan, Lots Under
Development, Finished Lots and Units covered by the Existing Loan, the Banks
shall make Advances to the extent available hereunder in repayment of the
Existing Loan. To the extent that such Advances are not sufficient to repay the
Existing Loan in full, Borrower shall repay such excess from its own funds and
not the proceeds of the Loan. The Existing Deeds of Trust shall be modified by
the Modification of Existing Deeds of Trust to secure payment of the Loan
pursuant to the terms hereof. Upon such repayment in full, the Existing Loan
shall be terminated.
SECTION 4. ADVANCES
4.1 METHOD FOR ADVANCES. Advances shall be made by Administrative Agent
(upon receipt of such funds from the Banks) in minimum amounts of $500,000.00 no
more frequently than daily on the same Business Day that notice is received, if
received by 9:00 a.m., Arizona time, or on the next Business Day if notice is
received after 9:00 a.m. on a Business Day, at the written request of a Person
or Persons listed on a signature authorization form executed by Borrower and
delivered to Administrative Agent from time to time, and approved by
Administrative Agent. Such Person or Persons are hereby authorized by Borrower
to direct the disposition of the proceeds of Advances until written notice of
the revocation of such authority is received from Borrower by Administrative
Agent and Administrative Agent has had a reasonable time to act upon such
notice. Administrative Agent shall have no duty to monitor for Borrower or to
report to Borrower the use of proceeds of Advances.
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4.2 PURPOSE OF ADVANCES. Advances shall be used first to pay interest and
fees due under the Loan Documents and to pay or reimburse Borrower for costs,
expenses, and fees actually incurred by Borrower in connection with the
acquisition of the Project, the construction of the Improvements, the
construction of Units, and other costs incurred by Borrower in the ordinary
course of Borrower's business and provided that all such amounts that are
currently due in the ordinary course of business have been paid, Advances may be
used for general working capital purposes of Borrower.
4.3 DETERMINATION OF AMOUNT OF ADVANCES. The Available Commitment, the
Collateral Value, the Maximum Allowed Advances, and the amount of each Advance
shall be determined by Administrative Agent based upon: (i) the Collateral
Certificate most recently submitted by Borrower (adjusted to reflect Entitled
Land, Lots Under Development, Finished Lots and Units sold, the effect of
Collateral losing eligibility hereunder and limitations pursuant to Section 5),
(ii) Administrative Agent's inspections made pursuant to this Agreement (as such
inspections may result in any adjustments to reflect any variance between (A)
the Collateral Certificate, and (B) the results of such inspections), and (iii)
such other information as Administrative Agent may reasonably require in order
to verify such amounts.
SECTION 5. BORROWING BASE CALCULATIONS
5.1 DETERMINATION OF AVAILABLE COMMITMENT. The Available Commitment shall
be determined in accordance with this Section 5 and shall be the lesser of (i)
the Commitment Amount as adjusted from time to time and (ii) the Collateral
Value.
5.2 DETERMINATION OF COLLATERAL VALUE. The "COLLATERAL VALUE," from time to
time, is equal to the aggregate Collateral Values for Entitled Land, Lots Under
Development, Finished Lots and Units included in the Borrowing Base as of the
time that the Collateral Value is determined. The "Collateral Value" is a
valuation of the Borrowing Base based on, in the case of Units, the stage of
construction, determined on a cumulative basis for the Entitled Land, Lots Under
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Development, Finished Lots and Units within each Approved Subdivision as
follows:
(a) ENTITLED LAND. With respect to Entitled Land, the Maximum Allowed
Advance for such Entitled Land.
(b) LOTS UNDER DEVELOPMENT. With respect to each Lot Under
Development: (i) the Maximum Allowed Advance for such Lot MINUS the Land
Allocation for such Lot, with the end result multiplied by the Completion
Percentage; PLUS (ii) the Land Allocation for such Lot.
(c) FINISHED LOTS. With respect to each Finished Lot, an amount equal
to the Maximum Allowed Advance with respect to such Lot.
(d) UNITS. With respect to each Unit, (i) the Maximum Allowed Advance
(taking into account any applicable Reclassification Adjustment) for the
Unit MINUS the Collateral Value of the related Finished Lot, with the end
result multiplied by the Completion Percentage, PLUS (i) the Collateral
Value of the related Finished Lot.
5.3 LIMITATION ON ADJUSTMENTS. Once the Collateral Value and the Maximum
Allowed Advance are initially established for a particular item of Collateral,
the Collateral Value and the Maximum Allowed Advance are not subject to increase
(except as the result of reclassification of the Collateral and changes in the
Completion Percentage), notwithstanding any subsequent Appraisal of the
Borrowing Base and notwithstanding any increase in a Budget.
5.4 MAXIMUM ALLOWED ADVANCE. In order to determine each Collateral Value,
the Maximum Allowed Advance shall be:
(a) ENTITLED LAND. With respect to Entitled Land, the Maximum Allowed
Advance shall be the lesser of (i) fifty percent (50%) of the Appraised
Value, or (ii) fifty percent (50%) of the Acquisition Cost.
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(b) LOTS UNDER DEVELOPMENT. With respect to Lots Under Development,
the Maximum Allowed Advance shall be the lesser of (i) sixty percent (60%)
of the Appraised Value, or (ii) sixty percent (60%) of the Total Cost.
(c) FINISHED LOTS. With respect to Finished Lots, the Maximum Allowed
Advance shall equal the lesser of (i) seventy percent (70%) of the
Appraised Value, or (ii) seventy percent (70%) of the Total Cost.
(d) UNITS. With respect to Units, the Maximum Allowed Advance shall be
determined in accordance with the following:
(i) With respect to each Presold Unit, the lesser of 90% of the
Appraised Value for that Unit or 90% of the price at which the Unit is
to be sold to a purchaser under the applicable Purchase Contract for
that Unit; PROVIDED, HOWEVER, that in no event will the Maximum
Allowed Advance for any Presold Unit exceed 90% of the Unit Cost for
that Unit.
(ii) With respect to each Spec Unit, 80% of the Appraised Value
for that Unit; PROVIDED, HOWEVER, that in no event will the Maximum
Allowed Advance for any Spec Unit exceed 80% of the Unit Cost for that
Unit.
(iii) With respect to each Model Unit, 80% of the Appraised Value
for that Unit; PROVIDED, HOWEVER, that in no event will the Maximum
Allowed Advance for any Model Unit exceed 80% of the Unit Cost for
that Unit.
5.5 ADJUSTMENTS AND LIMITATIONS. Notwithstanding any contrary provision of
this Section 5, the following adjustments and limitations shall apply to the
determination of the Collateral Value of the Borrowing Base:
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(a) MAXIMUM TERM - ENTITLED LAND. No Entitled Land may be included in
Borrowing Base beyond the date that is nine (9) Calendar Months after the
date upon which such Entitled Land was first classified as "Entitled Land"
for purposes of determining the Borrowing Base PROVIDED, HOWEVER, such
Entitled Land may thereafter be included as Collateral in the Borrowing
Base constituting Lots Under Development upon the satisfaction of the
conditions precedent set forth in this Agreement.
(b) MAXIMUM TERM - LOTS UNDER DEVELOPMENT. No Lots Under Development
may be included in the Borrowing Base beyond the date that is twelve (12)
Calendar Months after the date upon which such Lots Under Development was
first classified as "Lots Under Development" for purposes of determining
the Borrowing Base; PROVIDED, HOWEVER, such Lots Under Development may
thereafter be included as Collateral in the Borrowing Base constituting
Finished Lots upon the satisfaction of the conditions precedent set forth
in this Agreement.
(c) MAXIMUM TERM - FINISHED LOTS. No Finished Lots may be included in
the Borrowing Base beyond the date that is twenty-four (24) Calendar Months
after the date upon which such Lots were first classified as "Finished
Lots" for purposes of determining the Borrowing Base.
(d) MAXIMUM TERM - UNITS. No Presold Unit may be included in the
Borrowing Base beyond the date that is twelve (12) Calendar Months after
the date upon which such Unit was first classified as a "Presold Unit" for
purposes of determining the Borrowing Base. No Spec Unit may be included in
the Borrowing Base beyond the date that is twelve (12) Calendar Months
after the date upon which such Unit was first classified as a "Spec Unit"
for purposes of determining the Borrowing Base. No Model Unit may be
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included in the Borrowing Base beyond the date that is twenty-four (24)
Calendar Months after the date upon which such Unit was first classified as
a "Unit" for purposes of determining the Borrowing Base, provided, that if
such Model Unit is used for a phased, active subdivision, and the floor
plan of such Model Unit continues to be offered in such Subdivision,
Administrative Agent shall consider extending the period during which such
Model Unit may be included in the Borrowing Base. If Presold unit or a Spec
Unit is reclassified a different type of Unit, other than a Model Unit
(i.e. Presold Unit to Spec Unit or vice versa), then for the purposes of
determining the maximum term that such Unit may be included in the
Borrowing Base such reclassification date shall be deemed to be the that
such Unit is first classified as a Presold Unit or a Spec Unit, provided,
that in no event shall any such Unit be included in the Borrowing Base
beyond the date that is eighteen (18) Calendar Months in the aggregate
after the date upon which such Unit was first classified as a "Unit" for
the purposes of determining the Borrowing Base.
(e) CONVERSION OF PRESOLD UNITS AND SPEC UNITS. If a Spec Unit is
reclassified as a Presold Unit (by reason of the execution and delivery of
a Purchase Contract), such Unit shall be included in the Borrowing Base as
a Presold Unit and, on reclassification, such Presold Unit will be subject
to a Reclassification Adjustment. If a Presold Unit is reclassified as a
Spec Unit (by reason of the termination of a Purchase Contract), such Unit
shall be included in the Borrowing Base as a Spec Unit and, on
reclassification, such Spec Unit will be subject to a Reclassification
Adjustment.
(f) UNIT INELIGIBILITY. Units that are sold, that have been included
as Collateral in the Borrowing Base for the maximum term determined in
accordance with the provisions of this Section 5.5, or that are otherwise
not eligible to be included in the Borrowing Base pursuant to any provision
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of this Agreement will no longer be included in the Borrowing Base upon
sale and release in compliance with the provisions of this Agreement, upon
expiration of such term, or upon such Units becoming ineligible, as the
case may be. However, a Unit (but not Entitled Land, Lots Under Development
or Finished Lots) that is no longer included in the Borrowing Base because
of expiration of the term during which such Unit was entitled to be
included in the Borrowing Base or because of its becoming ineligible
pursuant to any provision of this Agreement will nevertheless remain part
of the Collateral until released as permitted by this Agreement.
5.6 OCCURRENCE OF CERTAIN EVENTS. Upon the occurrence of any of the
following events, any Collateral constituting any part of the Borrowing Base may
be declared by Administrative Agent to no longer be included in the Borrowing
Base:
(a) FORECLOSURE, ETC. The filing or commencement of any foreclosure
proceeding, forfeiture proceeding, notice of trustee's sale or other action
by any Person to realize upon any such Collateral.
(b) ENVIRONMENTAL MATTERS. In the event any Collateral is subject to
any environmental claim or Borrower is otherwise in breach of the
Environmental Agreement.
(c) DAMAGE/DESTRUCTION. In the event any Collateral is subject to any
damage or destruction (including, without limitation, fire, earthquake and
flood) that Administrative Agent determines is material, unless
Administrative Agent is holding, and has a first priority perfected
security interest in, insurance proceeds and other sums sufficient to
repair and reconstruct such Collateral.
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(d) CONDEMNATION. In the event any Collateral is subject to any
material condemnation as determined by Administrative Agent.
5.7 DETERMINATIONS. Any determination by Administrative Agent in its
reasonable discretion as to whether Entitled Land, Lots Under Development,
Finished Lots or Units are included in the Borrowing Base will be final,
conclusive, binding and effective immediately. Entitled Land, Lots Under
Development, Finished Lots or Units that are sold, that have been included in
the Borrowing Base for the maximum term determined in accordance with the
provisions of this Section 5.7, or that are otherwise not eligible to be
included in the Borrowing Base pursuant to any provision of this Agreement will
no longer be included in the Borrowing Base upon sale and release in compliance
with the terms of this Agreement, upon expiration of such term, or upon
otherwise becoming ineligible, as the case may be.
5.8 FURTHER LIMITATIONS ON COLLATERAL VALUES. Any other provision of the
Loan Documents to the contrary notwithstanding, in determining the Borrowing
Base and Collateral Values, the following additional restrictions shall apply
and such restrictions shall be computed and reflected in each Collateral
Inventory Report and Borrowing Base Report:
(a) COLLATERAL VALUE LIMIT ON AVAILABILITY FOR ALL ENTITLED LAND, LOTS
UNDER DEVELOPMENT AND FINISHED LOTS. The aggregate Collateral Value with
respect to all Entitled Land, Lots Under Development and Finished Lots
included in the Borrowing Base shall not at any time exceed 40% of the
aggregate Collateral Value of all of the Borrowing Base.
(b) COLLATERAL VALUE LIMIT ON AVAILABILITY FOR ALL SPEC UNITS AND
MODEL UNITS. The aggregate Collateral Value with respect to all Spec Units
and Model Units included in the Borrowing Base shall not at any time exceed
30% of the aggregate Collateral Value of all of the Borrowing Base.
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(c) INVENTORY LIMIT FOR SPEC UNITS AND MODEL UNITS. The maximum number
of Spec Units and Model Units that constitute the Borrowing Base shall not
at any time exceed twenty (20) such Units per Subdivision.
(d) INVENTORY LIMIT FOR UNSOLD FINISHED LOTS AND UNSOLD LOTS UNDER
DEVELOPMENT. The maximum number of unsold Finished Lots plus unsold Lots
Under Development under construction in Arizona and California shall not
exceed at any time 2.5 times the number of closings in Arizona and
California on a rolling four-quarter basis.
(e) SUBDIVISION SIZE LIMITATION. The maximum number of Lots comprising
a Subdivision shall not exceed 200 Lots, unless such Subdivision is to be
developed in phases satisfactory to Administrative Agent. With respect to
any Subdivision with more than 200 Lots, the Collateral Value of Entitled
Land, Lots Under Development, Finished Lots and Units related to such Lots
in excess of 200 shall not be included in the Borrowing Base.
(f) PURCHASE MONEY DEBT LIMITATION. The Collateral Value of any
Entitled Land, Lots Under Development, Finished Lots or Units securing
purchase money debt (other than the Loan) shall not be included in the
Borrowing Base.
(g) COMMERCIAL ENTITLED LAND. The aggregate Collateral Value with
respect to all Entitled Land constituting commercial property or intended
to be used for commercial rather than residential purposes included in the
Borrowing Base shall not at any time exceed $2,000,000.00.
If any of the limitations on the Borrowing Base, Maximum Allowed Advances,
Collateral Value, outstanding Advances or Loan Balance set forth in this Section
5.8 or elsewhere in this Agreement are exceeded, Administrative Agent may
exclude items from the Borrowing Base as selected by Administrative Agent in its
sole and absolute discretion until such requirements are met. Borrower shall
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make a remargining payment pursuant to Section 3.17 resulting from any such
adjustments by Administrative Agent.
5.9 COLLATERAL INVENTORY REPORT, COLLATERAL CERTIFICATE, AND BORROWING BASE
REPORT.
(a) COLLATERAL INVENTORY REPORT. On or before the dates that are four
(4) Business Days prior to the tenth (10th) and twenty-fifth (25th) day of
each Calendar Month, Borrower will prepare and submit to Administrative
Agent a Collateral Inventory Report for all of the Collateral in
substantially the form of the sample attached hereto as EXHIBIT "H",
including, among other things that Administrative Agent may require from
time to time, the following: (i) the total number, and a description of,
Entitled Land, Lots Under Development, Presold Units, Spec Units, Model
Units and Finished Lots that constitute the Borrowing Base; (ii) the name
of the Approved Subdivision; (iii) the Lot number as indicated on the
recorded plat of the Approved Subdivision; (iv) the Unit plan type; (v)
whether the Unit is a Presold Unit, a Spec Unit, a Model Unit, or
ineligible collateral; (vi) the Unit Budget; (vii) the percentage of
completion up to the date of the report and the hard construction costs to
complete the Lots Under Development and Units; (viii) the Appraised Value;
(ix) the listing price of the Unit or the amount of the Purchase Contract,
as applicable; (x) the applicable Eligibility Date; (xi) the Collateral
Value and the Maximum Allowed Advance by Lot and Subdivision; (xii) the
Acquisition Cost, Improvement Construction Cost and Total Cost; (xiii) the
amount of Loan proceeds that are available for Advances against each item
included in the Borrowing Base based on the terms of this Agreement; and
(ix) a list of all Collateral that is not included in the Borrowing Base.
The Collateral Inventory Report will also set forth such information
concerning construction of the Units and Improvements as Administrative
Agent may require, including, without limitation, the status of
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construction of the Units, a detailed breakdown of the costs of the various
phases of construction of the Units and Improvements showing the amounts
expended to date for such construction, and an itemized estimate of the
amount necessary to complete construction of the Units and Improvements in
their entirety. Administrative Agent shall complete its review of each
Collateral Inventory Report and establish the Borrowing Base Report
(subject to later adjustment if necessary) on or before the tenth (10th)
and twenty- fifth (25th) day of each Calendar Month (or on the next
succeeding Business Day if such date is not a Business Day).
(b) COLLATERAL CERTIFICATE. Each Collateral Inventory Report will be
accompanied by a Collateral Certificate, in the form attached hereto as
EXHIBIT "E", signed by an executive officer of Borrower. Entitled Land,
Lots Under Development, Units and Finished Lots may be added to the
Borrowing Base only upon receipt of the Collateral Inventory Report and
Collateral Certificate which include such Entitled Land, Lots Under
Development, Units and Finished Lots and upon satisfaction of all other
provisions of this Agreement. Each Collateral Certificate shall be in form
and substance satisfactory to Administrative Agent, shall contain such
certifications as Administrative Agent may reasonably require, and shall
set forth the following:
(i) The total Collateral Value for the Borrowing Base;
(ii) The calculated amount of Collateral Value and usage for all
types of Collateral in the Borrowing Base and a calculation of all
applicable limitations; and
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(iii) A statement that Borrower is in compliance with the terms
and conditions of the Loan Documents.
(c) FORM OF REPORT AND CERTIFICATE. The Collateral Inventory Report
and the Collateral Certificate will be in written form and on computer disk
formatted to Administrative Agent specifications.
(d) BORROWING BASE REPORT. Administrative Agent will prepare the
Borrowing Base Report and determine the Borrowing Base and the Collateral
Value of the Borrowing Base (and all other amounts and items relating
thereto) based upon (i) the Collateral Inventory Report and Collateral
Certificate most recently submitted by Borrower; (ii) Administrative
Agent's inspections made pursuant to this Agreement (as such inspections
may result in any adjustments to reflect any variance between the Borrowing
Base Report and/or the Collateral Inventory Report and the results of such
inspections by Administrative Agent); and (iii) such other information as
Administrative Agent may reasonably require in order to verify the
Borrowing Base, the Collateral Value of the Borrowing Base, and all other
amounts and items relating thereto. The Borrowing Base Report will also
take into account the sale of Units and all other adjustments and
limitations permitted or required by this Agreement. Each determination by
Administrative Agent, in its reasonable judgment, of the Borrowing Base and
the Collateral Value of the Borrowing Base, and each determination by
Administrative Agent, in its reasonable judgment, as to the amount of any
Advance to which Borrower is entitled, based on the information in the
Borrowing Base Report (and all other amounts and items entering into such
determinations), will be final, conclusive and binding upon Borrower.
Provided, that Borrower submits the Collateral Inventory Reports as
required pursuant to Section 5.9(a) above, Administrative Agent shall
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establish the Borrowing Base Report and determine the Collateral Value of
the Borrowing Base (subject to later adjustment if necessary) on or before
the tenth (10th) and twenty-fifth (25th) day of each Calendar Month (or on
the next succeeding Business Day if such date is not a Business Day).
SECTION 6. LETTERS OF CREDIT
6.1 ISSUANCE OF LETTERS OF CREDIT.
(a) Subject to the terms and conditions of this Agreement, (i) the
Issuing Bank agrees from time to time before the Conversion Date to issue
Letters of Credit for the account of Borrower; and (ii) the Banks severally
agree to participate in Letters of Credit issued for the account of
Borrower, subject to the prior approval by each Bank of the provisions of
each Letter of Credit. Each reference in this Agreement to the "issue" or
"issuance" or other forms of such words in relation to Letters of Credit
shall be deemed to include any extension or renewal of a Letter of Credit.
(b) Each Letter of Credit shall (i) by its terms be issued in a Stated
Amount; (ii) have a Stated Expiry Date no later than the Termination Date;
(iii) expire or be terminated by the beneficiary thereunder on or before
its Stated Expiry Date; (iv) not exceed the Available Commitment; (v) shall
not cause the Loan Balance to exceed the Available Commitment; and (v) not
cause the Outstanding LC Balance after the issuance of said Letter of
Credit to exceed $20,000,000.00.
(c) In addition to the conditions otherwise specified in this Section,
the obligation of the Issuing Bank to issue a Letter of Credit shall be
subject to the further condition precedent that the following statements
shall be correct, and each application for such Letter of Credit and the
issuance of such Letter of Credit shall constitute a representation and
warranty by Borrower that on the date of the issuance of such Letter of
Credit such statements are correct:
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(i) The representations and warranties in Section 17 are correct
on and as of the date of the issuance of such Letter of Credit, before
and after giving effect to such issuance, as though made on and as of
such date;
(ii) No Event of Default has occurred and is continuing; and
(iii) The conditions in Section 3.1 are satisfied as of the date
of issuance of the Letter of Credit, before and after giving effect to
such issuance.
6.2 ISSUANCE PROCEDURE FOR LETTERS OF CREDIT. By delivery to the Issuing
Bank of an Issuance Request on or before 9:00 a.m. (Phoenix, Arizona time) five
(5) Business Days prior to the requested Issuance Date, and the execution of
such applications and agreements as the Issuing Bank may reasonably request,
Borrower may request the issuance of a Letter of Credit in such form as Borrower
may reasonably request. Each Issuance Request shall include the form of the
Letter of Credit, the amount and other terms thereof. Subject to the terms and
conditions of this Agreement, the Issuing Bank will issue such Letter of Credit
on the Issuance Date specified in the Issuance Request submitted in connection
therewith. The Issuing Bank and Borrower agree that all Letters of Credit issued
pursuant to the terms of this Section shall be subject to the terms and
conditions and entitled to the benefits of this Agreement and the other Loan
Documents.
6.3 LETTER OF CREDIT FEES AND COSTS.
(a) Borrower agrees to pay to Administrative Agent, for distribution
to the Banks pursuant to the Co-Lender Agreement, a non-refundable fee (the
"Letter of Credit Fee") equal to one percent (1%) per annum on the Stated
Amount of each Letter of Credit, computed on a daily basis, from and
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including the Issuance Date of such Letter of Credit to the Stated Expiry
Date (the "Outstanding Period"). The Letter of Credit Fee shall be payable
in advance upon the issuance of a Letter of Credit. Upon an Event of
Default, the Letter of Credit Fee shall be equal to three hundred basis
points (3.0%) above the Letter of Credit Fee.
(b) Borrower further agrees to pay to the Issuing Bank for its account
a charge for all reasonable administrative expenses of the Issuing Bank in
connection with the issuance, amendment or modification (if any) and
administration of the Letter of Credit upon demand from time to time.
6.4 DISBURSEMENTS. The Issuing Bank will notify Borrower of the presentment
for payment of a Letter of Credit by any beneficiary thereto, together with
notice of the date (the "Disbursement Date") such payment shall be made. Subject
to the terms and provisions of the Letter of Credit, the Issuing Bank shall make
such payment (a "Disbursement") to the beneficiary of the Letter of Credit. Each
such Disbursement shall be deemed to be an Advance hereunder.
6.5 REIMBURSEMENT OBLIGATIONS OF BORROWER. Borrower's obligation to
reimburse the Banks with respect to each Disbursement (including interest
thereon) in respect of any Letter of Credit shall be absolute and unconditional
under any and all circumstances and irrespective of any setoff, counterclaim, or
defense to payment which Borrower may have or have had against the Banks, the
Issuing Bank, Administrative Agent or the beneficiary thereof, including any
defense based upon the occurrence of any Event of Default, any draft, demand or
certificate or other document presented under the Letter of Credit proving to be
forged, fraudulent, invalid or insufficient, the failure of any Disbursement to
conform to the terms of the Letter of Credit (if, in Issuing Bank's good faith
opinion, such Disbursement is determined to be appropriate) or any
non-application or misapplication by the beneficiary of the proceeds of such
Disbursement, or the legality, validity, form, regularity or enforceability of
the Letter of Credit; PROVIDED, HOWEVER, that nothing herein shall adversely
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affect the right of Borrower to commence any proceeding against Issuing Bank for
any wrongful Disbursement made by Issuing Bank under the Letter of Credit as a
result of acts or omissions constituting gross negligence or wilful misconduct
on the part of Issuing Bank.
6.6 NATURE OF REIMBURSEMENT OBLIGATIONS. Borrower shall assume all risks of
the acts, omissions or misuse of any Letter of Credit by the beneficiary
thereof. Neither the Banks nor the Issuing Bank (except to the extent of its own
gross negligence or wilful misconduct) shall be responsible for:
(a) The form, validity, sufficiency, accuracy, genuineness or legal
effect of any Letter of Credit or any document submitted by any party in
connection with the issuance of any Letter of Credit, even if such document
should in fact prove to be in any or all respects invalid, insufficient,
inaccurate, fraudulent or forged;
(b) The form, validity, sufficiency, accuracy, genuineness or legal
effect of any instrument transferring or assigning or purporting to
transfer or assign any Letter of Credit;
(c) Failure of any beneficiary of any Letter of Credit to comply fully
with conditions required in order to demand payment under a Letter of
Credit;
(d) Errors, omissions, interruption or delays in transmission or
delivery of any messages, by mail, cable, telegraph, telex or otherwise; or
(e) Any loss or delay in the transmission or otherwise of any document
or draft required by or from a beneficiary of a Letter of Credit in order
to make a Disbursement under a Letter of Credit or of the proceeds thereof.
None of the foregoing shall affect, impair or prevent the vesting of any of the
rights or powers granted the Banks or the Issuing Bank hereunder. In furtherance
and extension, and not in limitation or derogation of any of the foregoing, any
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action taken or omitted to be taken by the Banks or the Issuing Bank in good
faith shall be binding upon Borrower and shall not put the Banks or the Issuing
Bank under any resulting liability to Borrower.
6.7 BANKS OBLIGATION. Nothing herein shall be deemed to relieve any Bank
from its obligations to fulfill its Pro Rata Share of the Available Commitment
hereunder or to prejudice any right which Administrative Agent or Borrower may
have against any Bank as a result of any default by such Bank hereunder.
6.8 CERTAIN REQUIREMENTS AS TO LETTERS OF CREDIT. The Issuing Bank is under
no obligation to Issue any Letter of Credit if:
(a) Any order, judgment or decree of any Governmental Authority or
arbitrator shall by its terms purport to enjoin or restrain the Issuing
Bank from Issuing such Letter of Credit, or any requirement of law
applicable to the Issuing Bank or any request or directive (with which it
is customary for banks in the relevant jurisdiction to comply whether or
not having the force of law) from any Governmental Authority with
jurisdiction over the Issuing Bank shall prohibit, or request that the
Issuing Bank refrain from, the Issuance of letters of credit generally or
such Letter of Credit in particular or shall impose upon the Issuing Bank
with respect to such Letter of Credit any restriction, reserve, or capital
requirement (for which the Issuing Bank is not otherwise compensated
hereunder) not in effect on the closing date hereof, or shall impose upon
the Issuing Bank any unreimbursed loss, cost, or expense which was not
applicable on the closing date and which the Issuing Bank in good faith
deems material to it;
(b) The Issuing Bank has received written notice from any Bank,
Administrative Agent or Borrower, on or prior to the Business Day prior to
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the requested date of Issuance of such Letter of Credit, that one or more
of the applicable conditions contained herein is not then satisfied;
(c) The Stated Expiry Date of any requested Letter of Credit is not in
accord with the requirements of Section 6.1(b), unless all of the Banks
have approved such Stated Expiry Date;
(d) Any requested Letter of Credit does not provide for drafts, or is
not otherwise in form and substance acceptable to the Issuing Bank, or the
Issuance of a Letter of Credit shall violate any applicable policies of the
Issuing Bank; or
(e) Such Letter of Credit is to be used for a purpose other than as
provided herein or denominated in a currency other than Dollars.
6.9 RISK PARTICIPATIONS, DRAWINGS, AND REIMBURSEMENTS.
(a) Immediately upon the Issuance of each Letter of Credit, each Bank
shall be deemed to, and hereby irrevocably and unconditionally agrees to,
purchase from the Issuing Bank a participation in such Letter of Credit and
each drawing thereunder in an amount equal to the product of (i) the Pro
Rata Share of such Bank, times (ii) the maximum amount available to be
drawn under such Letter of Credit and the amount of any drawing,
respectively. For purposes of the Commitment, each Issuance of a Letter of
Credit shall be deemed to utilize each Bank's Pro Rata Share of the
Commitment by an amount equal to the amount of such participation.
(b) In the event of any request for a drawing under a Letter of Credit
by the beneficiary or transferee thereof, the Issuing Bank will promptly
notify Borrower. The Issuing Bank shall honor any Disbursement request
under any Letter of Credit only if (i) such request is delivered to the
Issuing Bank by the beneficiary of such Letter of Credit, and (ii) such
request is accompanied by the original documents, if any, required by the
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Letter of Credit for any Disbursement. Except as otherwise provided herein,
Borrower shall reimburse the Issuing Bank prior to 11:00 a.m. (Phoenix,
Arizona local time) on the day after any amount is paid by the Issuing Bank
under any Letter of Credit (each such date, an "Honor Date"), in an amount
equal to the amount so paid by the Issuing Bank. In the event Borrower is
required but fails to reimburse the Issuing Bank for the full amount of any
drawing under any Letter of Credit by 11:00 a.m. (Phoenix, Arizona local
time) on the day after the Honor Date, the Issuing Bank will promptly
notify Administrative Agent and Administrative Agent will promptly notify
each Bank thereof. Any notice given by the Issuing Bank or Administrative
Agent pursuant to this Section may be oral if immediately confirmed in
writing (including by facsimile); provided that the lack of such an
immediate confirmation shall not affect the conclusiveness or binding
effect of such notice.
(c) Each Bank shall upon any notice pursuant to this Section make
available to Administrative Agent for the account of the Issuing Bank an
amount in Dollars and in immediately available funds equal to its Pro Rata
Share of the amount of the drawing, whereupon the Banks shall (subject to
paragraph (d)) each be deemed to have made a Variable Rate Advance to
Borrower in that amount.
(d) With respect to any unreimbursed drawing, Borrower shall be deemed
to have incurred from the Issuing Bank a Variable Rate Advance in the
amount of such drawing.
6.10 ROLE OF THE ISSUING BANK. Each Bank and Borrower agree that, in paying
any drawing under a Letter of Credit, the Issuing Bank shall not have any
responsibility to obtain any document (other than any sight draft and
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certificates expressly required by the Letter of Credit) or to ascertain or
inquire as to the validity or accuracy of any such document or the authority of
the Person executing or delivering any such document.
6.11 CASH COLLATERAL UPON EVENT OF DEFAULT. Without limitation upon any of
the Banks' other rights or remedies under this Agreement or the other Loan
Documents, upon demand by Administrative Agent following the occurrence of an
Event of Default, Borrower shall immediately deposit an amount equal to any
amounts then available to be drawn under the Letters of Credit in a special
interest bearing account with Administrative Agent to be held by Administrative
Agent, for the benefit of the Banks, as collateral security for the obligations
described in this Agreement. To the extent that Borrower fails to deliver such
amount, Borrower agrees that such amount shall be includable for all purposes in
the amounts owing under this Agreement. Without limitation upon the generality
of the foregoing, Borrower agrees that such amounts may be included in credit
bids upon foreclosure of the liens of any or all of the Loan Documents. Such
account shall be pledged, pursuant to a pledge agreement in form and content
satisfactory to Administrative Agent, to Administrative Agent, for the benefit
of the Banks, as long as the Letter(s) of Credit are outstanding or any
obligation of Borrower under the Loan Documents remains outstanding, and shall
permit withdrawals only with the signature of Administrative Agent. Borrower
hereby agrees to execute all documents required by Administrative Agent in
connection with any such deposit in order to create, confirm, perfect, or permit
Administrative Agent to realize upon its security interests therein, and hereby
irrevocably grants to Administrative Agent a power of attorney, coupled with an
interest, to execute all such documents.
SECTION 7. RELEASES
7.1 RELEASE OF COLLATERAL REQUEST OF BORROWER. Borrower may request
releases of Entitled Land, Lots Under Development, Finished Lots and Units from
the lien and encumbrance of the Deed of Trust from time to time; PROVIDED,
HOWEVER, Administrative Agent shall be under no obligation to release any
Entitled Land, Lots Under Development, Finished Lot or Unit unless each of the
following conditions precedent is satisfied:
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(a) With respect to each parcel of Entitled Land, Lots Under
Development and Finished Lot (i) Borrower shall have paid to Administrative
Agent an amount equal to the applicable Collateral Value, (ii) no Event of
Default or Unmatured Event of Default has occurred and is continuing (other
than an Event of Default under Paragraphs 8.1(b)(c) or (d) of The Deeds of
Trust), and (iii) both before and after giving effect to such release and
any payments to be made pursuant to this sentence, the Loan Balance does
not exceed the Available Commitment and Borrower has made any payments then
required pursuant to Section 3.17 hereof;
(b) With respect to each Unit (i) Borrower shall have paid to
Administrative Agent an amount equal to the greater of (A) the applicable
Collateral Value, or (B) the Net Sales Proceeds, (ii) unless such release
is in connection with a sale to an unrelated third party purchaser, no
Event of Default or Unmatured Event of Default has occurred and is
continuing (other than an Event of Default under Paragraphs 8.1(b)(c) or
(d) of The Deeds of Trust), and (iii) both before and after giving effect
to such release and any payments to be made pursuant to this sentence, the
Loan Balance does not exceed the Available Commitment and Borrower has made
any payments then required pursuant to Section 3.17 hereof;
(c) If requested by Administrative Agent in connection with the
release of less than all of parcel of property that is not subject to a
plat, Administrative Agent shall have received such endorsements to the
Title Policy as Administrative Agent may require insuring the continuing
lien of the Deed of Trust as to the remaining real property encumbered by
the Deed of Trust and any easements required by Administrative Agent;
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(d) All costs and expenses of Administrative Agent relating to all
releases shall be paid by Borrower, including but not limited to
reconveyance fees, title fees, recording fees and legal expenses; and
(e) No release shall impair or adversely affect Administrative Agent's
security in any real property remaining subject to the Deed of Trust or any
term or provision of the Deed of Trust as it pertains to any real property
remaining subject to the Deed of Trust.
Any amounts payable to Administrative Agent under subparagraphs (a) and (b)
above shall be applied to the outstanding principal balance of all Advances
(first to Variable Rate Advances unless otherwise requested by Borrower).
Borrower shall take all action necessary to ensure that all Net Sales Proceeds
from the sale of a Unit are paid by the Title Company directly to Administrative
Agent, rather than to Borrower. All such proceeds shall be deposited into an
account in the name of Borrower, maintained with Administrative Agent and under
the sole dominion and control of Administrative Agent (the "Bank Control
Account"). Administrative Agent shall use its best efforts to apply amounts
payable to Administrative Agent under subparagraphs (a) and (b) above to the
outstanding principal balance of all Advances on the same Business Day received
(but in any event on the next Business Day). All funds at any time in the Bank
Control Account are hereby assigned to Administrative Agent as additional
security for the Loan and all other indebtedness of Borrower arising hereunder.
7.2 OTHER RELEASES. Subject to the satisfaction of the conditions contained
in Sections 7.1(c), (d) and (e) above, Administrative Agent shall release the
lien and encumbrance of the Deed of Trust from any property that is conveyed to
a homeowners' association or any property that is dedicated to governmental
entities if such conveyance is made without any compensation.
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SECTION 8. FEES
As additional consideration for the Commitment, Borrower agrees to pay to
Administrative Agent for distribution to Administrative Agent and the Banks in
accordance with the Co-Lender Agreement the following fees, from Borrower's own
funds (unless otherwise indicated), which shall be earned on the date due under
the Loan Documents and shall be non-refundable to Borrower:
8.1 FACILITY FEE. A fee for the Commitment (the "Facility Fee") at the rate
of one- quarter of one percent (.25%) per annum of the maximum Commitment Amount
(i.e., $70,000,000.00) shall be due and payable quarterly in advance on each
January 1, April 1, July 1 and October 1, provided that the initial Facility Fee
shall be payable on the date of this Agreement and shall be prorated for the
period commencing on the date of this Agreement and ending on December 31, 1999
at the per annum rate set forth above.
8.2 AGENCY FEE. The Agency Fee in accordance with terms and conditions set
forth in a side letter between Borrower and Administrative Agent.
8.3 LETTER OF CREDIT FEE. See Section 6.3 hereof.
8.4 ATTORNEYS' COSTS, EXPENSES, AND FEES. Attorneys' costs, expenses, and
fees for Administrative Agent's counsel and the Banks' counsel as provided in
the Loan Documents, payable on or before the date hereof and during the term of
the Commitment, from time to time upon the presentation by Administrative Agent
of statements therefor.
8.5 APPRAISAL FEES, TITLE INSURANCE PREMIUM, AND OTHER COSTS, EXPENSES, AND
FEES. Appraisal fees, appraisal review fees, title insurance premiums, and other
costs, expenses, and fees that Borrower is obligated to pay pursuant to the Loan
Documents, in the amounts specified by Administrative Agent, payable on or
before the date hereof, and monthly thereafter during the term of the
Commitment.
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SECTION 9. SECURITY
9.1 SECURITY. Borrower shall cause the Loan and Borrower's obligations
under this Agreement to be secured in form and substance satisfactory to
Administrative Agent by the following:
(a) One or more Deeds of Trust constituting:
(i) A first and prior lien on the Project, subject only to such
matters as specifically approved by Administrative Agent therein;
(ii) A valid and effectual assignment of rents and leases
covering the Project;
(iii) A valid and effectual security agreement granting
Administrative Agent a first and prior security interest in all of the
property described below in, to, or under which Borrower now has or
hereafter acquires any right, title or interest, whether present,
future, or contingent: all equipment, inventory, accounts, general
intangibles, instruments, documents, and chattel paper, as those terms
are defined in the Uniform Commercial Code, and all other personal
property of any kind (including without limitation money and rights to
the payment of money), whether now existing or hereafter created, that
are now or at any time hereafter (i) in the possession or control of
Administrative Agent in any capacity; (ii) erected upon, attached to,
or appurtenant to, the Project; (iii) located or used on the Project
or identified for use on the Project (whether stored on the Project or
elsewhere); or (iv) used exclusively in connection with, arising
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exclusively from, related exclusively to, or associated exclusively
with the Project or any of the personal property described herein, the
construction of any improvements on the Project, the ownership,
development, maintenance, leasing, management, or operation of the
Project, the use or enjoyment of the Project, or the operation of any
business conducted on the Project; together with all products and
proceeds of all of the foregoing, in any form;
together with any UCC financing statements for filing and/or recording and any
other items required by Administrative Agent to fully perfect the liens and
security interests of Administrative Agent.
SECTION 10. CONDITIONS PRECEDENT FOR EFFECTIVENESS OF AGREEMENT
The obligation of the Banks to make the Loan and each and every Advance and
the obligation of the Issuing Bank to issue Letters of Credit are subject to the
following express conditions precedent, all of which, unless otherwise provided
below, shall have been satisfied, in each case as determined by Administrative
Agent in its sole and absolute discretion, prior to the effectiveness of this
Agreement:
10.1 DOCUMENTS. Borrower shall have executed (or obtained the execution or
issuing of) and delivered to Administrative Agent the following documents, all
in form satisfactory to Administrative Agent:
(a) The Note;
(b) The Guarantee;
(c) An Environmental Indemnity Agreement covering all Subdivisions now
or hereafter constituting Collateral hereunder.
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(d) If Borrower or any partner or member in Borrower or any Guarantor
is other than a natural person: (i) a copy of the organizational documents
for that entity; (ii) evidence of proper formation and good standing of
that entity in the state of its organization; (iii) evidence of the
qualification or registration of that entity in the states in which such
entity is doing business, if such states are not the state of its
organization; and (iv) proper resolutions, authorizations, certificates and
such other documents as Administrative Agent may require, relating to the
existence and good standing of that entity and the authority of any person
executing documents on behalf of that entity. No change shall be made to
any organizational documents previously submitted to Administrative Agent
without Administrative Agent's prior written approval, which approval shall
not be unreasonably withheld.
10.2 CO-LENDER AGREEMENT. The Banks, Administrative Agent and the
Documentation and Syndication Agent shall have entered into the Co-Lender
Agreement.
10.3 INSURANCE POLICIES. Lender shall have received certificates evidencing
the policies of insurance required under the Loan Documents.
10.4 PAYMENT OF COSTS, EXPENSES, AND FEES. All costs, expenses, and fees to
be paid by Borrower under the Loan Documents on or before the effectiveness of
this Agreement, the effectiveness of the Commitment, the making of any Advance
or the Issuance of any Letter of Credit have been paid in full.
10.5 LEGAL OPINION. Borrower, at its expense, shall have provided
Administrative Agent with a written opinion by counsel in form and substance
reasonably acceptable to Administrative Agent.
10.6 REPRESENTATIONS TRUE. All representations and warranties by Borrower
shall remain true and correct and all agreements that Borrower is to have
performed or complied with by the date hereof shall have been performed or
complied with.
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10.7 NO DEFAULTS. No Event of Default or Unmatured Event of Default exists.
SECTION 11. CONDITIONS PRECEDENT TO APPROVAL OF SUBDIVISIONS
Borrower may, from time to time, request Administrative Agent to approve
Subdivisions. Approvals of each Subdivision shall be granted by Administrative
Agent in its reasonable discretion, provided, that such Subdivision satisfies at
all times the conditions precedent set forth in this Section 11. In any event,
only Subdivisions located in the metropolitan areas of Phoenix, Tucson,
Sacramento and San Francisco, and other Northern California metropolitan areas
shall be approved pursuant to this Agreement. When requesting consideration of a
new Subdivision, Borrower shall deliver to Administrative Agent such
documentation as Administrative Agent may require, and each of the following
conditions precedent shall have been satisfied, as determined by Administrative
Agent in its reasonable discretion:
11.1 PLAT OR SURVEY. Borrower shall have delivered to Administrative Agent
and Administrative Agent shall have approved either (a) one or more recorded
plats, one of which covers the entire Subdivision; each plat must contain a
legal description of the land covered by the plat, must describe and show all
boundaries of and lot lines within such land, all streets and other dedications,
and all easements affecting such land, and must satisfy such additional
requirements as Administrative Agent may, reasonably prescribe; or (b) one or
more current surveys and a tentative plat map approved by the applicable
Governmental Authority. Each survey must be certified by, and stamped with the
professional seal of, a surveyor or civil engineer satisfactory to
Administrative Agent and licensed in the State in which the Subdivision is
located. Each survey must satisfy the then current requirements for an ALTA or
similar survey and such additional requirements as Administrative Agent may
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prescribe in its sole discretion. Each tentative plat map must satisfy the
requirements of a plat as set forth in Section 11(a).
11.2 PRELIMINARY TITLE REPORT. Borrower shall have provided to
Administrative Agent, and Administrative Agent shall have approved, in its sole
and absolute discretion, one or more preliminary title reports covering the
Subdivision, together with a copy of each Schedule B item.
11.3 DEED OF TRUST/MODIFICATION TO DEED OF TRUST. Borrower shall have
executed, delivered, acknowledged, and recorded a Deed of Trust (or a
modification to existing Deed of Trust) covering, if possible, the entire
Subdivision (together with any financing statements required by Administrative
Agent). To the extent possible, Borrower shall ensure that all Entitled Land,
Lots Under Development, Finished Lots and Units located in a single Subdivision
are covered by a single Deed of Trust.
11.4 ENVIRONMENTAL QUESTIONNAIRE. The form of environmental questionnaire
requested by Administrative Agent, fully completed and duly executed by
Borrower. The answers to the questions in the questionnaire must be satisfactory
to Administrative Agent in its sole and absolute discretion.
11.5 ENVIRONMENTAL ASSESSMENT. A report of an environmental assessment of
the Entitled Land, Lots Under Development, Finished Lots or Units dated or
updated (unless in connection with a project encumbered by the Existing Deeds of
Trust) within the previous twelve (12) month period, addressed to Administrative
Agent by an environmental engineer acceptable to Administrative Agent containing
such information, results, and certifications as Administrative Agent may
require, in its sole and absolute discretion. Depending upon the results of the
environmental assessment, Borrower shall also provide such follow up testing,
reports, and other actions as may be required by Administrative Agent in its
sole and absolute discretion. The contents of the environmental assessment
report and any follow up must be satisfactory to Administrative Agent in its
sole and absolute discretion. All environmental reports shall be the sole
property of Administrative Agent.
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11.6 TITLE INSURANCE. Borrower shall have provided to Administrative Agent
and Administrative Agent shall have approved an American Land Title Association
or similar loan policy or policies of title insurance or an endorsement to an
existing title policy or policies or an irrevocable and unconditional commitment
to issue such policy or policies or endorsement issued by the Title Company at
Administrative Agent's request insuring the Deed of Trust encumbering each such
Subdivision. Each such policy shall have a liability limit of not less than the
Commitment Amount (or such lesser amount approved by Administrative Agent in its
sole and absolute discretion) and shall provide coverage and otherwise be in
form and substance satisfactory to Administrative Agent (including without
limitation mechanic's lien coverage, comprehensive coverage, and revolving
credit coverage) insuring Administrative Agent's interest under the applicable
Deed of Trust as a valid first lien on the fee interest in the property
encumbered by the Deed of Trust. Such policy shall be accompanied by such
reinsurance and co-insurance agreements and endorsements as Administrative Agent
may require in its sole and absolute discretion. Such policy must contain only
such exceptions as are satisfactory to Administrative Agent in its sole and
absolute discretion and must have attached such endorsements as Administrative
Agent may require in its sole and absolute discretion.
11.7 FLOOD ZONE. Evidence as to whether (i) the Subdivision is located in
an area designated by the United States Department of Housing and Urban
Development as having special flood or mudslide hazards, and (ii) the community
in which the Subdivision is located is participating in the National Flood
Insurance Program.
11.8 SOILS TESTS. A soils test report addressed to Administrative Agent
prepared by a licensed soils engineer acceptable to Administrative Agent showing
the locations of, and containing boring logs for, all bores, together with
recommendations for the design of the foundations of the Units.
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11.9 INSURANCE POLICIES. Borrower shall have provided to Administrative
Agent the certificates of insurance required under the Loan Documents.
11.10 ASSESSMENTS, CHARGES, AND TAXES. For taxes and assessments on the
Project that Administrative Agent has approved in writing in its sole and
absolute discretion for payment in installments pursuant to the Deed of Trust,
evidence that such installments are current. For all other taxes and assessments
and all utility and services charges, evidence that they have been paid in full.
11.11 CONTRACTS. If required by Administrative Agent, Borrower shall have
delivered to Administrative Agent all executed contracts relating to design and
construction of the Improvements and Units between Borrower and any other Person
(including, without limitation, each architect and each contractor or
subcontractor for labor, material, or services). The contract price in each
contract shall be within the budgeted amount in the applicable Budget.
11.12 PROJECTIONS. Borrower shall have delivered to Administrative Agent a
project proforma with respect to such Subdivision, including projected budgets,
sales and pricing in substantially the form of the sample attached hereto as
EXHIBIT "J".
11.13 PAYMENT OF COSTS, EXPENSES, AND FEES. All costs, expenses, and fees
to be paid by Borrower under the Loan Documents on or before the effectiveness
of this Agreement, the effectiveness of the Commitment, or the request for
Subdivision approval, including, without limitation recording, documentary stamp
tax and intangible taxes, shall have been paid in full.
11.14 OTHER ACTIONS BY BORROWER. Borrower shall have performed such other
actions as Administrative Agent may reasonably require.
11.15 REPRESENTATIONS TRUE. All representations and warranties by Borrower
shall remain true and correct and all agreements that Borrower is to have
performed or complied with by the date hereof shall have been performed or
complied with.
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11.16 NO DEFAULTS. No Event of Default or Unmatured Event of Default
exists.
SECTION 12. CONDITIONS PRECEDENT TO APPROVAL OF ENTITLED LAND
Borrower may, from time to time, request Administrative Agent to approve
Entitled Land for inclusion in the Borrowing Base. Approvals of Entitled Land
for inclusion in the Borrowing Base shall be granted by Administrative Agent in
its reasonable discretion, provided, that as such Collateral satisfies the
applicable requirements of this Agreement. Entitled Land shall be considered for
inclusion in the Borrowing Base no more frequently than twice per Calendar
Month. In addition to the conditions precedent for Advances herein, Borrower may
include and maintain Entitled Land in the Borrowing Base only if the following
conditions precedent are satisfied at all times that such Entitled Land is
included in the Borrowing Base, in each case as determined by Administrative
Agent in its reasonable discretion:
12.1 APPROVED SUBDIVISION. The Entitled Land shall be located in an
Approved Subdivision and Borrower shall have satisfied at all times the
conditions set forth in Section 11 with respect to such Entitled Land.
12.2 FEE TITLE. Fee title to the Entitled Land shall have been acquired by
Borrower and Administrative Agent shall have received evidence of such
acquisition satisfactory to Administrative Agent in its sole and absolute
discretion.
12.3 DOCUMENTS. Administrative Agent has received the following agreements,
documents, and instruments, each duly executed by the parties thereto and in
form and substance satisfactory to Administrative Agent in its sole and absolute
discretion:
(a) APPRAISAL. An Appraisal of the Entitled Land, with the date of
valuation (unless in connection with a Project previously encumbered by the
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Existing Deeds of Trust) within 120 days of the date of the request to
include the Entitled Land in the Borrowing Base. The Appraisal shall have
been approved by Administrative Agent in its sole and absolute discretion.
(b) OTHER ITEMS. Such other agreements, documents, and instruments as
Administrative Agent may reasonably require (including, without limitation,
if required by Administrative Agent, a copy of the zoning for the Entitled
Land, all related stipulations, and the zoning ordinances; a copy of all
conditions, covenants, and restrictions related to the Entitled Land; a
copy of any public reports or disclosures required under applicable state
or federal law once prepared by Borrower and approved by the applicable
Governmental Authority; evidence satisfactory to Administrative Agent that
such Entitled Land satisfy the definition of Entitled Land set forth
herein).
12.4 PAYMENT OF COSTS, EXPENSES, AND FEES. All costs, expenses, and fees to
be paid by Borrower under the Loan Documents on or before the effectiveness of
this Agreement, the effectiveness of the Commitment, or the request for approval
of the Entitled Land, including, without limitation recording, documentary stamp
tax and intangible taxes, shall have been paid in full.
12.5 OTHER ACTIONS BY BORROWER. Borrower shall have performed such other
actions and delivered such other documents as Administrative Agent may
reasonably require.
12.6 REPRESENTATIONS TRUE. All representations and warranties by Borrower
shall remain true and correct and all agreements that Borrower is to have
performed or complied with by the date hereof shall have been performed or
complied with.
12.7 NO DEFAULTS. No Event of Default or Unmatured Event of Default exists.
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12.8 LIMITATIONS. After giving effect to the addition of such Entitled Land
in the Borrowing Base, the limitations and restrictions on the Borrowing Base in
Section 5 are not violated.
SECTION 13. CONDITIONS PRECEDENT TO APPROVAL OF LOTS UNDER
DEVELOPMENT
Borrower may, from time to time, request Administrative Agent to approve
Lots Under Development for inclusion in the Borrowing Base. Approvals of Lots
Under Development for inclusion in the Borrowing Base shall be granted by
Administrative Agent in its reasonable discretion, provided, that such
Collateral satisfies the applicable requirements of this Agreement. Lots Under
Development shall be considered for inclusion in the Borrowing Base no more
frequently than twice per Calendar Month. In addition to the conditions
precedent for Advances herein, Borrower may include and maintain Lots Under
Development in the Borrowing Base only if the following conditions precedent are
satisfied at all times that such Lots Under Development are included in the
Borrowing Base, in each case as determined by Administrative Agent in its
reasonable discretion:
13.1 APPROVED SUBDIVISION. The Lots Under Development shall be located in
an Approved Subdivision and Borrower shall have satisfied at all times the
conditions set forth in Sections 11 and 12 with respect to such Lots Under
Development.
13.2 FEE TITLE. Fee title to the Lots Under Development shall have been
acquired by Borrower and Administrative Agent shall have received evidence of
such acquisition satisfactory to Administrative Agent in its sole and absolute
discretion.
13.3 DOCUMENTS. Administrative Agent has received the following agreements,
documents, and instruments, each duly executed by the parties thereto and in
form and substance satisfactory to Administrative Agent in its sole and absolute
discretion:
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a) APPRAISAL. An Appraisal of the Lots Under Development, with the
date of valuation (unless in connection with a Project previously
encumbered by the Existing Deeds of Trust) within 120 days of the date of
the request to include the Lots Under Development in the Borrowing Base.
The Appraisal shall have been approved by Administrative Agent in its sole
and absolute discretion.
(b) BUDGET. A Budget for the respective Improvements, together with
the cost of the applicable Lots Under Development as determined in
accordance with GAAP.
(c) PLANS AND SPECIFICATIONS. Plans and Specifications for the
respective Improvements.
(d) CONSTRUCTION. At the request of Administrative Agent, evidence
that construction of the Improvements will commence within thirty (30) days
or has commenced or been completed on the Lots Under Development.
(e) OTHER ITEMS. Such other agreements, documents, and instruments as
Administrative Agent may reasonably require (including, without limitation,
if required by Administrative Agent, a copy of the zoning for the Lots
Under Development, all related stipulations, and the zoning ordinances; a
copy of all conditions, covenants, and restrictions related to the Lots
Under Development; a copy of any public reports or disclosures required
under applicable state or federal law; a copy of the architectural
committee approval and any other approvals required under the conditions,
covenants, and restrictions).
13.4 PAYMENT OF COSTS, EXPENSES, AND FEES. All costs, expenses, and fees to
be paid by Borrower under the Loan Documents on or before the effectiveness of
this Agreement, the effectiveness of the Commitment, or the request for approval
of the Lots Under Development, including, without limitation recording,
documentary stamp tax and intangible taxes, shall have been paid in full.
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13.5 OTHER ACTIONS BY BORROWER. Borrower shall have performed such other
actions and delivered such other documents as Administrative Agent may
reasonably require.
13.6 REPRESENTATIONS TRUE. All representations and warranties by Borrower
shall remain true and correct and all agreements that Borrower is to have
performed or complied with by the date hereof shall have been performed or
complied with.
13.7 NO DEFAULTS. No Event of Default or Unmatured Event of Default exists.
13.8 LIMITATIONS. After giving effect to the addition of such Lots Under
Development in the Borrowing Base, the limitations and restrictions on the
Borrowing Base in Section 5 are not violated.
SECTION 14. ADDITIONAL CONDITIONS PRECEDENT TO THE INCLUSION OF
EACH FINISHED LOT IN THE BORROWING BASE
Borrower may, from time to time, request Administrative Agent to approve
Finished Lots for inclusion in the Borrowing Base. Approvals of each Finished
Lot for inclusion in the Borrowing Base shall be granted by Administrative Agent
in its reasonable discretion, provided, that such Finished Lot satisfies the
applicable requirements of this Agreement. Finished Lots shall be considered for
inclusion no more frequently than twice per Calendar Month. In addition to the
conditions precedent for Advances herein, Borrower may include and maintain each
Finished Lot in the Borrowing Base only if the following conditions precedent
are satisfied at all times that such Finished Lot is included in the Borrowing
Base, in each case as determined by Administrative Agent in its reasonable
discretion:
14.1 APPROVED SUBDIVISION. The Finished Lot shall be located in an Approved
Subdivision and Borrower shall have satisfied at all times the conditions set
forth in Sections 11, 12 and 13 with respect to such Lot.
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14.2 FEE TITLE. Fee title to the applicable Finished Lot shall have been
acquired by Borrower and Administrative Agent shall have received evidence of
such acquisition satisfactory to Administrative Agent in its sole and absolute
discretion.
14.3 PLAT. Borrower shall have delivered to Administrative Agent and
Administrative Agent shall have approved a final plat and final map (with
respect to California properties), and if required by Administrative Agent with
respect to California properties Administrative Agent shall have received a
Subdivision Map Act Endorsement to the applicable title policy, covering the
applicable Finished Lots.
14.4 DOCUMENTS. Administrative Agent has received the following agreements,
documents, and instruments, each duly executed by the parties thereto and in
form and substance satisfactory to Administrative Agent in its sole and absolute
discretion:
(a) APPRAISAL. An Appraisal for all of the Finished Lots in the
respective Subdivision with the date of valuation (unless in connection
with Finished Lots previously encumbered by the Existing Deeds of Trust)
within 120 days of the date of the request to include the Finished Lot in
the Borrowing Base. The Appraisal shall have been approved by
Administrative Agent in its sole and absolute discretion.
(b) IMPROVEMENTS. Representation by Borrower that substantially all
Improvements related to the Finished Lot have been installed and that
construction of the Improvements complies with plans and specifications
previously approved by Administrative Agent.
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(c) OTHER ITEMS. Such other agreements, documents, and instruments as
Administrative Agent may reasonably require.
14.5 PAYMENT OF COSTS, EXPENSES, AND FEES. All costs, expenses, and fees to
be paid by Borrower under the Loan Documents on or before the effectiveness of
this Agreement, the effectiveness of the Commitment, or the request for approval
of the Finished Lot, including, without limitation recording, documentary stamp
tax and intangible taxes, shall have been paid in full.
14.6 OTHER ACTIONS BY BORROWER. Borrower shall have performed such other
actions and delivered such other documents as Administrative Agent may
reasonably require.
14.7 REPRESENTATIONS TRUE. All representations and warranties by Borrower
shall remain true and correct and all agreements that Borrower is to have
performed or complied with by the date hereof shall have been performed or
complied with.
14.8 NO DEFAULTS. No Event of Default or Unmatured Event of Default exists.
14.9 LIMITATIONS. After giving effect to the addition of such Finished Lot
in the Borrowing Base, the limitations and restrictions on the Borrowing Base in
Section 5 are not violated.
SECTION 15. ADDITIONAL CONDITIONS PRECEDENT TO THE INCLUSION OF EACH UNIT IN THE
BORROWING BASE
Borrower may, from time to time, request Administrative Agent to approve
Units for inclusion in the Borrowing Base or to reclassify existing Finished
Lots or Units. Approvals of each Unit for inclusion in the Borrowing Base and
reclassification of existing Finished Lots and Units shall be granted by
Administrative Agent in its reasonable discretion, provided, that each such Unit
satisfies the applicable requirements of this Agreement. Units shall be
considered for inclusion or reclassification in the Borrowing Base no more
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frequently than twice per Calendar Month. In addition to the conditions
precedent for Advances herein, Borrower may include and maintain each Unit in
the Borrowing Base only if the following conditions precedent are satisfied at
all times that such Unit is included in the Borrowing Base, in each case as
determined by Administrative Agent in its reasonable discretion:
15.1 APPROVED SUBDIVISION. The Unit shall be located in an Approved
Subdivision and Borrower shall have satisfied at all times the conditions set
forth in Sections 11, 12, 13 and 14 with respect to the Unit and related Lot.
15.2 FEE TITLE. Fee title to the applicable Lot shall have been acquired by
Borrower and Administrative Agent shall have received evidence of such
acquisition satisfactory to Administrative Agent in its sole and absolute
discretion.
15.3 PLAT. Borrower shall have delivered to Administrative Agent and
Administrative Agent shall have approved a final plat and final map (with
respect to California properties), and if required by Administrative Agent with
respect to California properties Administrative Agent shall have received a
Subdivision Map Act Endorsement to the applicable title policy, covering the
applicable Lot.
15.4 DOCUMENTS. Administrative Agent has received the following agreements,
documents, and instruments, each duly executed by the parties thereto and in
form and substance satisfactory to Administrative Agent in its sole and absolute
discretion:
(a) APPRAISAL. An Appraisal for the respective type of Unit, valid as
determined by Administrative Agent in its sole and absolute discretion,
and, if requested by Administrative Agent, an updated Appraisal for the
respective type of Unit. The Appraisal shall have been approved by
Administrative Agent in its sole and absolute discretion.
(b) BUDGET. A Budget for the respective type of Unit together with the
Acquisition Cost of the applicable Lot.
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(c) PLANS AND SPECIFICATIONS. Plans and Specifications for the
respective type of Unit.
(d) PURCHASE CONTRACT. At the request of Administrative Agent, if such
Unit is a Presold Unit, a copy of a Purchase Contract for such Unit.
(e) PUBLIC REPORTS. If required by Administrative Agent, a copy of the
public report issued to Borrower for the sale of the Units once prepared by
Borrower and approved by the applicable Governmental Authority.
(f) OTHER ITEMS. Such other agreements, documents, and instruments as
Administrative Agent may reasonably require.
15.5 PAYMENT OF COSTS, EXPENSES, AND FEES. All costs, expenses, and fees to
be paid by Borrower under the Loan Documents on or before the effectiveness of
this Agreement, the effectiveness of the Commitment, or the request for approval
of the Unit, including, without limitation recording, documentary stamp tax and
intangible taxes, shall have been paid in full.
15.6 OTHER ACTIONS BY BORROWER. Borrower shall have performed such other
actions and delivered such other documents as Administrative Agent may
reasonably require.
15.7 REPRESENTATIONS TRUE. All representations and warranties by Borrower
shall remain true and correct and all agreements that Borrower is to have
performed or complied with by the date hereof shall have been performed or
complied with.
15.8 NO DEFAULTS. No Event of Default or Unmatured Event of Default exists.
15.9 LIMITATIONS. After giving effect to the addition of such Unit in the
Borrowing Base, the limitations and restrictions on the Borrowing Base in
Section 5 are not violated.
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SECTION 16. ADDITIONAL CONDITIONS PRECEDENT TO ADVANCES
The Banks shall be obligated to make an Advance only upon satisfaction by
Borrower of the following additional conditions precedent, as determined by
Administrative Agent in its sole and absolute discretion:
16.1 REPRESENTATIONS AND WARRANTIES ACCURATE. The representations and
warranties by Borrower in the Loan Documents are correct on and as of the date
of the Advance, as though made on and as of such date, and after giving effect
to such Advance.
16.2 DEFAULTS. No Event of Default or Unmatured Event of Default shall have
occurred and be continuing both before and after giving effect to such issuance
or Advance.
16.3 DRAW REQUEST. Borrower shall have delivered or sent by facsimile to
Administrative Agent a Draw Request for such Advance.
16.4 APPROVALS AND INSPECTIONS BY GOVERNMENTAL AUTHORITIES. As required by
Administrative Agent, all inspections, Approvals and Permits by Governmental
Authorities or other Persons required for the stage of completion of the
Improvements or the Unit have been obtained and, if required by Administrative
Agent, Administrative Agent has received evidence thereof satisfactory to
Administrative Agent.
16.5 PAYMENT OF COSTS, EXPENSES, AND FEES. All costs, expenses, and fees to
be paid by Borrower under the Loan Documents on or before the Advance have been
paid in full.
Borrower hereby authorizes Administrative Agent, and Administrative Agent
reserves the right in its sole and absolute discretion, to verify any documents
and information submitted to Administrative Agent in connection with this
Agreement. Administrative Agent may elect, in its sole and absolute discretion,
to waive any of the foregoing conditions precedent. Any such waiver shall be
effective only if (i) it is in writing executed by Administrative Agent, (ii) it
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specifically identifies the condition precedent, and (iii) it states whether the
condition precedent is waived as a requirement of the effectiveness of this
Agreement, as a requirement of the effectiveness of the Commitment, or as a
requirement for a particular Advance, or otherwise. Any such waiver shall be
limited to the condition(s) precedent therein and the requirements therein.
Delay or failure by Administrative Agent to insist on satisfaction of any
condition precedent shall not be a waiver of such condition precedent or any
other condition precedent. If Borrower is unable to satisfy any condition
precedent of an Advance, the making of the Advance shall not preclude
Administrative Agent from thereafter declaring the condition or event causing
such inability to be an Event of Default.
SECTION 17. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants to Administrative Agent, Documentation and
Syndication Agent and the Banks as follows:
17.1 RECITALS AND STATEMENTS. The recitals and statements of intent of
Borrower appearing in this Agreement are true and correct.
17.2 ORGANIZATION; POWERS; ETC. (a) The Borrower is duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
formation; (b) the Borrower has the power and authority to own its property and
assets and to carry on its business as now conducted and is qualified to do
business in every jurisdiction where such qualification is required except where
the failure to so qualify would not result in a material adverse effect on the
business, assets, operations or condition (financial or otherwise) of the
Borrower; and (c) the Borrower has the power to execute, deliver and perform
this Agreement and the other Loan Documents and to borrow hereunder.
17.3 AUTHORIZATION; ETC. The execution, delivery and performance by the
Borrower of this Agreement, the Advances hereunder, and the issuance, execution
and delivery of the Notes: (a) have been duly authorized by all requisite
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action; (b) will not violate (i) any provision of law, any order of any court,
or any rule, regulation or order of any other agency of government, (ii) the
organizational documents of Borrower, or (iii) any provision of any material
indenture, agreement or other instrument to which the Borrower is a party, or by
which the Borrower or any of its properties or assets are or may be bound; (c)
will not be in conflict with, result in a breach of or constitute (alone, with
notice, with lapse of time, or with any combination of these factors) a default
under any indenture, agreement or other instrument referred to in (b)(iii)
above; and (d) will not result in the creation or imposition of any Lien upon
any property or assets of the Borrower (except pursuant to the Loan Documents).
Except for filings which may be required under the 1934 Act, no registration
with or consent or approval of, or other action by, any Governmental Authority
is required in connection with the execution, delivery and performance of this
Agreement, the execution and delivery of the Notes or the Advances hereunder.
17.4 ENFORCEABILITY. This Agreement constitutes, and each other Loan
Document when duly executed and delivered by the Borrower and Guarantors will
constitute, the legal, valid and binding obligation of the Borrower and
Guarantors, respectively, enforceable in accordance with its terms, subject, as
to the enforcement of remedies, to applicable bankruptcy, reorganization,
insolvency, moratorium and other laws of general applicability relating to or
affecting creditors' rights from time to time in effect and to general
principles of equity (regardless of whether such enforcement is considered in a
proceeding at law or in equity).
17.5 LITIGATION. There are no actions, suits or proceedings at law or in
equity or by or before any governmental instrumentality or other agency now
pending or, to the knowledge of the Borrower, threatened against or affecting
the Borrower or Guarantors or any property or rights of the Borrower or
Guarantors which would be reasonably likely in the aggregate to (i) materially
impair the ability of the Borrower or Guarantors to perform their obligations
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under this Agreement, the Notes or the other Loan Documents or materially impair
the ability of the Borrower or Guarantors to carry on business substantially as
now being conducted or (ii) result in any material adverse change in the
business, assets, operations, or condition (financial or otherwise) of the
Borrower or Guarantors.
17.6 FEDERAL RESERVE REGULATIONS.
(a) The Borrower is not engaged principally, or as one of its
important activities, in the business of extending credit for the purpose
of purchasing or carrying Margin Stock.
(b) No part of the proceeds of any Loan will be used, whether directly
or indirectly, and whether immediately, incidentally or ultimately, (i) to
purchase or carry Margin Stock or to extend credit to others for the
purpose of purchasing or carrying Margin Stock or to refund indebtedness
originally incurred for such purpose, or (ii) for any purpose which entails
a violation of, or which is inconsistent with, the provisions of the
Regulations of the Board, including Regulation G, U or X.
17.7 INVESTMENT COMPANY ACT. The Borrower is not an "investment company" or
a company "controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
17.8 PUBLIC UTILITY HOLDING COMPANY ACT. The Borrower is not a "holding
company," or a "subsidiary company" of a "holding company," or an "affiliate" of
a "holding company" or of a "subsidiary company" of a "holding company," within
the meaning of the Public Utility Holding Company Act of 1935, as amended.
17.9 NO BREACH. The execution, delivery and performance by Borrower and
Guarantors of this Agreement, the Notes, the Loan Documents and all other
documents and instruments relating to the Loan will not result in any breach of
the terms, conditions or provisions of, or constitute a default under, any
agreement or instrument under which Borrower or Guarantors is a party or is
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obligated. Neither Borrower nor any Guarantor is in default in the performance
or observance of any covenants, conditions or provisions of any such agreement
or instrument.
17.10 FINANCIAL STATEMENTS TRUE. All financial statements, profit and loss
statements, statements as to ownership and other statements or reports
previously or hereafter given to the Administrative Agent or the Banks by or on
behalf of Borrower and Guarantors are and shall be true, complete and correct as
of the date thereof. There has been no material adverse change in the financial
condition of Borrower or any Guarantor since the latest financial statements
given to the Administrative Agent or the Banks.
17.11 SIGNIFICANT DEBT AGREEMENTS. Neither Borrower nor any Guarantor is in
default in any material respect under any Significant Debt Agreement.
17.12 ERISA. (a) No Reportable Event has occurred and is continuing with
respect to any Plan; (b) PBGC has not instituted proceedings to terminate any
Plan; (c) neither the Borrower, any member of the Controlled Group, nor any
duly-appointed administrator of a Plan (i) has incurred any liability to PBGC
with respect to any Plan other than for premiums not yet due or payable or (ii)
has instituted or intends to institute proceedings to terminate any Plan under
Section 4041 or 4041A of ERISA; and (d) each Plan of Borrower has been
maintained and funded in all material respects in accordance with its terms and
in all material respects in accordance with all provisions of ERISA applicable
thereto. The Borrower does not participate in, or is not required to make
contributions to, any Multi-employer Plan (as that term is defined in Section
3(37) of ERISA).
17.13 SOLVENT. Borrower in the aggregate (both before and after giving
effect to the Loan contemplated hereby) is solvent, has assets having a fair
value in excess of the amount required to pay its probable liabilities on its
existing debts as they become absolute and matured, and has, and will have,
access to adequate capital for the conduct of its business and the ability to
pay its debts from time to time incurred in connection therewith as such debts
mature.
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17.14 LIENS. The liens, security interests and assignments created by the
Loan Documents will, when granted, be valid, effective, properly perfected and
enforceable liens, security interests and assignments.
17.15 LICENSES. Borrower has obtained, or will obtain when necessary or
appropriate, and there remain in full force and effect all licenses, permits,
consents, approvals and authorizations necessary or appropriate for the
construction of the Improvements and Units.
17.16 FILING OF TAXES. Borrower has filed all federal, state and local tax
returns and has paid all of its current obligations before delinquent, including
all federal, state and local taxes and all other payments required under
federal, state or local law.
17.17 BUDGETS AND PLANS AND SPECIFICATIONS. Each applicable Budget contains
Borrower's best estimate of all costs, expenses, and fees to be incurred by
Borrower in connection with the Improvements and the Units. Each Plans and
Specifications and related working drawings are an accurate and complete
description of the Improvements or Units related thereto.
17.18 AFFIRMATION. Each request by Borrower for an Advance shall constitute
an affirmation on the part of Borrower that the representations and warranties
contained herein are true and correct in all material respects as of the time of
such request and that the conditions precedent set forth in Sections 10, 11, 12,
13, 14, 15 and 16 hereof have been satisfied in all material respects. All
representations and warranties made herein shall survive the execution of this
Agreement, all Advances and the execution and delivery of all other documents
and instruments in connection with the Loan, so long as the Banks have any
commitment to lend to Borrower hereunder and until the Loan and all indebtedness
hereunder have been paid in full and all of Borrower's obligations hereunder
have been fully discharged.
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SECTION 18. AFFIRMATIVE COVENANTS
So long as the Banks have any commitment to lend to Borrower hereunder and
until the Loan and all other indebtedness hereunder have been paid in full and
all of Borrower's obligations hereunder have been fully discharged:
18.1 CORPORATE, LIMITED LIABILITY COMPANY, OR PARTNERSHIP EXISTENCE. If
Borrower is a corporation, a limited liability company, or a partnership,
Borrower shall continue to be validly existing, and in the case of a corporation
or a limited liability company in good standing, under the law of the
jurisdiction of its organization or formation.
18.2 BOOKS AND RECORDS; ACCESS BY ADMINISTRATIVE AGENT. Borrower will
maintain a single, standard, modern system of accounting, on an accrual basis in
accordance with GAAP, including without limitation, a single, complete, and
accurate set of books and records of its assets, business, financial condition,
operations, property, prospects, and results of operations in accordance with
good accounting practices. Borrower will give representatives of Administrative
Agent access to all assets, property, books, records, and documents of Borrower
and will permit such representatives to inspect such assets and property and to
audit, copy, examine, and make excerpts from such books, records, and documents.
18.3 INFORMATION AND STATEMENTS. Borrower shall furnish or cause to be
furnished to Administrative Agent the following information and statements:
(a) CONSOLIDATING AND CONSOLIDATED QUARTERLY STATEMENTS OF THE
MERITAGE GROUP. As soon as available, and in any event within sixty (60)
days after the end of each fiscal quarter of the Meritage Group, copies of
the consolidating and consolidated balance sheet of the Meritage Group as
of the end of such fiscal quarter, and consolidating and consolidated
statements of income and cash flows of the Meritage Group for that fiscal
quarter and for the portion of the fiscal year ending with such fiscal
quarter, in each case setting forth in comparative form the figures for the
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corresponding period of the preceding fiscal year, all in reasonable detail
and fairly stated and prepared by the Meritage Group in accordance with
GAAP. As soon as available and in any event within 60 days after the end of
each quarter of the Meritage Group's fiscal year, a copy of the Meritage
Group's quarterly report on Form 10-Q filed with the SEC.
(b) CONSOLIDATING AND CONSOLIDATED ANNUAL STATEMENTS OF THE MERITAGE
GROUP. As soon as available and in any event within one hundred twenty
(120) days after the close of each fiscal year of the Meritage Group,
audited consolidated financial statements of the Meritage Group, including
its consolidated balance sheet as of the close of such fiscal year and
consolidated statements of income and cash flows of the Meritage Group for
such fiscal year, in each case setting forth in comparative form the
figures for the preceding fiscal year, all in reasonable detail and
accompanied by an unqualified opinion thereon of independent public
accountants of recognized national standing selected by the Meritage Group
and acceptable to Administrative Agent, to the effect that such financial
statements have been prepared in accordance with GAAP (except for changes
in which such accountants concur) and that the examination of such accounts
in connection with such financial statements has been made in accordance
with generally accepted auditing standards and, accordingly, includes such
tests of the accounting records and such other auditing procedures as were
considered necessary in the circumstances. As soon as available and in any
event within one hundred twenty (120) days after the close of each fiscal
year of the Meritage Group, company prepared consolidating financial
statements of the Meritage Group, including its consolidating balance sheet
as of the close of such fiscal year and consolidating statements of income
and cash flows of the Meritage Group for such fiscal year, in each case
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setting forth in comparative form the figures for the preceding fiscal
year, all in reasonable detail and prepared in accordance with GAAP. Within
60 days prior to each fiscal year of the Meritage Group, a projection, in
reasonable detail and in form and substance satisfactory to Administrative
Agent, on a quarterly basis of the cash flow and of the earnings of the
Meritage Group for the next one (1) fiscal year, together with gross and
net margin analysis of each project by quarter. As soon as available and in
any event within 120 days after the end of the Meritage Group's fiscal
year, a copy of the Meritage Group's annual report on Form 10-K filed with
the SEC.
(c) CLOSING REPORT. As soon as available and in any event within
fifteen (15) Business Days after the end of each Calendar Month, a monthly
report of all Unit and other sales closed on the previous rolling month, in
form and substance satisfactory to Administrative Agent, together with a
reconciliation of the most recently submitted Borrowing Base Report and
recalculation of the Borrowing Base after giving effect to such closings.
For purposes of this paragraph, a sale will be deemed to have closed when
Title Company has received all funds necessary to close the sale and to pay
Administrative Agent all sums owed to Administrative Agent pursuant to
Section 3.17 hereof.
(d) SALES REPORTS AND INVENTORY REPORTS. As soon as the same are
available, and in any event within fifteen (15) Business Days after the end
of each Calendar Month, a monthly sales, closings and backlog report
showing sales of Units during the preceding month. Within sixty (60) days
after the end of each calendar quarter, a report showing (A) the status of
Units under construction and Lots as of the end of the preceding calendar
quarter, and (B) an inventory report of Entitled Land, Lots Under
Development and Finished Lots as of the end of the preceding calendar
quarter. Such reports shall be in substantially the form of the samples
attached hereto as EXHIBIT "I" and shall contain such detailed information
as Administrative Agent may reasonably require.
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(e) COLLATERAL INVENTORY REPORT AND COLLATERAL CERTIFICATE. On or
before the dates that are four (4) Business Days prior to the tenth (10th)
and the twenty-fifth (25th) day of each Calendar Month, the Collateral
Inventory Report, accompanied by the Collateral Certificate.
(f) CERTIFICATE OF COMPLIANCE. A certificate in form and substance
satisfactory to Administrative Agent that the Meritage Group is in
compliance with all covenants, terms, and conditions applicable thereto
under or pursuant to all agreements with Administrative Agent and the Banks
and under the Loan Documents, including, without limitation, the Financial
Covenants. Such certificate shall be provided by Borrower within one
hundred twenty (120) days after the end of each fiscal year of Borrower and
within sixty (60) days after the end of each interim quarterly accounting
period of Borrower.
(g) OTHER ITEMS AND INFORMATION. Such other information concerning
Borrower, the Project, and the assets, business, financial condition,
operations, property, prospects, and results of operations of Borrower as
Administrative Agent reasonably requests from time to time. In this regard,
upon request of Administrative Agent, Borrower shall deliver to
Administrative Agent counterparts and/or conditional assignments as
security of any and all construction contracts, receipted invoices, bills
of sale, statements, conveyances, and other agreements, documents, and
instruments of any nature relating to the Project or under which Borrower
claims title to any materials or supplies used or to be used in the
Project. Also, in this regard, upon request of Administrative Agent,
Borrower shall deliver to Administrative Agent a complete list of all
contractors, subcontractors, material suppliers, other vendors, artisans,
and laborers performing work or services or providing materials or supplies
for the Project.
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18.4 LAW; JUDGMENTS; MATERIAL AGREEMENTS; APPROVALS AND PERMITS. Borrower
shall comply with all laws, ordinances, regulations, and rules (federal, state,
and local) and all judgments, orders, and decrees of any arbitrator, other
private adjudicator, or Governmental Authority relating to Borrower, the
Project, or the assets, business, operations, or property of Borrower. Borrower
shall comply in all material respects with all material agreements, documents,
and instruments to which Borrower is a party or by which Borrower, the Project,
or any of the other assets or property of Borrower is bound or affected.
Borrower shall comply with all Requirements (including, without limitation, as
applicable, requirements of the Federal Housing Administration and the Veterans
Administration) and all conditions and requirements of all Approvals and
Permits. Borrower shall obtain and maintain in effect from time to time all
Approvals and Permits required for the business activities and operations then
being conducted by Borrower in the Project.
18.5 TAXES AND OTHER INDEBTEDNESS. Except for taxes and assessments being
contested in accordance with the Deed of Trust and except for taxes and
assessments that Administrative Agent has agreed in its sole and absolute
discretion may be paid in installments as provided in the Deed of Trust,
Borrower shall pay and discharge (i) before delinquency all taxes, assessments,
and governmental charges or levies imposed upon it, upon its income or profits,
or upon any property belonging to it, or upon the Note, any Deed of Trust, or
the indebtedness evidenced or secured thereby, (ii) when due all lawful claims
(including, without limitation, claims for labor, materials, and supplies),
which, if unpaid, might become a Lien or Encumbrance upon any of its assets or
property, and (iii) all its other material trade credit. Upon the request of
Administrative Agent, Borrower shall deliver to Administrative Agent receipts or
other evidence satisfactory to Administrative Agent showing payment of all taxes
and assessments on the Collateral. Borrower shall pay when due all dues and
charges for water and water delivery, electricity, gas, sewers, waste removal,
bills for repairs, and any and all other claims, encumbrances and expenses
incident to the ownership of the Collateral.
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18.6 ASSETS AND PROPERTY. Borrower will maintain, keep, and preserve all of
its assets and property (tangible and intangible) (including, without
limitation, the Project) necessary or useful in the proper conduct of its
business and operations in good working order and condition, ordinary wear and
tear excepted.
18.7 INSURANCE. The following insurance shall be obtained and maintained
and all related premiums shall be paid as they become due:
(a) PROPERTY. Insurance of the Project against damage or loss by fire,
lightning, and other perils, on an all-risks basis, such coverage to be in
an amount not less than the full replacement cost. During the period of
construction of the Project, such policy shall be written in the so-called
"BUILDER'S RISK COMPLETED VALUE NON-REPORTING FORM," on an all-risks basis,
with no coinsurance requirement except as approved by Administrative Agent,
and shall contain a provision granting the insured permission to complete
and/or occupy the Project.
(b) LIABILITY. Commercial general liability insurance protecting
Borrower and Administrative Agent against loss or losses from liability
imposed by law or assumed in any agreement, document, or instrument and
arising from bodily injury, death, or property damage with a limit of
liability of not less than $2,000,000.00 per occurrence and $2,000,000.00
general aggregate. Also, "UMBRELLA" excess liability insurance in an amount
not less than $5,000,000.00. Such policies must be written on an occurrence
basis so as to provide blanket contractual liability, broad form property
damage coverage, and coverage for products and completed operations. In
addition, there shall be obtained and maintained business motor vehicle
liability insurance protecting Borrower and Administrative Agent against
loss or losses from liability relating to motor vehicles owned, non-owned,
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or hired used by Borrower, any contractor, any subcontractor, or any other
Person in any manner related to the Project with a limit of liability of
not less than $2,000,000.00 (combined single limit for personal injury
including bodily injury and death and property damage).
(c) FLOOD. A policy or policies of flood insurance in the maximum
amount of flood insurance available with respect to the Project under the
Flood Disaster Protection Act of 1973, as amended. This requirement will be
waived upon presentation of evidence satisfactory to the Administrative
Agent that no portion of the Project is located within an area identified
by the U.S. Department of Housing and Urban Development as having special
flood hazards.
(d) WORKMAN'S COMPENSATION. Workman's compensation insurance,
disability benefits insurance, and such other forms of insurance as
required by law covering loss resulting from injury, sickness, disability,
or death of employees of Borrower, any contractor, and any subcontractor
located on or assigned to the Project. Borrower shall cause each contractor
and each subcontractor having employees located on or assigned to the
Project to obtain and maintain this same coverage for all eligible
employees.
(e) ADDITIONAL INSURANCE. Borrower shall obtain and maintain such
other policies of insurance as Administrative Agent may reasonably request
in writing.
(f) OTHER. All required insurance shall be procured and maintained in
financially sound and generally recognized responsible insurance companies
selected by Borrower. Such companies must be authorized to write such
insurance in the States of Arizona and California. Each company shall be
rated "A" or better by A.M. Best Co., in Best's Key Guide, or such other
rating acceptable to Administrative Agent in Administrative Agent's sole
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and absolute discretion. All property policies evidencing required
insurance shall name Administrative Agent as first mortgagee and loss
payee. All liability policies evidencing required insurance shall name
Administrative Agent as additional insured. The policies shall not be
cancelable as to the interests of the Administrative Agent due to the acts
of Borrower. The policies shall provide for at least thirty (30) days prior
written notice of the cancellation or modification thereof to
Administrative Agent.
(g) EVIDENCE. Certificates of insurance evidencing that such insurance
is in full force and effect, shall be delivered to Administrative Agent,
together with proof of the payment of the premiums thereof. At least
fifteen (15) days prior to the expiration of such policies, Borrower shall
furnish Administrative Agent evidence that such policy has been renewed or
replaced in the form of a certificate reciting that there is in full force
and effect, with a term covering at least the next succeeding calendar
year, insurance of the types and in the amounts required in this Section
18.7. If required by Administrative Agent, Borrower shall provide to
Administrative Agent the original or certified copies of the insurance
policies required herein.
18.8 ERISA. Borrower will fund each Defined Benefit Plan and Defined
Contribution Plan (as such terms are defined in ERISA) established or maintained
by Borrower so that there is never an Accumulated Funding Deficiency (as defined
in SECTION 412 of the Internal Revenue Code of 1986, as amended).
18.9 APPRAISALS. Administrative Agent shall have the right to order
Appraisals from time to time. Each Appraisal is subject to review and approval
by Administrative Agent. Borrower agrees upon demand by Administrative Agent to
pay to Administrative Agent the cost and expense for such Appraisals and a fee
determined by Administrative Agent for review of each such Appraisal by
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Administrative Agent. However, Borrower's obligation to pay costs and expenses
associated with a reappraisal of existing Collateral shall be limited to once
per year for each such reappraisal, unless such reappraisal is ordered after the
occurrence of an Event of Default or as a result of federal regulatory
requirements. All FNMA appraisals or other appraisals of Units accepted by
Administrative Agent that do not have a specific expiration date shall be
updated at Administrative Agent's request. Based on the updated, respective
Appraised Value approved or determined by Administrative Agent in its sole and
absolute discretion, Administrative Agent shall have the right to revise the
Collateral Values and/or the Maximum Allowed Advances applicable to any
Collateral at any time. If the outstanding principal amount of Advances exceeds
the Available Commitment as a result of such revision, then Borrower shall be
required to make a mandatory prepayment to Administrative Agent pursuant to
Section 3.17 hereof.
18.10 COMMENCEMENT AND COMPLETION. As requested by Administrative Agent,
Borrower shall cause construction of the Improvements and the Units to be
prosecuted and completed in good faith, with due diligence, and without delay.
Upon completion of each Unit, Borrower shall obtain the issuance of a permanent
certificate of occupancy or other equivalent permit required by the applicable
Governmental Authority and, if requested by Administrative Agent, make a copy
thereof available to Administrative Agent for inspection. Borrower shall cause
the Improvements and the Units to be constructed (i) in a good and workmanlike
manner, (ii) in compliance with all applicable Requirements, and (iii), unless
otherwise consented to by Administrative Agent in advance in writing in the sole
and absolute discretion of Administrative Agent, in accordance with the Plans
and Specifications. Upon demand by Administrative Agent, Borrower shall correct
any defect in the Units or any departure from any applicable Requirements or, to
the extent not theretofore approved in writing by Administrative Agent, the
respective Plans and Specifications. Borrower understands and agrees that
inspection of the Improvements and the Units by or on behalf of Administrative
Agent, the review by Administrative Agent of Draw Requests and related documents
and information, the making of Advances by the Banks, any actions by
Administrative Agent under Section 18.12 hereof, and any other actions by
Administrative Agent shall not be a waiver of Administrative Agent's right to
require compliance with this Section 18.10.
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18.11 TITLE INSURANCE. If Title Company pays any claims under any Title
Policy, Borrower will take any and all actions necessary to cause the total
liability under the Title Policy to remain at or to be increased to the
Commitment Amount notwithstanding the payment of such claim or claims, including
without limitation, providing any supplemental Title Policies or endorsements or
reinsurance agreements if requested by Administrative Agent, the cost of which
shall be paid by Borrower. Upon payment of any such claims, Borrower will obtain
and provide to Administrative Agent any and all documentation reasonably
requested by Administrative Agent to ensure that the maximum coverage provided
for hereunder shall not have been diminished as a result of the payment of such
claims.
18.12 RIGHTS OF INSPECTION; CORRECTION OF DEFECTS; AGENCY. Administrative
Agent and its agents, employees, and representatives shall have the right at any
time and from time to time to enter upon the Project in order to inspect the
Project. If Administrative Agent, in its judgment, determines that any materials
or work do not conform with the respective Plans and Specifications or with any
applicable Requirements or are otherwise not in conformity with sound building
practice, and such defect is not corrected within twenty (20) days after notice
thereof to Borrower, Administrative Agent shall have the right to stop the work
and to order replacement or correction of any such materials or work regardless
of whether or not such materials or work have theretofore been incorporated in
the Units, regardless of whether Administrative Agent's representatives have
previously inspected such work or materials, and regardless of whether
Administrative Agent has previously made Advances to pay for such work or
materials. Borrower shall promptly make such replacement or correction.
Inspection by Administrative Agent or by Administrative Agent's inspectors of
the Project is for the sole purpose of protecting the security of Administrative
Agent and is not to be construed as a representation by Administrative Agent
that there has been compliance with the Plans and Specifications or the
applicable Requirements or that the Units are free of defects in materials or
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workmanship. Borrower may make or cause to be made such other independent
inspections as Borrower may desire for its own protection. Borrower hereby
appoints and authorizes Administrative Agent, as Borrower's agent and
attorney-in-fact, to record any notices of completion, cessation of labor, and
other notices that Administrative Agent determines to be necessary to record to
protect any interest of Administrative Agent under the Loan Documents. This
agency and power of attorney is coupled with an interest and is irrevocable.
Based on any such inspections, Administrative Agent shall have the right in its
sole and absolute discretion to approve or disapprove Total Costs and Unit Costs
submitted by Borrower, make revisions to the applicable Completion Percentage of
Lots Under Development and Units, determine whether the conditions set forth in
Sections 11, 12, 13, 14, 15 and 16 have been satisfied, and make revisions to
the Collateral Values and Maximum Allowed Advances applicable to any Entitled
Land, Lots Under Development, Finished Lot or Unit at any time. If the
outstanding principal amount of advances exceeds the Available Commitment as a
result of such revision, then Borrower shall be required to make a mandatory
prepayment to Administrative Agent pursuant to Section 3.17 hereof.
18.13 MISCELLANEOUS. Any inspections or determinations made by
Administrative Agent or lien waivers, receipts, or other agreements, documents,
and instruments obtained by Administrative Agent are made or obtained solely for
Administrative Agent's own benefit and not in any way for the benefit or
protection of Borrower. Administrative Agent may accept and rely on any
information from Architect, any other Person providing labor, materials, or
services for Improvements or Units, Borrower, or any other Person as to labor or
materials furnished or incorporated in the Improvements or Units and the cost
and payment therefor and as to all other matters relating to construction of
Improvements or the Units and the Project without the necessity of verifying
such information. Administrative Agent has no obligation to Borrower to ensure
compliance by Architect or any other Person in carrying out construction of the
Improvements or Units.
18.14 VERIFICATION OF COSTS. Administrative Agent shall have the right at
any time and from time to time to review and verify all costs, expenses, and
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Pees in each Budget. Based on its review and verification of costs, expenses,
and fees in each Budget, Administrative Agent shall have the right to adjust any
and all such budgeted amounts.
18.15 CROSS-COLLATERALIZATION. At Administrative Agent's request at any
time and from time to time, Borrower agrees to execute and deliver such
additional agreements, documents, and instruments as Administrative Agent
determines to be necessary or appropriate so that all Collateral shall also
secure any or all (as determined by Administrative Agent) other obligations of
Borrower to the Banks and/or so that any or all property, interests in property,
and rights to property selected by Administrative Agent securing other
obligations of Borrower to the Banks also secure the Obligations. Borrower
agrees to pay all costs, expenses, and fees incurred by Administrative Agent in
connection with any and all such cross-collateralization requests by
Administrative Agent (including, without limitation, taxes, costs, expenses, and
fees of Administrative Agent's attorneys).
18.16 ADMINISTRATIVE AGENT'S INSPECTOR(S). Borrower agrees that during
construction of Improvements and Units, Administrative Agent shall have the
right to employ an outside inspector or inspectors who shall review as agent for
Administrative Agent all construction activities undertaken in regard to
Improvements and Units and who shall prepare reports of such reviews.
Alternatively, Administrative Agent may elect to have employees of
Administrative Agent perform such reviews and prepare such reports. In addition,
the employees of Administrative Agent will review the inspection reports of any
outside inspector(s), will review Draw Requests, will perform other activities
related to Draw Requests, and will perform other activities in administering and
monitoring the Advances. Prior to the occurrence of an Event of Default or an
Unmatured Event of Default, Administrative Agent shall limit such inspections to
no more frequently than once per calendar quarter.
18.17 FURTHER ASSURANCES. Borrower shall promptly execute, acknowledge, and
deliver such additional agreements, documents, and instruments and do or cause
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to be done such other acts as Administrative Agent may reasonably request from
time to time to better assure, preserve, protect, and perfect the interest of
Administrative Agent in the Collateral and the rights and remedies of
Administrative Agent, Documentation and Syndication Agent and the Banks under
the Loan Documents.
18.18 COSTS AND EXPENSES OF BORROWER'S PERFORMANCE OF COVENANTS AND
SATISFACTION OF CONDITIONS. Borrower will perform all of its obligations and
satisfy all conditions under the Loan Documents at its sole cost and expense.
18.19 PAYMENT OF RELEASE PRICE. Borrower shall, upon the closing of a sale
of any Entitled Land, Lots Under Development, Finished Lot or Unit pay to
Administrative Agent for application to the outstanding unpaid aggregate amount
of Advances hereunder, an amount equal to the amount required under Section 7.1
for the release of such Collateral.
18.20 CONSTRUCTION AND SALES RECORDS. Borrower shall, at all times,
maintain complete and accurate records of Borrower's construction and sales
activities and shall, upon prior notice thereof by Administrative Agent, permit
Administrative Agent to review such records upon request by Administrative Agent
at any time and from time to time during regular business hours. Such records
shall include, without limitation, (i) any and all documents, instruments,
contracts and agreements relating to the construction or sale of Units or Lots
entered into by Borrower with or for the benefit of purchasers, contracts,
subcontractors, or other Persons, as applicable, (ii) lien waivers and releases
with respect to all construction in place, (iii) requests for disbursement and
voucher submitted by contracts, subcontractors, or other Persons, and (iv) all
permits, licenses and approvals necessary for the continuation and completion of
construction.
18.21 GUARANTEES. Borrower shall cause each wholly owned (direct or
indirect) Subsidiary of Meritage now existing or hereinafter created to execute
the Guarantee and satisfy the conditions set forth in Section 10.1(c), unless
Administrative Agent agrees in writing that such Subsidiary need not execute the
Guarantee.
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18.22 SERVICES. To the extent requested by Administrative Agent, Borrower
shall provide to Administrative Agent satisfactory evidence, which may be in the
form of letters from local utility and other service companies or local
Governmental Authorities, that (i) telephone service, electric power, garbage
removal, storm sewer, sanitary sewer, water, and any other services or utilities
required by Administrative Agent exist at the boundary of and parcel containing
the Lots Under Development and are available thereto, (ii) such services and
utilities are adequate to serve such property, and (iii) no conditions exist to
affect Borrower's or any subsequent owner's right to connect to, to obtain, and
to have unlimited use of such services and utilities, except for the payment of
a normal connection charge and except for payment of subsequent charges for such
services and utilities to the service or utility supplier. By requesting
inclusion of such Lots Under Development into the Borrowing Base, Borrower
represents to Administrative Agent that the foregoing conditions have been
satisfied.
18.23 CC&RS. When available, Borrower shall deliver to Administrative Agent
the CC&Rs for each Subdivision for review and approval by Administrative Agent
in its reasonable discretion.
SECTION 19. NEGATIVE COVENANTS
Until the Commitment terminates in full and the Obligations are paid and
performed in full, Borrower agrees that:
19.1 CHANGE IN CONTROL OR MANAGEMENT. Should there be a Change in Control
as to the Meritage Group, the Loan shall be immediately due and payable. In
addition, should there be a material change in management as to the Meritage
Group, the Loan shall be immediately due and payable unless the Administrative
Agent should consent to the substitute management team. The termination of both
Landon and Hilton as co-chief executive officers of Meritage shall be deemed a
material change in management.
19.2 AMENDMENTS TO ORGANIZATIONAL DOCUMENTS. No member of the Meritage
Group hall amend its organizational documents if the result thereof could result
in the occurrence directly or indirectly of a Material Adverse Change.
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19.3 FINANCIAL COVENANTS. Borrower shall not permit:
(a) MINIMUM LIQUIDITY. The Meritage Group's Liquidity at any time to
be less than $7,000,000.00.
(b) MAXIMUM LEVERAGE. The ratio of (a) the Meritage Group's
consolidated Liabilities, minus Subordinated Debt to (b) Adjusted Tangible
Net Worth, to be greater than 2.5 to 1.0 as of the end of the first three
fiscal quarters of each fiscal year of the Meritage Group and to be greater
than 2.25 to 1.0 as of the end of the fourth fiscal quarter of each fiscal
year of the Meritage Group, determined as of the end of each fiscal quarter
of the Meritage Group's fiscal year. For the purposes of calculating the
foregoing ratio, Subordinated Debt may not exceed twenty percent (20%) of
Adjusted Tangible Net Worth.
(c) MINIMUM FIXED CHARGE COVERAGE. The ratio of the Meritage Group's
consolidated EBITDA to total interest incurred, to be less than 2.0 to 1.0,
determined as of the end of each fiscal quarter of the Meritage Group's
fiscal year for the immediately preceding four fiscal quarters.
(d) MINIMUM ADJUSTED TANGIBLE NET WORTH. The consolidated Adjusted
Tangible Net Worth of the Meritage Group determined as of the end of each
quarter of the Meritage Group's fiscal year to be less than the sum of (a)
$50,000,000, (b) fifty percent (50%) of Consolidated Net Income for each
fiscal quarter of the Meritage Group in which Consolidated Net Income is
positive (without offset for any fiscal quarter in which the Meritage
Group's Consolidated Net Income is negative), and (c) seventy-five percent
(75%) of any new stated capital or paid in capital acquired by the Meritage
Group commencing January 1, 2000.
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(e) GUARANTIES. The Meritage Group to make or suffer to exist any
Contingent Obligation (including, without limitation, any Contingent
Obligation with respect to the obligations of a Subsidiary or joint venture
that is not a Loan Party) or otherwise assume, guarantee or in any way
become contingently liable or responsible for obligations of any other
Person, whether by agreement to purchase those obligations of any other
Person, or by agreement for the furnishing of funds through the purchase of
goods, supplies or services (whether by way of stock purchase, capital
contribution, advance or loan) for the purpose of paying or discharging the
obligations of any other Person that, in the aggregate, exceeds twenty
percent (20%) of the consolidated Adjustable Tangible Net Worth of the
Meritage Group.
Any failure to comply with the foregoing financial covenants shall
constitute an Event of Default.
19.4 MERGERS, CONSOLIDATIONS, SALES OF ASSETS. The Meritage Group shall not
merge into or consolidate with any other Person, or permit any other Person to
merge into or consolidate with it, or sell, transfer, lease or otherwise dispose
of (in one transaction or in a series of transactions) all or substantially all
of its assets, whether now owned or hereafter acquired.
19.5 BUSINESS OF BORROWER. Borrower shall not substantially change the
nature of the business conducted by the Borrower.
19.6 ERISA LIABILITIES. Borrower shall not create or suffer to exist ERISA
Liabilities in an aggregate amount in excess of $50,000.00 for all Plans, if
any, maintained by Borrower.
19.7 DISSOLUTION OR LIQUIDATION. Borrower shall not dissolve or liquidate,
or merge or consolidate with or into any other entity, or turn over the
management or operation of its property, assets or business to any other person,
firm or corporation.
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19.8 JOINT VENTURES. The Meritage Group shall not invest in any
non-consolidated joint ventures that would result in the aggregate of such joint
venture investments, whether in the form of debt or equity, exceeding twenty
percent (20%) of the Meritage Group's Tangible Net Worth.
SECTION 20. INSPECTION BY ADMINISTRATIVE AGENT
20.1 ENTER PROPERTY. Administrative Agent shall have the right, but not the
obligation, to enter at any reasonable times upon the Project to determine if
the construction of the Improvements or the Unit is in conformity with the Plans
and Specifications and all other requirements hereof and to examine and make
copies and extracts of any books, records, accounting data and other documents,
including without limitation all permits, licenses, consents and approvals of
Governmental Authorities having jurisdiction over Borrower, the Improvements and
the contractor and all subcontractors supplying labor and/or materials in
connection with the Improvements.
20.2 NO DUTY TO INSPECT. Administrative Agent shall have no duty to
supervise or inspect any construction or to inspect any books and records; any
inspection by Administrative Agent shall be for the sole purpose of protecting
Administrative Agent's security and preserving the rights of Administrative
Agent, Documentation and Syndication Agent and the Banks hereunder. Failure by
Administrative Agent to inspect any work shall not constitute a waiver of any of
Administrative Agent's rights hereunder. Inspection not followed by notice of an
Event of Default shall not constitute a waiver of any Event of Default then
existing. Any inspection by Administrative Agent shall not be a representation
by Administrative Agent that there has been or will be compliance with the Plans
and Specifications or that the construction is free from defective materials or
workmanship, nor shall any inspection by Administrative Agent constitute
approval of any certification given to Administrative Agent or relieve any
person making such certification of responsibility therefor.
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SECTION 21. WAIVER
21.1 WAIVER. Borrower waives presentment, demand, protest and notices of
protest, nonpayment, partial payment and all other notices and formalities
except as expressly called for in this Agreement. Borrower consents to and
waives notice of: (i) the granting of indulgences or extensions of time of
payment, (ii) the taking or releasing of security, and (iii) the addition or
release of persons who may be or become primarily or secondarily liable for the
Loan or any other indebtedness arising in connection with the Loan, or any part
thereof, and all in such manner and at such time as the Banks may deem
advisable.
21.2 DELAY. No delay or omission by Administrative Agent or the Banks in
exercising any right, power or remedy hereunder, and no indulgence given to
Borrower, with respect to any term, condition or provision set forth herein,
shall impair any right, power or remedy of Administrative Agent or the Banks
under this Agreement, or be construed as a waiver by Administrative Agent or the
Banks of, or acquiescence in, any Event of Default. Likewise, no such delay,
omission or indulgence by Administrative Agent or the Banks shall be construed
as a variation or waiver of any of the terms, conditions or provisions of this
Agreement. Any actual waiver by the Banks of any Event of Default shall not be a
waiver of any other prior or subsequent Event of Default or of the same Event of
Default after notice to Borrower demanding strict performance.
SECTION 22. DEFAULT
22.1 EVENT OF DEFAULT. The occurrence of any of the following events or
conditions shall constitute an Event of Default under this Agreement:
(a) Any failure to pay any principal or interest under the Notes when
the same shall become due and payable and such failure continues for ten
(10) days after notice thereof to Borrower, or the failure to pay any other
sum due under the Notes, this Agreement or any other Loan Document when the
same shall become due and payable and such failure continues for ten (10)
days after notice thereof to Borrower. No notice, however, shall be
required after maturity of any portion of the Notes.
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(b) Any failure or neglect to perform or observe any of the covenants,
conditions or provisions of this Agreement, the Notes or any other Loan
Document (other than a failure or neglect described in one or more of the
other provisions of this Paragraph 22.1) and such failure or neglect either
cannot be remedied or, if it can be remedied, it continues unremedied for a
period of thirty (30) days after notice thereof to Borrower.
(c) Any warranty, representation or statement contained in this
Agreement, in the Notes or in any other Loan Document, or made or furnished
to Administrative Agent or the Banks by or on behalf of Borrower, that
shall be or shall prove to have been false when made or furnished.
(d) The filing by Borrower, any endorser of the Notes, or any
guarantor of the Loan (or against Borrower or such endorser or guarantor to
which Borrower or such endorser or guarantor acquiesces or that is not
dismissed within sixty (60) days after the filing thereof) of any
proceeding under the federal bankruptcy laws now or hereafter existing or
any other similar statute now or hereafter in effect; the entry of an order
for relief under such laws with respect to Borrower or such endorser or
guarantor; or the appointment of a receiver, trustee, custodian or
conservator of all or any part of the assets of Borrower or such endorser
or guarantor.
(e) The insolvency of Borrower, any endorser of the Notes or any
guarantor of the Loan; or the execution by Borrower or such endorser or
guarantor of an assignment for the benefit of creditors; or the convening
by Borrower or such endorser or guarantor of a meeting of its creditors, or
any class thereof, for purposes of effecting a moratorium upon or extension
or composition of its debts; or the failure of Borrower or such endorser or
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guarantor to pay its debts as they mature; or if Borrower or such endorser
or guarantor is generally not paying its debts as they mature.
(f) The admission in writing by Borrower, any endorser of the Notes or
any guarantor of the Loan that it is unable to pay its debts as they mature
or that it is generally not paying its debts as they mature.
(g) The liquidation, termination or dissolution of Borrower or any
guarantor of the Loan.
(h) Any levy or execution upon, or judicial seizure of, any portion of
any collateral or security for the Loan.
(i) Any attachment or garnishment of, or the existence or filing of
any lien or encumbrance, other than any lien or encumbrance permitted by
the Deed of Trust, against any portion of any collateral or security for
the Loan, that is not removed or released within thirty (30) days after its
creation.
(j) The institution of any legal action or proceedings to enforce any
lien or encumbrance upon any portion of any collateral or security for the
Loan, that is not dismissed within thirty (30) days after its institution.
(k) The occurrence of any event of default and the expiration of any
applicable notice and cure period under the Notes, any of the Loan
Documents or any other document or instrument executed or delivered in
connection with the Loan.
(l) The occurrence of any event of default and the expiration of any
applicable notice and cure period under any document or instrument given by
Borrower, by any entity owned by Borrower or, if Borrower is a corporation,
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partnership or trust, by any entity owned by the same persons or entities
that own Borrower, in connection with any other indebtedness of Borrower or
such entity to the Banks.
(m) The occurrence of any adverse change in the financial condition of
Borrower or Guarantor that Agent, in its reasonable discretion, deems
material, or if Agent in good faith shall believe that the prospect of
payment or performance of the Loan is impaired.
(n) Either of (A) the occurrence of any one or more Reportable Events
or (B) a failure to make a "required payment" under the provisions of
Section 412(n)(1) of the Code shall have occurred with respect to any Plan
or Plans and the occurrence of either (A) or (B) above shall have resulted
in any of (1) liability of the Borrower to the PBGC or to one or more Plans
in an aggregate amount exceeding $50,000.00, (2) the termination of the
respective Plan or Plans by the PBGC, (3) the appointment by the
appropriate United States District Court of a trustee to administer such
Plan or Plans or (4) for the imposition of a Lien in favor of such Plan or
Plans.
(o) The occurrence of any default or event of default, and the
expiration of any applicable notice and cure period, under any Significant
Debt Agreement.
(p) Any failure to comply with the Financial Covenants.
22.2 REMEDIES. Upon the occurrence of any Event of Default and at any time
while such Event of Default is continuing, Administrative Agent and/or the Banks
may do one or more of the following:
(a) Cease making Advances and declare the Loan and all other
indebtedness of Borrower hereunder immediately due and payable, without
notice or demand;
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(b) Proceed to protect and enforce its rights and remedies under this
Agreement, the Note, and all Loan Documents;
(c) Take over and complete construction of the Improvements or the
Units by or through any agent, contractor or subcontractor of its
selection, and make Advances in payment of the costs, expenses, fees,
attorneys' fees and other charges incurred in connection with such taking
over and completion, together with reasonable allowances for supervision;
and
(d) Avail itself of any other relief to which Administrative Agent or
the Banks may be legally or equitably entitled.
22.3 ENFORCEMENT COSTS. Borrower shall pay all costs and expenses,
including without limitation costs of title searches and title policy
commitments, Uniform Commercial Code searches, court costs and reasonable
outside attorneys' fees, incurred by Administrative Agent and the Banks in
enforcing payment and performance of the Loan and the other indebtedness and
obligations of Borrower hereunder or in exercising the rights and remedies of
Administrative Agent and the Banks hereunder. All such costs and expenses shall
be secured by all Loan Documents. In the event of any court proceedings, court
costs and attorneys' fees shall be set by the court and not by jury and shall be
included in any judgment obtained by Administrative Agent and the Banks.
SECTION 23. ACTION UPON AGREEMENT
23.1 NO THIRD PARTY BENEFICIARIES. This Agreement is made for the sole
protection and benefit of the parties hereto and no other person or organization
shall have any right of action hereon.
23.2 INTEGRATION. This Agreement and the other Loan Documents embody the
entire Agreement of the parties with regard to the subject matter hereof. There
are no representations, promises, warranties, understandings or agreements
expressed or implied, oral or otherwise, in relation thereto, except those
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expressly referred to or set forth herein. Borrower acknowledges that the
execution and delivery of this Agreement is its free and voluntary act and deed,
and that said execution and delivery have not been induced by, nor done in
reliance upon, any representations, promises, warranties, understandings or
agreements made by Administrative Agent, the Banks, their agents, officers,
employees or representatives.
23.3 MODIFICATIONS. No promise, representation, warranty or agreement made
subsequent to the execution and delivery of this Agreement by either party
hereto, and no revocation, partial or otherwise, or change, amendment or
addition to, or alteration or modification of, this Agreement shall be valid
unless the same shall be in writing signed by all parties hereto.
23.4 NO JOINT VENTURE. Administrative Agent, the Banks and Borrower each
have separate and independent rights and obligations under this Agreement.
Nothing contained herein shall be construed as creating, forming or constituting
any partnership, joint venture, merger or consolidation of Borrower and
Administrative Agent or the Banks for any purpose or in any respect.
SECTION 24. GENERAL
24.1 WAIVER OF GUARANTY AND SURETYSHIP DEFENSES. Each Borrower hereby
waives to the fullest extent permissible by law the right to plead any statute
of limitations as a defense to any demand secured hereby. Except as set forth
herein, each Borrower waives any requirements of presentment, demands for
payment, notices of nonpayment or late payment, protest, notices of protest,
notices of dishonor, and all other formalities. No offset or claim that any
Borrower now or may in the future have against Administrative Agent or the Banks
shall relieve any Borrower from paying installments or performing any other
obligation herein or secured hereby. Each Borrower waives all rights or
privileges it might otherwise have to require Administrative Agent or the Banks
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to proceed against or exhaust any collateral securing any promissory note or to
proceed against any guarantor of such indebtedness, or to pursue any other
remedy available to Administrative Agent or the Banks in any particular manner
or order under the legal or equitable doctrine or principle of marshalling or
suretyship, and each Borrower further agrees that Administrative Agent or the
Banks may proceed against any or all of the collateral in such order and manner
as Administrative Agent or the Banks in their sole discretion may determine. To
the extent that any court of competent jurisdiction determines that any Borrower
is a guarantor, surety or accommodation party with respect to any portion of the
Obligations (the "Guaranteed Obligations"), or has subjected its property to
secure the indebtedness of another, such Borrower hereby expressly waives the
benefits of the provisions of A.R.S. ss.12-1641, ET SEQ., 16 Arizona Rules of
Civil Procedure, Rule 17(f), A.R.S. ss.ss.12-1644, 33-722 and 33-814, and waives
any defense arising by reason of any disability or other defense of such
Borrower or by reason of the cessation from any cause whatsoever of the
liability of such Borrower, and, although it is the intention of all parties to
this Agreement that this Agreement and the other Loan Documents will be governed
by, and construed in accordance with, the laws of the State of Arizona, without
giving effect to its conflicts of laws rules, to the extent that any court of
competent jurisdiction applies the laws of the State of California to all or any
part of the Agreement or the Loan Documents or with respect to any Borrower,
each Borrower hereby unconditionally and irrevocably waives any rights and
defenses such Borrower may have because any Guaranteed Obligations is secured by
real property. These rights and defenses include, without limitation, any rights
or defenses based upon Sections 2899, 3433, 580a, 580b, 580d or 726 of the
California Code of Civil Procedure, and any comparable provisions of the laws of
any other jurisdiction and all other suretyship defenses it otherwise might or
would have under California law or other applicable law. Without limiting the
provisions of this Section 24.1, the "Joint Borrower Provisions" attached hereto
as SCHEDULE 24.1 are incorporated herein by this reference and each Borrower
agrees to be bound thereby.
24.2 SURVIVAL. This Agreement shall survive the making of the Loan and
shall continue so long as any part of the Loan, or any extension or renewal
thereof, remains outstanding.
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24.3 DISCRETIONARY RIGHTS. All rights, powers and remedies granted
Administrative Agent and the Banks herein, or otherwise available to
Administrative Agent and the Banks, are for the sole benefit and protection of
Administrative Agent and the Banks, and except as otherwise provided herein
Administrative Agent and the Banks may exercise any such right, power or remedy
at their option and in their sole and absolute discretion without any obligation
to do so. In addition, if, under the terms hereof, Administrative Agent and the
Banks are given two or more alternative courses of action, Administrative Agent
and the Banks may elect any alternative or combination of alternatives, at its
option and in its sole and absolute discretion. All monies advanced by the Banks
under the terms hereof and all amounts paid, suffered or incurred by the Banks
in exercising any authority granted herein, including reasonable attorneys'
fees, shall be secured by the Loan Documents, shall bear interest at the highest
rate payable on the Loan until paid, and shall be due and payable by Borrower to
the Banks immediately without demand.
24.4 INDEMNITY. Borrower shall defend, indemnify, and hold Administrative
Agent, Documentation and Syndication Agent and each Bank and their officers,
directors, employees, and agents harmless from and against all claims, costs,
expenses, actions, suits, proceedings, losses, damages, and liabilities of any
kind whatsoever, including, but not limited to, attorneys' fees and expenses,
arising out of any matter relating, directly or indirectly, (i) to the Loan,
(ii) to the ownership, development, construction or sale of the Collateral, or
(iii) to any financial statements, reports, projections, and other information
provided by Borrower or any other Loan Party with respect to the business and
operations of the Meritage Group, in each case whether resulting from internal
disputes of Borrower, disputes between Borrower and any guarantor, or whether
involving other third parties or entities (including, without limitation, other
Banks) or out of any matter whatsoever related to this Agreement, the loan
documents, or any property encumbered thereby, but excluding any claim or
liability which results as the direct result of the gross negligence or willful
misconduct of Administrative Agent, Documentation and Syndication Agent and the
Banks or the breach by Administration Agent and the Banks of this Agreement.
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This indemnity provision shall continue in full force and effect and shall
survive not only the making of the Loan but shall also survive the repayment of
the Loan and the performance of all of Borrower's other obligations hereunder.
24.5 JOINT AND SEVERAL. If Borrower consists of more than one person or
entity their liability shall be joint and several. The provisions hereof shall
apply to the parties according to the context thereof and without regard to the
number or gender of words or expressions used.
24.6 TIME OF ESSENCE. Time is expressly made of the essence of this
Agreement.
24.7 NOTICES. Notices and other communications provided for herein shall be
in writing and shall be delivered by hand or overnight courier service or mailed
as follows:
(a) if to the Borrower:
MONTEREY HOMES CONSTRUCTION, INC.
MONTEREY HOMES ARIZONA, INC.
CHANDLER 110, LLC
MERITAGE HOMES OF NORTHERN CALIFORNIA, INC.
6613 North Scottsdale Road, Suite 200
Scottsdale, Arizona 85259
Attention: Larry W. Seay, Chief Financial Officer
(b) if to the Administrative Agent:
NORWEST BANK ARIZONA, NATIONAL ASSOCIATION
100 West Washington, 11th Floor
Phoenix, Arizona 85003
Attention: Regional Real Estate Group, MAC S4101-110
(c) if to a Bank, to it at its address (or telecopy number) set forth
in Schedule 2.1 or in any assignment and acceptance pursuant to which such
Bank shall have become a party hereto.
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<PAGE>
All notices and other communications given to any party hereto in accordance
with the provisions of this Agreement shall be deemed to have been given on the
date of receipt if delivered by hand or overnight courier service, or on the
date two (2) Business Days after dispatch by certified or registered mail if
mailed, in each case delivered, sent or mailed (properly addressed) to such
party as provided in this Section or in accordance with the latest unrevoked
direction from such party given in accordance with this Section.
24.8 PAYMENT OF COSTS. Borrower shall pay all costs and expenses arising
from the preparation of this Agreement, the closing of the Loan, the making of
Advances, the issuing of Letters of Credit, and the monitoring and
administration of the Loan, including but not limited to title insurance
premiums, other title company charges, recording and filing fees, costs of
Uniform Commercial Code searches, Administrative Agent and the Banks's
reasonable in-house and outside attorneys' fees, Administrative Agent's
reasonable processing and closing fees, Administrative Agent's reasonable
inspection fees, appraisal and appraisal review fees, any intangible or
recording taxes and any other charges that may be imposed on Administrative
Agent or the Banks as a result of this transaction.
24.9 CHOICE OF LAW. This Agreement shall be governed by and construed
according to the laws of the State of Arizona.
24.10 SUCCESSORS. Except as otherwise provided herein, this Agreement shall
be binding upon, and shall inure to the benefit of, the parties hereto and their
successors and assigns.
24.11 HEADINGS. The headings or captions of sections in this Agreement are
for reference only, do not define or limit the provisions of such sections, and
shall not affect the interpretation of this Agreement.
24.12 PARTICIPATIONS AND ASSIGNMENTS. Each Bank, at any time, shall have
the right (subject to the terms of the Co-Lender Agreement) to sell, assign,
transfer, negotiate or grant participation interests in the Loan and in any
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<PAGE>
documents and instruments executed in connection herewith. In connection with
any assignment by a Bank of all or a portion of its interest in the Loan (i)
except in the case of an assignment to a Bank or an affiliate of any Bank, or if
an Unmatured Event of Default or an Event of Default shall be continuing,
Borrower must give its prior written consent to such assignment (which consent
shall not be unreasonably withheld or delayed), (ii) the amount of the
Commitment of the assigning Bank subject to each such assignment shall not be
less than $10,000,000.00 or such lesser amount if such amount is the entire
Commitment of the assigning Bank, and (iii) any assignee shall have a net worth
of at least $350,000,000 and total assets of a least $2.5 billion. Within five
Business Days after receipt of notice of any assignment of a Bank's interest the
Loan, the Borrower shall execute and deliver to Administrative Agent, in
exchange for the surrendered Note or Notes (A) a new Note or Notes to the order
of such assigning Bank in a principal amount equal to the applicable Commitment
retained by it, if any, and (B) a new Note or Notes, to the order of the
assignee Bank in a principal amount equal to the applicable Commitment assigned
to it. Such new Note or Notes shall be in an aggregate principal amount equal to
the aggregate principal amount of such surrendered Note or Notes; such new Notes
shall be dated the date of the surrendered Notes which they replace and shall
otherwise be in substantially the form of EXHIBIT "A". Canceled Notes shall be
returned to the Borrower. Each Bank is authorized to furnish to any participant
or prospective participant any information or document that such Bank may have
or obtain regarding the Loan, Borrower or any guarantor of the Loan.
24.13 SEVERABILITY. The illegality or unenforceability of any provision of
this Agreement or any instrument or agreement required hereunder shall not in
any way affect or impair the legality or enforceability of the remaining
provisions of this Agreement or any instrument or agreement required hereunder.
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<PAGE>
24.14 ARBITRATION PROVISIONS.
(a) ARBITRATION.
(i) Except for "Core Proceedings" under the United States
Bankruptcy Code, the Administrative Agent, Banks and Borrower agree to
submit to binding arbitration all claims, disputes and controversies
between or among them, whether in tort, contract or otherwise (and
their respective employees, officers, directors, attorneys, and other
agents) arising out of or relating to in any way the Loan and related
Loan Documents which are the subject of this Agreement and its
negotiation, execution, collateralization, administration, repayment,
modification, extension, substitution, formation, inducement,
enforcement, default or termination. Any arbitration proceeding will
(1) proceed in Phoenix, Arizona; (2) be governed by the Federal
Arbitration Act (Title 9 of the United States Code); and (3) be
conducted in accordance with the Commercial Arbitration rules of the
American Arbitration Association("AAA").
(ii) The arbitration requirement does not limit the right of any
party to (A) foreclose against real or personal property collateral;
(B) exercise self-help remedies relating to collateral or proceeds of
collateral such as repossession; or (C) obtain provisional ancillary
remedies such as replevin, injunctive relief, attachment or the
appointment of a receiver, before, during or after the pendency or any
arbitration proceeding. This exclusion does not constitute a waiver of
the right or obligation of any party to submit any dispute to
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<PAGE>
arbitration, including those arising from the exercise of the actions
detailed in sections (A), (B) and (C) of this paragraph.
(iii) Any arbitration proceeding will be before a single
arbitrator selected according to the Commercial Arbitration Rules of
the AAA. The arbitrator will be a neutral attorney who has practiced
in the area of commercial law for a minimum of ten years. The
arbitrator will determine whether or not an issue is arbitratable and
will give effect to the statutes of limitation in determining any
claim. Judgment upon the award rendered by the arbitrator may be
entered in any court having jurisdiction.
(b) MOTION PRACTICE. In any arbitration proceeding the arbitrator will
decide (by documents only or with a hearing at the arbitrator's discretion)
any pre- hearing motions which are similar to motions to dismiss for
failure to state a claim or motions for summary adjudication.
(c) DISCOVERY. In any arbitration proceeding discovery will be
permitted and will be governed by the Arizona Rules of Civil Procedure. All
discovery must be completed no later than 20 days before the hearing date
and within 180 days of the commencement of arbitration proceedings. Any
requests for an extension of the discovery periods, or any discovery
disputes, will be subject to final determination by the arbitrator upon a
showing that the request for discovery is essential for the party's
presentation and that no alternative means for obtaining information is
available.
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<PAGE>
(d) PAYMENT OF ARBITRATION COSTS AND FEES. The arbitrator shall award
costs and expenses of the arbitration proceeding in accordance with the
provision of this Agreement, the Note and/or other Loan Documents.
24.15 JURY WAIVER. BORROWER, ADMINISTRATIVE AGENT, CO-AGENT AND THE BANKS
HEREBY VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT
TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER BASED UPON
CONTRACT, TORT OR OTHERWISE) BETWEEN OR AMONG BORROWER, ADMINISTRATIVE AGENT,
CO-AGENT AND THE BANKS ARISING OUT OF OR IN ANY WAY RELATED TO THE NOTE, THIS
DOCUMENT OR ANY OTHER RELATED DOCUMENT OR ANY RELATIONSHIP BETWEEN
ADMINISTRATIVE AGENT, THE BANKS AND BORROWER. THIS PROVISION IS A MATERIAL
INDUCEMENT TO THE BANKS TO PROVIDE THE FINANCING DESCRIBED HEREIN OR IN THE
OTHER RELATED DOCUMENTS.
IN WITNESS WHEREOF, these presents are executed as of the date indicated
above.
MONTEREY HOMES CONSTRUCTION, INC.,
an Arizona Corporation
By: /s/ Larry W. Seay
-------------------------------------
Name: Larry W. Seay
-----------------------------------
Title: Vice President - Finance & CFO
----------------------------------
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<PAGE>
MONTEREY HOMES ARIZONA, INC.,
an Arizona corporation
By: /s/ Larry W. Seay
-------------------------------------
Name: Larry W. Seay
-----------------------------------
Title: Vice President - Finance & CFO
----------------------------------
CHANDLER 110, LLC,
an Arizona limited liability company
BY: MONTEREY HOMES CONSTRUCTION, INC.,
an Arizona corporation, Member
By: /s/ Larry W. Seay
-------------------------------------
Name: Larry W. Seay
-----------------------------------
Title: Vice President - Finance & CFO
----------------------------------
MERITAGE HOMES OF NORTHERN CALIFORNIA,
INC., a California corporation
By: /s/ Larry W. Seay
-------------------------------------
Name: Larry W. Seay
-----------------------------------
Title: Vice President - Finance & CFO
----------------------------------
BORROWER
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<PAGE>
NORWEST BANK ARIZONA, NATIONAL
ASSOCIATION, a national banking
association
By: /s/ Kevin Kosan
-------------------------------------
Name: Kevin Kosan
-----------------------------------
Title: Vice President
----------------------------------
ADMINISTRATIVE AGENT AND BANK
CALIFORNIA BANK & TRUST, a California
banking corporation
By: /s/ Eileen E. Porter
-------------------------------------
Name: Eileen E. Porter
-----------------------------------
Title: Vice President
----------------------------------
DOCUMENTATION AND SYNDICATION
AGENT AND BANK
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<PAGE>
SCHEDULE 3.1
COMMITMENTS OF THE BANKS
as to the Loan
as of _____________, 1999
INITIALLY, THE COMMITMENTS OF THE BANKS SHALL BE AS FOLLOWS:
BANK % COMMITMENT
---- ------- -----------
1. Norwest Bank Arizona, National Association 54.6875% $35,000,000
2. California Bank & Trust 45.3125% $29,000,000
Maximum Commitment 100% $64,000,000
On February 17, 2000, the commitment of the Banks shall be as set forth below if
both of the following is satisfied: (i) the CB&T Facility has been fully paid
and all further commitments to provide credit thereunder have terminated and
(ii) no Unmatured Event of Default or Event of Default has occurred and is
continuing. If such events have not occurred, the commitment of California Bank
& Trust shall be increased only in the sole and absolute discretion of
California Bank & Trust.
BANK % COMMITMENT
---- ------- -----------
1. Norwest Bank Arizona, National Association 50.0% $35,000,000
2. California Bank & Trust 50.0% $35,000,000
Maximum Commitment 100% $70,000,000
<PAGE>
ADDRESSES
1. NORWEST BANK ARIZONA, NATIONAL ASSOCIATION
100 West Washington, 11th Floor
Phoenix, Arizona 85003
Attention: Regional Real Estate Group, MAC S4101-110
2. CALIFORNIA BANK & TRUST
11622 El Camino Real, Suite 200
San Diego, California 92130
Attention: Peggy Standefer, Esq.
with a copy to:
CB&T REAL ESTATE FINANCE
3101 North Central Avenue, Suite 520
Phoenix, Arizona 85012
Attention: Mark Young
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<PAGE>
SCHEDULE 24.1
JOINT BORROWER PROVISIONS
1. Administrative Agent and the Banks are entitled to rely, and shall be
exonerated from any liability for relying upon, any Draw Request, request for
Letter of Credit or similar request made by any Borrower without the need for
any consent or other authorization of any other Borrower and upon any
information or certificate provided on behalf of any Borrower by an officer,
partner, manager or other representative of such Borrower.
2. As further described in the Agreement, the parties hereto intend that
all of the Obligations shall constitute one indebtedness, and that each Borrower
shall constitute a borrower (and not a guarantor, surety or accommodation
party), with respect to all of the Obligations. In the event that (and only to
the extent that), notwithstanding the contrary intent of the parties, any court
of competent jurisdiction determines that any Borrower is a guarantor, surety or
accommodation party with respect to any portion of the Obligations, or has
granted a lien or security interest on its property to secure the debt of
another, the waivers and other provisions of 24.1 of the Agreement and this
Schedule 24.1 shall apply to such Borrower in connection with the Guaranteed
Obligations.
2.1 Each Borrower consents and agrees that Administrative Agent, for
the benefit of Banks, may, at any time and from time to time, agree with any one
Borrower, without notice or demand to the other Borrowers, and without affecting
the enforceability of or security for the Guaranteed Obligations under any Loan
Document, to:
(a) supplement, modify, amend, extend, renew, or otherwise change the
time for payment or the terms of the Guaranteed Obligations or any part
thereof, including any increase or decrease of the rate(s) of interest
thereon;
(b) supplement, modify, amend or waive, or enter into or give any
agreement, approval or consent with respect to, the Guaranteed Obligations
<PAGE>
or any part thereof or any of the Loan Documents or any additional security
or guaranties, or any condition, covenant, default, remedy, right,
representation or term thereof or thereunder;
(c) accept new or additional instruments, documents or agreements
relative to any of the Loan Documents or the Guaranteed Obligations or any
part thereof;
(d) accept partial payments on the Guaranteed Obligations;
(e) receive and hold additional security or guaranties for the
Guaranteed Obligations or any part thereof;
(f) release, reconvey, terminate, waive, abandon, subordinate,
exchange, substitute, transfer and enforce any security or guaranties for
the Guaranteed Obligations, and apply any security and direct the order or
manner of sale thereof as Administrative Agent, on behalf of Banks, in its
sole and absolute discretion may determine;
(g) release any Person or any guarantor from any personal liability
with respect to the Guaranteed Obligations or any part thereof,
(h) settle, release on terms satisfactory to Administrative Agent and
Banks or by operation of applicable laws or otherwise liquidate or enforce
any Guaranteed Obligations and any security or guaranty therefor in any
manner, consent to the transfer of any security and bid and purchase at any
sale; and
(i) consent to the merger, change or any other restructuring or
termination of the corporate existence of any Borrower or any other Person,
and correspondingly restructure the Guaranteed Obligations, and any such
merger, change, restructuring or termination shall not affect the liability
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<PAGE>
of the other Borrowers or the continuing existence of any Lien securing the
Guaranteed Obligations under any Loan Document to which such Borrowers are
a party or the enforceability hereof or thereof with respect to all or any
part of the Guaranteed Obligations.
2.2 Upon the occurrence of and during the continuance of any Event of
Default, Administrative Agent and Banks may enforce each Loan Document
independently as to each Borrower and independently of any other remedy or
security Administrative Agent and Banks at any time may have or hold in
connection with the Guaranteed Obligations, and it shall not be necessary for
Administrative Agent and Banks to marshal assets in favor of any of the
Borrowers or any other Person or to proceed upon or against and/or exhaust any
other security or remedy before proceeding to enforce such Loan Document. Each
of the Borrowers expressly waives any right to require Administrative Agent or
any Bank to marshal assets in favor of any Borrower or any other Person or to
proceed against any other Person or any Collateral provided by any other Person,
and agrees that Administrative Agent and Banks may proceed against any Persons
and/or Collateral in such order as they shall determine in their sole and
absolute discretion. The Administrative Agent and Banks may file a separate
action or actions against any Borrower, whether action is brought or prosecuted
with respect to any other security or against any other Person, or whether any
other Person is joined in any such action or actions. Each Borrower expressly
waives the benefit of any statute(s) of limitations affecting its liability
under the Loan Documents or the enforcement of the Guaranteed Obligations or
created or granted by any Loan Document. The rights of Administrative Agent and
Banks hereunder and under the Agreement shall be reinstated and revived, and the
enforceability of the Agreement shall continue, with respect to any amount at
any time paid on account of the Obligations which thereafter shall be required
to be restored or returned by Administrative Agent or Bank upon the bankruptcy,
insolvency or reorganization of any Borrower or any other Person, or otherwise,
all as though such amount had not been paid. The enforceability of the Loan
Documents at all times shall remain effective as to each Borrower as to the
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<PAGE>
Guaranteed Obligations of such Borrower even though such Guaranteed Obligations,
including any part thereof may be or hereafter may become invalid or otherwise
unenforceable as against any other Borrower or any other Person and whether or
not any other Borrower or any other Person shall have any personal liability
with respect thereto.
2.3 Each Borrower expressly waives in respect of the Guaranteed
Obligations any and all defenses now or hereafter arising or asserted by reason
of (a) any disability or other defense of any other Borrower or any other Person
with respect t o the Guaranteed Obligations, (b) the unenforceability or
invalidity of any security or guaranty for the Guaranteed Obligations or the
lack of perfection or continuing perfection or failure of priority of any
security for the Guaranteed Obligations, (c) the cessation for any cause
whatsoever of the ability of any other Borrower or any other Person (other than
by reason of the full payment and performance of all Obligations), (d) any
failure of Administrative Agent or any Bank to marshal assets in favor of any of
the other Borrowers or any other Person, (e) except as otherwise required by law
or as provided in any Loan Document, any failure of Administrative Agent or any
Bank to give notice of sale or other disposition of Collateral to any other
Borrower or any other Person or any defect in any notice that may be given in
connection with any sale or disposition of Collateral, (f) except as otherwise
required by law or as provided in any Loan Document, any failure of
Administrative Agent or any Bank to comply with applicable laws in connection
with the sale or other disposition of any Collateral or other security for any
Obligation, including, without limitation, any failure of Administrative Agent
or any Bank to conduct a commercially reasonable sale or other disposition of
any Collateral or other security for any Guaranteed Obligation, (g) any act or
omission of Administrative Agent or any Bank or others that directly or
indirectly results in or aids the discharge or release of any other Borrower or
any other Person or any other security or guaranty for the Guaranteed
Obligations by operation of law or otherwise, (h) any law which provides that
the obligation of a surety or guarantor must neither be larger in amount nor in
other respects more burdensome than that of the principal or which reduces a
surety's or guarantor's obligation in proportion to the principal obligation,
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<PAGE>
(i) any failure of Administrative Agent or any Bank to file or enforce a claim
in any bankruptcy or other proceeding with respect to any Person, (j) the
election by Administrative Agent or any Bank, in any bankruptcy proceeding of
any Person, of the application or non-application of Section 1111(b)(2) of the
United States Bankruptcy Code, (k) any extension of credit or the grant of any
Lien under Section 364 of the United States Bankruptcy Code, (l) any use of cash
collateral under Section 363 of the United States Bankruptcy Code, (m) any
agreement or stipulation with respect to the provision of adequate protection in
any bankruptcy proceeding of any Person, (n) the avoidance of any Lien in favor
of Administrative Agent or Banks for any reason, (o) any bankruptcy, insolvency,
reorganization, arrangement, readjustment of debt, liquidation or dissolution
proceeding commenced by or against any Person, including any discharge of, or
bar or stay against collecting, all or any of the Guaranteed Obligations (or any
interest thereon) in or as a result of any such proceeding, or (p) to the extent
permitted, the benefits of any form of one-action rule.
2.4 Each Borrower waives all rights and defenses that such Borrower
may have because any Guaranteed Obligation is secured by real property. This
means, among other things:
(1) Administrative Agent and Banks may collect from such Borrower
and/or foreclose on any Collateral pledged by such Borrower without fast
foreclosing on any real or personal property collateral pledged by any
other Borrower (or by any other Person) with respect to any such Guaranteed
Obligation.
(2) If Administrative Agent and/or Banks foreclose on any real
property collateral pledged by such Borrower or any other Borrower (or by
any other Person) with respect to any such Guaranteed Obligation:
(A) The amount of such Guaranteed Obligation may be reduced only
by the price for which that Collateral is sold at the foreclosure
sale, even if the Collateral is worth more than the sale price.
-5-
<PAGE>
(B) Administrative Agent and Banks may collect from such Borrower
and/or foreclose on any Collateral pledged by such Borrower even if
Administrative Agent and/or any Bank, by foreclosing on the real
property Collateral, has destroyed any right such Borrower may have to
collect from any other Borrower (or from any other Person who pledged
such Collateral).
This is an unconditional and irrevocable waiver of any rights and defenses such
Borrower may have because any Guaranteed Obligation is secured by real property.
These rights and defenses include, but are not limited to, any rights or
defenses based upon Section 580a, 580b, 580d or 726 of the California Code of
Civil Procedure, and any comparable provisions of the laws of any other
jurisdiction and all other suretyship defenses it otherwise might or would have
under California law or other applicable law.
2.5 Each Borrower waives all rights and defenses arising out of an
election of remedies by Administrative Agent and/or Banks, even though that
election of remedies, such as a non-judicial foreclosure with respect to
security for a Guaranteed Obligation, has destroyed such Borrower's rights of
subrogation and reimbursement against the principal by the operation of Section
580d of the California Code of Civil Procedure or otherwise.
2.6 Without limiting the generality of the foregoing, in the event
that all or any part of the Guaranteed Obligations at any time are secured by
one or more Deeds of Trust, each Borrower authorizes Administrative Agent and
Banks, upon the occurrence of and during the continuance of any Event of
Default, at their sole option, without notice or demand and without affecting
any Obligations, the enforceability of the Guaranteed Obligations under the
Agreement, or the validity or enforceability of any Liens of Administrative
Agent and Banks on any Collateral securing the Guaranteed Obligations, to
foreclose any or all of such Deeds of Trust by judicial or non-judicial sale.
2.7 Notwithstanding anything to the contrary elsewhere contained
herein or in any other Loan Document to which any Borrower is a party, each
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<PAGE>
Borrower hereby waives with respect to each other Borrower and its respective
successors and assigns (including any surety) and any other party any and all
rights at law or in equity, to subrogation, to reimbursement, to exoneration, to
contribution, to setoff or to any other rights that could accrue to a surety
against a principal, to a guarantor against a maker or obligor, to an
accommodation party against the party accommodated, or to a holder or transferee
against a maker and which each Borrower may have or hereafter acquire against
any other Borrower or any other party in connection with or as a result of any
Borrower's execution, delivery and/or performance of the Agreement or any other
Loan Document to which any such Borrower is a party until payment in full of all
Guaranteed Obligations. Each Borrower agrees that it shall not have or assert
any such rights against any other Borrower or any such Borrower's successors and
assigns or any other Person (including any surety), either directly or as an
attempted setoff to any action commenced against such Borrower by such other
Borrower (as borrower or in any other capacity) or any other Person. Each
Borrower hereby acknowledges and agrees that this waiver is intended to benefit
Administrative Agent and Banks and shall not limit or otherwise affect any of
the Borrowers' liability hereunder under any other Loan Document to which any
Borrower is a party, or the enforceability hereof or thereof.
2.8 Without limiting the generality of the foregoing and to the extent
otherwise applicable, each Borrower hereby waives discharge by waiving all
defenses based on suretyship or impairment of collateral securing the Guaranteed
Obligations.
3. Each Borrower warrants and agrees that each of the waivers and consents
set forth herein is made with full knowledge of its significance and
consequences, with the understanding that events giving rise to any defense
waived may diminish, destroy or otherwise adversely affect rights which each
Borrower otherwise may have against the other Borrowers, Administrative Agent,
Banks, or others, or against any Collateral securing the Guaranteed Obligations.
If any of the waivers or consents herein are determined to be contrary to any
applicable law or public policy, such waivers and consents shall be effective to
the maximum extent permitted by law.
-7-
<PAGE>
4. Each Borrower represents and warrants to Administrative Agent and Banks
that such Borrower has established adequate means of obtaining from each other
Borrower, on a continuing basis, financial and other information pertaining to
the businesses, operations and condition (financial and otherwise) of each other
Borrower and their respective properties, and each Borrower now is and hereafter
will be completely familiar with the businesses, operations and condition
(financial and otherwise) of each other Borrower and its respective properties.
Each Borrower hereby expressly waives and relinquishes any duty on the part of
Administrative Agent and Banks to disclose to such Borrower any matter, fact or
thing related to the businesses, operations or condition (financial or
otherwise) of any other Borrower or such other Borrower's properties, whether
now known or hereafter known by Administrative Agent and Banks during the term
of the Agreement.
-8-
<PAGE>
EXHIBIT "A"
PROMISSORY NOTE
<PAGE>
EXHIBIT "B-1"
DEED OF TRUST, ASSIGNMENT OF RENTS,
SECURITY AGREEMENT AND FIXTURE FILING (ARIZONA)
<PAGE>
EXHIBIT "B-2"
DEED OF TRUST, ASSIGNMENT OF RENTS,
SECURITY AGREEMENT AND FIXTURE FILING (CALIFORNIA)
<PAGE>
EXHIBIT "C-1"
MODIFICATION OF DEED OF TRUST (ARIZONA)
<PAGE>
EXHIBIT "C-2"
MODIFICATION OF DEED OF TRUST (CALIFORNIA)
<PAGE>
EXHIBIT "D"
GUARANTEE
<PAGE>
EXHIBIT "E"
COLLATERAL CERTIFICATE
<PAGE>
EXHIBIT "F"
PROPOSED INITIAL APPROVED SUBDIVISIONS
<PAGE>
EXHIBIT "G"
CONSTRUCTION SCHEDULE
<PAGE>
EXHIBIT "H"
SAMPLE COLLATERAL INVENTORY REPORT
<PAGE>
EXHIBIT "I"
SAMPLE SALES AND INVENTORY REPORTS
<PAGE>
EXHIBIT "J"
SAMPLE PROJECT PROFORMA
<PAGE>
As of July 31, 1999
Guaranty Federal Bank, F.S.B.
8333 Douglas Avenue
Dallas, Texas 75225
Re: Modification of an existing $70,000,000.00 guidance line from Guaranty
Federal Bank, F.S.B. ("Lender") to Legacy/Monterey Homes L.P., an
Arizona corporation ("Borrower"); such loan and other indebtedness
being guaranteed by Meritage Corporation, a Maryland corporation,
MTH-Texas GP, Inc., an Arizona corporation and MTH-Texas LP, Inc., an
Arizona corporation (collectively referred to as "Guarantor")
Gentlemen:
Reference is made to that certain Master Loan Agreement dated as of January
31, 1993 (and all amendments thereto, if any) (the "Loan Agreement") between
Lender and Borrower governing a $70,000,000.00 loan (as increased) (the "Loan")
for the acquisition and/or refinancing of residential lots located in certain
counties in the State of Texas as described therein, and the construction of
single-family residences thereon. Unless otherwise expressly defined herein,
each term used herein with its initial letter capitalized shall have the meaning
given to such term in the Loan Agreement. As used in this letter agreement, the
term "Loan Instruments" shall mean and include (i) the "Loan instruments" as
defined in the Loan Agreement, (ii) the Fourth Modification Agreement dated as
of even date herewith, executed by and between the parties hereto, and (iii)
this letter agreement and all other documents executed in conjunction herewith
(and all amendments thereto, if any).
Borrower and Lender desire to increase the Loan Amount to the stated
principal amount of $80,000,000.00 and to amend and modify certain terms and
provisions of the Loan and the Loan Instruments as follows:
1. The Loan Amount is hereby increased from $70,000,000.00 to
$80,000,000.00. All references in the Loan Instruments to the amount of
$70,000,000.00 are hereby increased to $80,000,000.00.
2. The stated maturity date of the Note is hereby extended to and including
July 31, 2000, when the entire unpaid principal balance of the Note, together
with all accrued and unpaid interest shall be due and payable; provided,
however, such date may be extended as set forth in Paragraph 9 of the Loan
Agreement (as amended hereby).
<PAGE>
Guaranty Federal Bank, F.S.B.
As of July 31, 1999
Page 2
3. Exhibit A to the Loan Agreement is hereby modified by deleting such
exhibit in its entirety and replacing it with Exhibit A attached hereto.
4. All Loan Instruments hereby are amended and modified in a manner
consistent with the modifications, terms and/or provisions contained herein.
Except as modified hereby, all the terms, provisions and conditions of the Loan
Instruments shall remain in full force and effect.
5. This letter agreement constitutes the "Letter Agreement" referred to in
the Fourth Modification Agreement of even date herewith executed by and between
the parties hereto.
6. The terms and provisions of this letter agreement may not be modified,
amended, altered or otherwise affected except by instrument in writing executed
by Lender and Borrower.
7. Each Guarantor by its execution hereof agree to the amendments and
modifications to the Loan Instruments set forth herein and in the prior
amendments and modifications to the Loan Instruments and agree that all of such
modifications do not and will not waive, release or in any manner modify either
Guarantor's obligations and liabilities under and pursuant to the Guaranty.
(The balance of this page is intentionally left blank.)
<PAGE>
Guaranty Federal Bank, F.S.B.
As of July 31, 1999
Page 3
If this letter agreement correctly sets forth our understanding of the
subject matter contained herein, please indicate this by executing this letter
agreement in the space furnished below and then return a fully-executed copy to
the undersigned.
Very truly yours,
BORROWER:
LEGACY/MONTEREY HOMES L.P.,
an Arizona limited partnership
BY: MTH-TEXAS GP, INC.,
an Arizona corporation,
General Partner
By: /s/ Rick Morgan
-------------------------------
Name: Rick Morgan
Title: Vice President
<PAGE>
Guaranty Federal Bank, F.S.B.
As of July 31, 1999
Page 4
GUARANTOR:
MERITAGE CORPORATION,
a Maryland corporation
By: /s/ John London
------------------------------------
Name: John London
Title: Co-CEO
MTH-TEXAS GP, INC.,
an Arizona corporation,
By: /s/ Rick Morgan
------------------------------------
Name: Rick Morgan
Title: Vice President
MTH-TEXAS LP, INC.,
an Arizona corporation
By: /s/ Rick Morgan
------------------------------------
Name: Rick Morgan
Title: Vice President
<PAGE>
Guaranty Federal Bank, F.S.B.
As of July 31, 1999
Page 5
ACCEPTED AND AGREED TO:
LENDER:
GUARANTY FEDERAL BANK, F.S.B.,
a federal savings bank
By: /s/ Sam A. Meade
------------------------------------
Name: Sam A. Meade
Title: Senior Vice President
<PAGE>
EXHIBIT A
TO LOAN AGREEMENT
1. Introductory Paragraph. RESIDENCE AND INVENTORY LOT LIMITATIONS. At any
given time, Residences and Inventory Lots financed under the Loan shall be
limited to the following numbers, unless modified by Lender in writing:
Total Residences: Seven Hundred Seventy-five (775).
Specs: One Hundred Twelve (112).
Models: Sixty-three (63).
Inventory Lots: Six Hundred Twenty-Five (625).
Borrower may increase the number of Specs allowed above by the same number
by which Borrower is short of Models allowed above. Borrower covenants and
agrees not to allow, and is prohibited from allowing, any more than ten
(10) Specs, three (3) Models or one hundred fifty (150) Inventory Lots to
exist in any Approved Subdivision (as hereinafter defined).
The outstanding aggregate amount of the Loan Allocations for all Specs and
Models at any time shall never exceed $16,800,000.00.
The outstanding aggregate amount of the Loan Allocations for all Inventory
Lots at any time shall never exceed $10,000,000.00.
The term "SPECS" means a Residence which is not a Model and is not Under
Contract. The term "MODEL" means a Residence specifically utilized for the
purposes of marketing other residential products. The term "UNDER CONTRACT"
shall mean Residences under written contract to sell to bona fide third
parties unrelated to Borrower, having no contingency or any other
conditions not reasonably susceptible to being satisfied, providing for
earnest money deposits of at least $2,000.00, and for which Lender has
received preliminary loan approval from a bona fide residential permanent
lender.
The term "INVENTORY RESIDENCE" means any Residence which is not a Model.
2. Introductory Paragraph. APPROVED SUBDIVISIONS. The following subdivisions
and any additional subdivisions approved in writing by Lender (the
"APPROVED SUBDIVISIONS") are approved by Lender for the Residences and
Inventory Lots:
Subdivision County
----------- ------
Stone Canyon (Fern Bluff) Williamson
Oakmont Forest Williamson
Settlers Ridge/Creekside Travis
Round Rock Ranch Williamson
The Meadows (Thunderbird Est.) Collin
Brighton Estates - Arlington Tarrant
Bristol Park (Fountain Creek) Collin
Chase-Oaks Collin
Cottonwood Bend Collin
Country Club Park Dallas
Creekwood Estates Denton
Crestwood Collin
Cross Creek West Collin
Eden Road Estates Tarrant
El Dorado Heights Collin
Heritage Park - Allen Collin
Highland Parkway Collin
Hillcrest Estates Collin
EXHIBIT A, - Page 1
<PAGE>
Hunters Glen Collin
Independence Hill Collin
Meadow Glen PH IIB Denton
Oakwood Glen Collin
Orchard Valley Estates Denton
Parkdale - Plano Collin
Shadow Lakes Collin
Shadow Lakes North Collin
Lakes of Valley Ranch Dallas
Vista Ridge Estates Denton
Windhaven Farms (Carelle Custom) Collin
Ravenglass Estates Collin
Frankford Meadows Dallas
Hunter Trail Tarrant
Fossil Beach Tarrant
3. Introductory Paragraph. APPROVED PRICE RANGE. The Residences shall be in
the $70,000.00 to $350,000.00 price range.
4. Paragraph 1(c). GUARANTOR. Guarantor of the Loan shall be: Meritage
Corporation, a, Maryland corporation (formerly known as "Monterey Homes
Corporation"); MTH-Texas G.P., Inc., an Arizona corporation; and MTH-Texas
L.P., Inc., an Arizona corporation.
5. Paragraph 2(h). LOAN FINANCE CHARGE. None.
6. Paragraph 2(k) and 6(g). INSPECTION FEE. An inspection fee of $30.00 per
Residence shall be paid to Lender on the day the Mortgage pertaining to
such Residence is recorded in the Real Property Records.
7. Paragraph 4(c). LOAN RATIOS. The Loan Allocation shall not exceed the
lesser of (1) one hundred percent (100%) of the direct costs of a Property,
as determined by Lender or, (2) seventy percent (70%) of the lowest of the
values as provided in Paragraph 4(c)(i),(ii) and (iii) of this Loan
Agreement.
8. Paragraph 6(q). OTHER ENTITIES. The Mortgages shall additionally secure all
other indebtedness now or hereafter owed by the following entities to
Lender: None.
9. Paragraph 6(s). REQUIRED RELEASES. Borrower shall cause: (a) Inventory
Residences to be released from a Mortgage nine (9) months from the day such
Mortgage is recorded in the Real Property Records, (b) Models to be
released from a Mortgage twenty-four (24) months from the day such Mortgage
is recorded in the Real Property Records, and (c) Inventory Lots to be
released from a Mortgage twelve (12) months from the day such Mortgage is
recorded in the Real Property Records; provided, however, if no default
then exists under any Loan Instruments, Lender may, at its option, extend
the Required Release Date for periods of three (3) months (the "EXTENDED
RELEASE DATE"); provided, such Extended Release Date shall in no event go
beyond the Stated Maturity Date (as hereinafter defined) or the Extended
Maturity Date (as hereinafter defined), if applicable.
10. Paragraph 7. REQUIRED PRINCIPAL REDUCTIONS. Prior to the date that Lender
gives Borrower the notice described in Paragraph 4(f) above, the following
shall apply: in the event a Property has been granted an Extended Release
Date (as provided in Paragraph 9 of this Exhibit A) and a Mortgage remains
covering such Property beyond the following periods from the date such
Mortgage is recorded, then Borrower shall make a principal payment of the
Note in an amount equal to ten percent (10%) of the Loan Allocation with
respect to such Property (and the Loan Allocation for such Property shall
be reduced by the same amount), as determined by Lender:
Inventory Residences: Fifteen (15) months.
Models: Twenty-four (24) months.
Inventory Lots: Twelve (l2) months.
EXHIBIT A, - Page 2
<PAGE>
From and after the date that Lender gives Borrower the notice described in
Paragraph 4(f) of the Loan Agreement, the following shall apply: in the
event a Property has been granted an Extended Release Date, as provided in
Paragraph 9 of this Exhibit A, Borrower shall make a principal payment on
the Note of ten percent (10%) of that portion of the Loan advanced by
Lender for such Property, within the following periods from the date a
Mortgage covering such Property is recorded in the Real Property Records:
Inventory Residences: Fifteen (15) months.
Models: Twenty-four (24) months.
Inventory Lots: Twelve (12) months.
11. Paragraph 9. MATURITY AND EXTENSION. The maturity date of the Note shall be
the later of the maturity date as provided in the Note (July 31, 2000) (the
"STATED MATURITY DATE"), or nine (9) months after the recording in the Real
Property Records of the last Mortgage (the "EXTENDED MATURITY DATE")
approved by Lender and recorded prior to the expiration of the Stated
Maturity Date. After the Stated Maturity Date, no additional Mortgage shall
be recorded.
12. Paragraph 10. ADDITIONAL DEFAULTS. In addition to the events of default
stipulated in the Loan Instruments, it shall be a default under this Loan
Agreement if Borrower fails to comply with any of the following: None.
13. Paragraph 11. ADDITIONAL LOAN COVENANTS. Borrower shall fully perform and
satisfy the following "ADDITIONAL LOAN COVENANTS":
(a) The aggregate net worth of Borrower (determined in accordance with
generally accepted accounting principles, consistently applied) shall
not fall below $15,000,000.00.
(b) The ratio of total liabilities to equity (as determined by Lender)
shall not exceed 4.0 to 1.0.
(c) John Landon shall at all times retain management control of Borrower.
(d) In no event shall Monterey Homes Corporation, a Maryland corporation,
be in default under any secured indebtedness.
If Borrower or Guarantor (if applicable to Guarantor) breaches any of the
Additional Loan Covenants then, at Lender's election, no additional
Mortgages shall be recorded in the Real Property Records; provided,
however, that a breach of any Additional Loan Covenants shall not be
considered a default under the Loan Instruments.
14. Paragraph 16(d). RELEASE PRICE. The partial release price shall be a cash
amount equal to the Loan Allocation for the Property multiplied by the
Stage (expressed as a percentage) of the Property, all as determined by
Lender; provided, however, if Lender shall have given Borrower the notice
described in Paragraph 4(f) of the Loan Agreement, then the partial release
price shall be an amount in cash equal to one hundred and one hundred
percent (100%) of the outstanding balance of the Loan advanced by Lender
for the Property.
15. Paragraph 16(e). EXTENSION FEE. If Lender extends the Required Release
Date, as provided in Paragraph 9 of this Exhibit A, Borrower shall pay to
Lender an extension fee of one percent (1%) of that portion of the Loan
advanced by Lender for each such Property times a fraction, the numerator
of which is the number of days the Required Release Date is extended and
the denominator of which is 365.
EXHIBIT A, - Page 3
<PAGE>
FOURTH MODIFICATION AGREEMENT
This FOURTH MODIFICATION AGREEMENT (this "AGREEMENT") is made and entered
into as of July 31, 1999, by and between LEGACY/MONTEREY HOMES L.P., an Arizona
limited partnership ("BORROWER"), and GUARANTY FEDERAL BANK, F.S.B., a federal
savings bank organized and existing under the laws of the United States
("LENDER").
WITNESSETH:
WHEREAS, pursuant to a certain Master Loan Agreement (the "LOAN AGREEMENT")
dated as of January 31, 1993, between Lender and Borrower, Lender made a loan
(the "LOAN") to Borrower, evidenced by a certain Revolving Promissory Note (the
"NOTE") dated as of January 31, 1993, payable to Lender in the stated principal
amount of FIFTY MILLION AND NO/100 DOLLARS ($50,000,000.00) (as increased), with
interest and principal payable as set forth therein; and
WHEREAS, to secure the Note and Loan, Master Form Deed(s) of Trust (With
Security Agreement and Assignment of Rents and Leases) (hereinafter collectively
referred to as the "MASTER DEEDS OF TRUST," whether one or more), which Master
Deeds of Trust have been recorded in certain counties in the State of Texas as
more particularly described on Exhibit A attached hereto; and which Master Deeds
of Trust are incorporated by reference pursuant to the terms and provisions of
certain Deeds of Trust Incorporating by Reference a Master Form Deed of Trust
(With Security Agreement and Assignment of Rents and Leases) (hereafter
collectively referred to as the "SUPPLEMENTAL DEEDS OF TRUST," whether one or
more) recorded in such counties and encumbering certain real and other property
(the "PROPERTY") described in such Supplemental Deeds of Trust (such Master
Deeds of Trust and Supplemental Deeds of Trust hereafter collectively referred
to as the "DEEDS OF TRUST," whether one or more); and
WHEREAS, the Deeds of Trust were modified pursuant to a Modification
Agreement (the "FIRST MODIFICATION") dated ____________, 1997, and recorded in
various counties in Texas, which First Modification modified certain terms and
provisions of the Loan as set forth therein; and
WHEREAS, the Deeds of Trust were further pursuant to a Second Modification
Agreement (the "SECOND MODIFICATION") dated as of May 19, 1998, and recorded in
various counties in Texas, which Second Modification modified certain terms and
provisions of the Loan as set forth therein; and
WHEREAS, the Deeds of Trust were further pursuant to a Third Modification
Agreement (the "THIRD MODIFICATION") dated as of March ______, 1999, and
recorded in various counties in Texas, which Third Modification modified certain
terms and provisions of the Loan as set forth therein; and
WHEREAS, the Note and the Loan are guaranteed pursuant to that certain
Guaranty Agreement dated as of June 30, 1997 (the "GUARANTY"), executed by
MTH-Texas GP, Inc., an Arizona corporation, MTH-Texas LP, Inc., an Arizona
corporation, and Meritage Corporation, a Maryland corporation (formerly known as
"MONTEREY HOMES CORPORATION") ("GUARANTOR," whether one or more); and
WHEREAS, the Loan Agreement, the Note, the First Modification, the Second
Modification, the Third Modification Agreement, the Deeds of Trust and all other
documents evidencing and/or securing the Loan are hereinafter collectively
called the "LOAN INSTRUMENTS"; and
FOURTH MODIFICATION AGREEMENT - Page 1
<PAGE>
WHEREAS, Lender, the owner and holder of the Note and the Deeds of Trust
and all rights and titles evidenced thereby, and Borrower, the record owner of
the Property and being liable for the payment of the Note and Loan, desire to
modify the Loan Instruments as herein provided.
NOW, THEREFORE, in consideration of Ten and No/100 Dollars ($10.00) and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto hereby agree as follows:
1. The stated maturity date of the Note is hereby extended to and including
July 31, 2000, when the entire unpaid principal balance of the Note, together
with all accrued and unpaid interest shall be due and payable; provided,
however, such date may be extended as set forth in the Loan Agreement.
2. The Loan is hereby increased from $70,000,000.00 to $80,000,000.00. All
references in the Loan Instruments to the amount of $70,000,000.00 are hereby
increased to $80,000,000.00.
3. Borrower shall execute and deliver to Lender a letter agreement (in form
and substance satisfactory to Lender in its sole discretion) (the "LETTER
AGREEMENT") dated as of the date hereof amending certain other terms and
provisions of the Loan Instruments. (Hereafter, this Agreement and the Letter
Agreement shall be included in the defined term "LOAN INSTRUMENTS.")
4. Borrower acknowledges and agrees, that as an accommodation to Borrower,
Exhibit A hereto (which exhibit describes the recording information of the
Master Deeds of Trust) shall be attached to this Agreement (and to any and all
other documents which may require the attachment of a description of the
recording information of the Master Deeds of Trust) after Borrower's execution
of same. Accordingly, Borrower hereby authorizes and directs Lender to attach
such Exhibit A to this Agreement.
5. Notwithstanding anything to the contrary contained in the Deeds of Trust
or other Loan Instruments, with respect to any amendment to the Master Deeds of
Trust, the following terms and provisions shall apply:
With respect to any amendment or modification of the Master Deeds of Trust
now or hereafter executed by Borrower (or any future owner of the Property
if different from Borrower) and duly recorded in the appropriate official
public records, Borrower acknowledges and agrees that such amendment or
modification of the Master Deeds of Trust shall constitute an amendment or
modification to the terms and provisions of any such Supplemental Deeds of
Trust (and shall be incorporated into any such Supplemental Deeds of Trust
and made a part thereof for all purposes, as though such amendment or
modification of the Master Deeds of Trust specifically referred to such
Supplemental Deeds of Trust) without the necessity of any specific
reference in such amendment or modification to any such Supplemental Deeds
of Trust; and no such amendment or modification of the Master Deeds of
Trust shall impair the obligations of Borrower under any such Supplemental
Deeds of Trust or any other of the Loan Instruments.
6. Borrower hereby expressly promises to pay to the order of Lender, the
principal amount of the Note (as modified and increased) and all accrued and
unpaid interest now or hereafter to become due and payable under the Note, and
Borrower hereby expressly promises to perform all of the obligations of Borrower
under the Loan Instruments (as modified and increased).
7. The liens of the Deeds of Trust are hereby acknowledged by Borrower to
be good, valid and subsisting liens, and such liens are hereby renewed and
extended so as to secure the payment of the Note and Loan (as modified and
increased).
8. Borrower hereby represents and warrants to Lender that (a) Borrower is
the sole legal and beneficial owner of the Property; (b) Borrower has the full
power and authority to make the agreements contained in this Agreement without
joinder or consent of any other party; (c) the
FOURTH MODIFICATION AGREEMENT - Page 2
<PAGE>
execution, delivery and performance of this Agreement will not contravene or
constitute an event which itself or which with the passing of time or giving of
notice or both would constitute a default under any deed of trust, loan
agreement, indenture or other agreement to which Borrower or Guarantor is a
party or by which Borrower or any of its property is bound; and (d) there exists
no default under the Loan Instruments (as modified). BORROWER HEREBY AGREES TO
INDEMNIFY AND HOLD LENDER HARMLESS AGAINST ANY LOSS, CLAIM, DAMAGE, LIABILITY OR
EXPENSE (INCLUDING WITHOUT LIMITATION, ATTORNEYS' FEES) INCURRED AS A RESULT OF
ANY REPRESENTATION OR WARRANTY MADE BY BORROWER HEREIN PROVING TO BE UNTRUE IN
ANY MATERIAL RESPECT.
9. The terms and conditions hereof may not be modified, amended, altered or
otherwise affected except by instrument in writing executed by Lender and
Borrower.
10. All Loan Instruments are hereby amended and modified in a manner
consistent with the modifications, terms and/or provisions contained herein.
Except as expressly modified hereby, the terms and conditions of the Loan
Instruments are and shall remain in full force and effect.
11. Borrower agrees to pay to Lender, contemporaneously with the execution
and delivery hereof, all costs and expenses incurred in connection with this
transaction, title insurance endorsement premiums, reasonable fees of Lender's
counsel and recording fees.
12. Borrower hereby agrees to execute and deliver to Lender such further
documents and instruments evidencing or pertaining to the Loan, as modified and
increased hereby, as may be reasonably requested by Lender from time to time so
as to evidence the terms and conditions hereof.
[The balance of this page is intentionally left blank.]
FOURTH MODIFICATION AGREEMENT -Page 3
<PAGE>
EXECUTED on the date(s) set forth in the acknowledgment(s) below to be
EFFECTIVE as of the date first above written.
BORROWER:
LEGACY/MONTEREY HOMES L.P.,
an Arizona limited partnership
BY: MTH-TEXAS GP, INC., an
Arizona corporation,
General Partner
By: /s/ Rick Morgan
------------------------------------
Name: Rick Morgan
Title: Vice President
LENDER:
GUARANTY FEDERAL BANK, F.S.B.,
a federal savings bank
By: /s/ Sam A. Meade
------------------------------------
Name: Sam A. Meade
Title: Senior Vice President
STATE OF TEXAS ss.
ss.
COUNTY OF COLLIN ss.
This instrument was ACKNOWLEDGED before me on July 26, 1999, by Rick
Morgan, Vice President of MTH-TEXAS GP, INC., an Arizona corporation, as General
Partner of LEGACY/MONTEREY HOMES L.P., an Arizona limited partnership, on behalf
of said limited partnership.
[SEAL] /s/ Ana Patterson
------------------------------------
Notary Public
My Commission Expires:
------------------------------------
Printed Name of Notary Public
FOURTH MODIFICATION AGREEMENT - Page 4
<PAGE>
STATE OF TEXAS ss.
ss.
COUNTY OF DALLAS ss.
This instrument w s acknowledged before me on the 29th day of July, 1999,
by Sam A. Meade, Senior Vice President of GUARANTY FEDERAL BANK, F.S.B., a
federal savings bank, on behalf of said federal savings bank.
/s/ Leslie Ruth Reynolds
------------------------------------
Notary Public in and for the
[SEAL] Above country and state
My Commission Expires:
02/04/2001 Leslie Ruth Reynolds
- ---------------------- ------------------------------------
Printed Name of Notary
FOURTH MODIFICATION AGREEMENT -Page 5
<PAGE>
CONSENT OF GUARANTOR
Each of the undersigned, as a guarantor ("Guarantor," whether one or more)
of the loan (the "Loan"), evidenced by the Note and secured by the Deeds of
Trust described in the foregoing Fourth Modification Agreement (the "Agreement")
to which this Consent is attached, hereby acknowledge and consent (jointly and
severally) to the terms of the Agreement and agree (jointly and severally) that
the execution and delivery of the Agreement will in no way change or modify
Guarantor's respective obligations under their respective Guaranty (as defined
in the Agreement); and each Guarantor acknowledges and agrees (jointly and
severally) that the Indebtedness (as defined in the respective instruments
comprising the Guaranty) includes the Loan (as increased and set forth in the
Agreement), together with any and all other Indebtedness now or at any time
hereafter owing by Guarantor to Lender; and each Guarantor (jointly and
severally) hereby unconditionally and absolutely guarantees to Lender the
payment when due of such Indebtedness, and hereby acknowledge and agree that
their respective Guaranty is in full force and effect, and that there are no
claims, counterclaims, offsets or defenses to their respective Guaranty; and
each Guarantor acknowledges and consents (jointly and severally) to the terms of
any and all prior modifications to the terms of the Loan (including, without
limitation, any and all extensions of the term thereof and increases in the
principal thereof prior to the date hereof, if any).
EXECUTED on the date(s) set forth in the acknowledgment(s) below to be
EFFECTIVE as, of the 31st day of July, 1999.
GUARANTOR:
MERITAGE CORPORATION,
a Maryland co oration
By: /s/ John R. Landon
------------------------------------
Name: John R. Landon
Title: Co-CEO
MTH-TEXAS GP, INC.,
an Arizona corporation
By: /s/ Rick Morgan
------------------------------------
Name: Rick Morgan
Title: Vice President
MTH-TEXAS LP, INC.,
an Arizona corporation
By: /s/ Rick Morgan
------------------------------------
Name: Rick Morgan
Title: Vice President
FOURTH MODIFICATION AGREEMENT -Page 6
<PAGE>
STATE OF TEXAS ss.
ss.
COUNTY OF COLLIN ss.
This instrument was ACKNOWLEDGED before me on July 27, 1999, by John R
Landon, Co-CEO of MERITAGE CORPORATION, a Maryland corporation, on behalf of
said corporation.
[SEAL] /s/ Ana Patterson
------------------------------------
Notary Public
My Commission Expires:
- ---------------------- ------------------------------------
Printed Name of Notary Public
STATE OF TEXAS ss.
ss.
COUNTY OF COLLIN ss.
This instrument was ACKNOWLEDGED before me on July 26, 1999, by Rick
Morgan, Vice President of MTH-TEXAS GP, 1NC., an Arizona corporation, on behalf
of said corporation.
[SEAL] /s/ Ana Patterson
------------------------------------
Notary Public
My Commission Expires:
- ---------------------- ------------------------------------
Printed Name of Notary Public
STATE OF TEXAS ss.
ss.
COUNTY OF COLLIN ss.
This instrument was ACKNOWLEDGED before me on July 26, 1999, by Rick
Morgan, Vice President of MTH-TEXAS LP, IN , an Arizona corporation, on behalf
of said corporation.
[SEAL]
/s/ Ana Patterson
------------------------------------
Notary Public
My Commission Expires:
- ---------------------- ------------------------------------
Printed Name of Notary Public
FOURTH MODIFICATION AGREEMENT - Page 7
<PAGE>
EXHIBIT A
Description of the Deed(s) of Trust
LEGACY/MONTEREY, L.P.
COLLIN COUNTY Recorded September 4, 1996, Clerk File 96-0075977
DALLAS Recorded September 5, 1996, Volume 96175 Page 00192
DENTON Recorded September 5, 1996, Clerk File 96-80061921
HARRIS Recorded August 6, 1997, Clerk File No. S579911
ROCKWALL Recorded August 19, 1997, Clerk File No. 176219
TARRANT Recorded September 5, 1996, Clerk File D196175179
TRAVIS Recorded September 6, 1996,Volume 12766, Page 1157
WILLIAMSON Recorded September 9, 1996, Clerk File 9648096
Fort Bend sent to Legacy for sig. Today (1-26-99)
EXHIBIT A, Description of the Deeds of Trust - Page 1
<PAGE>
CERTIFICATE OF RESOLUTIONS
OF
MERITAGE CORPORATION
I, Rick Morgan, Assistant Secretary of MERITAGE CORPORATION, a Maryland
corporation (the "Company"), do hereby certify as follows:
(i) that I am the duly elected and qualified Assistant Secretary of the
Company and the custodian of the Company's records;
(ii) that a meeting of the Board of Directors of the Company was duly
called and held on July 27, 1999, and at such meeting a quorum of the
Directors was present and acting throughout;
(iii) that set forth below is a true and correct restatement of certain
resolutions adopted by the Directors of the Company at such meeting
held on July 27, 1999;
RESOLVED, that the President or any Vice President of the Company be and is
hereby authorized and directed to do any and all things deemed necessary or
advisable and in the best interest of the Company, at his sole discretion, in
connection with the obtainment by LEGACY/MONTEREY HOMES L.P., an Arizona limited
partnership (the "Partnership") of a loan in the amount of $80,000,000.00 (the
"Loan"), to be obtained from GUARANTY FEDERAL BANK, F.S.B. ("Lender") for the
purpose of the Partnership acquiring, developing and/or constructing various
residential subdivisions (herein collectively and singularly called the
"Project"), to be located in certain counties in Texas; to execute and deliver
appropriate loan instruments in the name of and on behalf of the Company, and
all documents, certificates and agreements in this connection required by Lender
including, without limitation, guaranties which guarantee the Loan, the Loan
being reasonably expected to benefit, directly or indirectly, the Company;
FURTHER RESOLVED, that the seal of the Company and the attestation of the
signature of the President or any Vice President by the Secretary or an
Assistant Secretary of the Company will not be necessary, but if the seal or
such attestation is required by any party in connection with the transaction
contemplated by these resolutions, the Secretary or an Assistant Secretary of
the Company is hereby authorized to attest, for and on behalf of the Company,
the signature of the President or any Vice President upon any instrument,
document or other writing executed on behalf of the Company by the President or
any Vice President thereof and to affix the seal of the Company thereto;
FURTHER RESOLVED, that the officers of the Company are hereby severally
authorized to (a) sign, execute, certify to, verify, acknowledge, deliver,
accept, file and record any and all instruments and documents, and (b) take, or
cause to be taken, any and all such action in the name and on behalf of the
Company or otherwise, as in any such officer's judgment is necessary, desirable
CERTIFICATE OF RESOLUTIONS, Page 1
<PAGE>
or appropriate in order to consummate the transactions contemplated by or
otherwise to effect the purposes of the foregoing resolutions;
FURTHER RESOLVED, that all actions heretofore taken by the incorporators or
the directors or the officers of the Company, and all things done by their
authority, with respect to the organization of the Company and in connection
with the acquisition of lands for and the financing and construction of the
Project as aforesaid, be and the same are hereby ratified, approved and adopted
as the acts of the Company;
FURTHER RESOLVED, that said officers are authorized and empowered to
perform all acts and execute and. deliver all instruments, documents and
agreements required by Lender to carry out the purposes of this resolution.
(i) that none of the resolutions set forth above have been amended,
modified, revoked or rescinded; and each such resolution is in full
force and effect on the date hereof; and
(ii) that the following are the duly elected, qualified and serving
officers of the Company, that their addresses are as stated in
connection with each, and that the signature set out opposite the
name of each officer is the genuine signature of such person, to wit:
NAME AND ADDRESS SIGNATURE
- ---------------- ---------
President:
/s/ John R. Landon
- ------------------------------------
Vice President:
/s/ Rick Morgan
- ------------------------------------
Secretary:
- ------------------------------------
CERTIFICATE OF RESOLUTIONS, Page 2
<PAGE>
Assistant Secretary:
/s/ Rick Morgan
- ------------------------------------
(iii) that (a) all franchise and other taxes required to maintain the
Company's corporate existence have been paid when due and that no
such taxes are delinquent; (b) no proceedings are pending for the
forfeiture of the Company's Certificate of Incorporation or the
Company's dissolution, voluntary or involuntary; (c) the Company is
duly qualified to do business in the State of Texas and any other
states in which it is doing business, and is in good standing in such
states; (d) there is no provision of the Articles of Incorporation or
Bylaws of the Company limiting the power of the Board of Directors to
pass the Resolutions set out above, and that such Resolutions are in
conformity with the provisions of said Articles of Incorporation and
Bylaws.
(The balance of this page is intentionally left blank.)
CERTIFICATE OF RESOLUTIONS, Page 3
<PAGE>
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of the Company
this 27th day of July 1999.
/s/ Rick Morgan
------------------------------------
Rick Morgan, Assistant Secretary
(Corporate Seal)
STATE OF TEXAS ss.
ss.
COUNTY OF COLLIN ss.
SWORN TO AND SUBSCRIBED BEFORE ME, this 26 day of July, 1999, to certify
which witness my hand and seal of office.
/s/ Ana Patterson
------------------------------------
Notary Public in and for
__________ County, ___________
My Commission Expires:
- ---------------------- ------------------------------------
(Printed Name of Notary)
CERTIFICATE OF RESOLUTIONS, Page 4
<PAGE>
CERTIFICATE OF RESOLUTIONS
OF
MTH-TEXAS LP, INC.
I, Rick Morgan, Assistant Secretary of MTH-TEXAS LP, INC., an Arizona
corporation (the "Company"), do hereby certify as follows:
(i) that I am the duly elected and qualified Assistant Secretary of the
Company and the custodian of the Company's records;
(ii) that a meeting of the Board of Directors of the Company was duly
called and held on July 27, 1999, and at such meeting a quorum of the
Directors was present d acting throughout;
(iii) that set forth below is a true and correct restatement of certain
resolutions adopted by he Directors of the Company at such meeting
held on July 27, 1999;
RESOLVED, that the President or any Vice President of the Company be and is
hereby authorized and directed to do any and all things deemed necessary or
advisable and in the best interest of the Company, at his sole discretion, in
connection with the obtainment by LEGACY/MONTEREY HOMES, L.P., an Arizona
limited partnership (the "Partnership") of a loan in the amount of
$80,000,000.00 (the "Loan"), to be obtained from GUARANTY FEDERAL BANK, F.S.B.
("Lender") for the purpose of the Partnership acquiring, developing and/or
constructing various residential subdivisions (herein collectively and
singularly called the "Proiect"), to be located in certain counties in Texas; to
execute and deliver appropriate loan instruments in the name of and on behalf of
the Company, and all documents, certificates and agreements in this connection
required by Lender including, without limitation, guaranties which guarantee the
Loan, the Loan being reasonably expected to benefit, directly or indirectly, the
Company;
FURTHER RESOLVED, that the seal of the Company and the attestation of the
signature of the President or any Vice President by the Secretary or an
Assistant Secretary of the Company will not be necessary, but if the seal or
such attestation is required by any party in connection with the transaction
contemplated by these resolutions, the Secretary or an Assistant Secretary of
the Company is hereby authorized to attest, for and on behalf of the Company,
the signature of the President or any Vice President upon any instrument,
document or other writing executed on behalf of the Company by the President or
any Vice President thereof and to affix the seal of the Company thereto;
FURTHER RESOLVED, that the officers of the Company are hereby severally
authorized to (a) sign, execute, certify to, verify, acknowledge, deliver,
accept, file and record any and all instruments and documents, and (b) take, or
cause to be taken, any and all such action in the name
CERTIFICATE OF RESOLUTIONS, Page 1
<PAGE>
and on behalf of the Company or otherwise, as in any such officer's judgment is
necessary, desirable or appropriate in order to consummate the transactions
contemplated by or otherwise to effect the purposes of the foregoing
resolutions;
FURTHER RESOLVED, that all actions heretofore taken by the incorporators or
the directors or the officers of the Company, and all things done by their
authority, with respect to the organization of the Company and in connection
with the acquisition of lands for and the financing and construction of the
Project as aforesaid, be and the same are hereby ratified, approved and adopted
as the acts of the Company;
FURTHER RESOLVED, that said officers are authorized and empowered to
perform all acts and execute and deliver all instruments, documents and
agreements required by Lender to carry out the purposes of this resolution.
(i) that none of the resolutions set forth above have been amended,
modified, revoked or rescinded; and each such resolution is in full
force and effect on the date hereof; and
(ii) that the following are the duly elected, qualified and serving
officers of the Company, that their addresses are as stated in
connection with each, and that the signature set out opposite the
name of each officer is the genuine signature of such person, to wit:
NAME AND ADDRESS SIGNATURE
- ---------------- ---------
President
/s/ John R. Landon
- ------------------------------------
Vice President:
/s/ RICK MORGAN
- ------------------------------------
Secretary:
- ------------------------------------
CERTIFICATE OF RESOLUTIONS, Page 2
<PAGE>
Assistant Secretary:
/s/ Rick Morgan
- ------------------------------------
(iii) that (a) all franchise and other taxes required to maintain the
Company's corporate existence have been paid when due and that no
such taxes are delinquent; (b) no proceedings are pending for the
forfeiture of the Company's Certificate of Incorporation or the
Company's dissolution, voluntary or involuntary; (c) the Company is
duly qualified to do business in the State of Texas and any other
states in which it is doing business, and is in good standing in such
states; (d) there is no provision of the Articles of Incorporation or
Bylaws of the Company limiting the power of the Board of Directors to
pass the Resolutions set out above, and that such Resolutions are in
conformity with the provisions of said Articles of Incorporation and
Bylaws.
(The balance of this page is intentionally left blank.)
CERTIFICATE OF RESOLUTIONS, Page 3
<PAGE>
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of the Company
this 27th day of July 1999.
/s/ Rick Morgan
------------------------------------
Rick Morgan, Assistant Secretary
(Corporate Seal)
STATE OF TEXAS ss.
ss.
COUNTY OF COLLIN ss.
SWORN TO AND SUBSCRIBED BEFORE ME, this 26th day of July, 1999, to certify
which witness my hand and seal of office.
/s/ Ana Patterson
------------------------------------
Notary Public in and for
Collin County, Texas
My Commission Expires:
8-28-99
- ---------------------- ------------------------------------
(Printed Name of Notary)
CERTIFICATE OF RESOLUTIONS, Page 4
<PAGE>
CERTIFICATE OF RESOLUTIONS
OF
MTH-TEXAS GP, INC.
I, Rick Morgan, Assistant Secretary of MTH-TEXAS GP, INC., an Arizona
corporation (the "Company"), do hereby certify as follows:
(i) that I am the duly elected and qualified Assistant Secretary of the
Company and the custodian of the Company's records;
(ii) that a meeting of the Board of Directors of the Company was duly
called and held on July 27, 1999, and at such meeting a quorum of the
Directors was present and acting throughout;
(iii) that set forth below is a true and correct restatement of certain
resolutions adopted by the Directors of the Company at such meeting
held on July 27, 1999;
RESOLVED, that the President or any Vice President of the Company be and is
hereby authorized and directed to do any and all things deemed necessary or
advisable and in the best interest of the Company, at his sole discretion, in
connection with (a) the formation of LEGACY/MONTEREY HOMES L.P., an Arizona
limited partnership (the "Partnership"); (b) the acquisition by the Company of a
general partnership interest in the Partnership; and (c) the obtainment by the
Partnership of a loan in the amount of $80,000,000.00 (the "Loan"), to be
obtained from GUARANTY FEDERAL BANK, F.S.B. ("Lender") for the purpose of the
Partnership acquiring, developing and/or constructing various single family lots
and\or residential subdivisions (herein collectively and singularly called the
"Project"), to be located in certain counties in Texas; to execute and deliver
appropriate loan instruments in the name of end on behalf of the Company, and
all documents, certificates and agreements in this connection required by Lender
including, without limitation, guaranties which guarantee the Loan, the Loan
being reasonably expected to benefit, directly or indirectly, the Company;
FURTHER RESOLVED, that the seal of the Company and the attestation of the
signature of the President or any Vice President by the Secretary or an
Assistant Secretary of the Company will not be necessary, but if the seal or
such attestation is required by any party in connection with the transaction
contemplated by these resolutions, the Secretary or an Assistant Secretary of
the Company is hereby authorized to attest, for and on behalf of the Company,
the signature of the President or any Vice President upon any instrument,
document or other writing executed on behalf of the Company by the President or
any Vice President thereof and to affix the seal of the Company thereto;
FURTHER RESOLVED, that the officers of the Company are hereby severally
authorized to (a) sign, execute, certify to, verify, acknowledge, deliver,
accept, file and record any and all instruments and documents, and (b) take, or
cause to be taken, any and all such action in the name and on behalf of the
CERTIFICATE OF RESOLUTIONS, Page 1
<PAGE>
Company or otherwise, as in any such officer's judgment is necessary, desirable
or appropriate in order to consummate the transactions contemplated by or
otherwise to effect the purposes of the foregoing resolutions;
FURTHER RESOLVED, that all actions heretofore taken by the incorporators or
the directors or the officers of the Company, and all things done by their
authority, with respect to the organization of the Company and in connection
with the acquisition of lands for and the financing and construction of the
Project as aforesaid, be and the same are hereby ratified, approved and adopted
as the acts of the Company;
FURTHER RESOLVED, that said officers are authorized and empowered to
perform all acts and execute and deliver all instruments, documents and
agreements required by Lender to carry out the purposes of this resolution.
(i) that none of the resolutions set forth above have been amended,
modified, revoked or rescinded; and each such resolution is in full
force and effect on the date hereof; and
(ii) that the following are the duly elected, qualified and serving
officers of the Company, that their addresses are as stated in
connection with each, and that the signature set out opposite the
name of each officer is the genuine signature of such person, to wit:
NAME AND ADDRESS SIGNATURE
- ---------------- ---------
President
/s/ John R. Landon
- ------------------------------------
Vice President:
/s/ Rick Morgan
- ------------------------------------
Secretary:
- ------------------------------------
CERTIFICATE OF RESOLUTIONS, Page 2
<PAGE>
Assistant Secretary:
/s/ Rick Morgan
- ------------------------------------
(iii) that (a) all franchise and other taxes required to maintain the
Company's corporate existence have been paid when due and that no
such taxes are delinquent; (b) no proceedings are pending for the
forfeiture of the Company's Certificate of Incorporation or the
Company's dissolution, voluntary or involuntary; (c) the Company is
duly qualified to do business in the State of Texas and any other
states in which it is doing business, and is in good standing in such
states; (d) there is no provision of the Articles of Incorporation or
Bylaws of the Company limiting the power of the Board of Directors to
pass the Resolutions set out above, and that such Resolutions are in
conformity with the provisions of said Articles of Incorporation and
Bylaws.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of the Company
this 27th day of July, 1999.
/s/ Rick Morgan
------------------------------------
Rick Morgan, Assistant Secretary
(Corporate Seal)
STATE OF TEXAS ss.
ss.
COUNTY OF COLLINS ss.
SWORN TO AND SUBSCRIBED BEFORE ME, this 26 day of July, 1999, to certify
which witness my hand and seal of office.
/s/ Ana Patterson
------------------------------------
Notary Public in and for
_________ County, __________
My Commission Expires:
- ---------------------- ------------------------------------
(Printed Name of Notary)
CERTIFICATE OF RESOLUTIONS, Page 3
<PAGE>
CONSENT OF PARTNERS
The undersigned, being all the general and limited partners of
MONTEREY/LEGACY HOMES L.P., an Arizona limited partnership (the "Partnership"),
to induce GUARANTY FEDERAL BANK, F.S.B., a federal savings bank ("Lender"), to
make a loan or loans to the Partner ship in the original principal amount of
$80,000,000.00 (the "Loan"), do hereby, jointly and severally, certify to and
agree with Lender as follows:
(i) That the undersigned constitute all of the general and limited
partners of the Partnership;
(ii) That the undersigned are the custodians of the Partnership
records and have full and complete knowledge of the matters set forth
herein;
(iii) That the Partnership is evidenced and constituted by that
certain Limited Partnership Agreement, dated as of June - 1997, a photocopy
of which is attached hereto as Exhibit A, and that such document (the
"Partnership Agreement") is the only document constituting the Partnership
Agreement;
(iv) That the President, Vice President or CFO of MTH-TEXAS GP, INC.,
an Arizona cdrporation is authorized and directed to do any and all things
deemed necessary or advisable and in the best interest of the Partnership,
in his sole discretion, in connection with the Loan, to execute and deliver
in the name of the Partnership instruments of mortgage and deed of trust
and all instruments, documents, certificates and
agreements required by Lender in connection with the Loan; and to do
and perform all acts and things that may be deemed necessary or proper, in
the sole discretion of the President, Vice President or CFO of MTH-TEXAS
GP, INC., an Arizona corporation, regarding the negotiation and
consummation of the Loan;
(v) That the provisions of the Partnership Agreement have not been
amended, modified or rescinded; the Partnership has been neither terminated
nor dissolved; both the Partnership and the Partnership Agreement are in
full force and effect and in existence on the date hereof; there exist no
restrictions or limitations on the authority of any one or more of the
undersigned partners of the Partnership to consummate the financing
contemplated by this Consent; and that such financing will be in conformity
with the terms, provisions and requirements of the Partnership Agreement;
and
(vi) Further, to induce Lender to extend the financing contemplated by
this Consent, the undersigned agree that in the event any dispute
whatsoever arises among any or all of the undersigned, the undersigned
jointly and severally will indemnify Lender and any corporation
controlling, controlled by or under common control with Lender and any
officer, director or employee of Lender of any such corporation, and will
hold Lender and such corporation and any such officer, director or employee
harmless from and against all expenses, including (but not limited to)
legal fees, damages and other liabilities of any type whatsoever
<PAGE>
(including, but not limited to, any liabilities arising out of demands by
any of the undersigned for undisbursed loan funds) suffered or incurred as
a result of or in connection with any such dispute. The foregoing indemnity
agreement shall be governed by and construed according to the laws of the
State of Texas unless any such indemnity obligation shall be invalid or
unenforceable under such laws, in which event the laws of that state whose
laws can apply to and validate the obligation hereunder shall apply.
(vii) This Consent may be executed in a number of identical
counterparts, each of which for all purposes is deemed an original, and all
of which constitute collectively one (1) Consent; but, in making proof of
this Consent, it shall not be necessary to produce or account for more than
one (1) such counterpart.
IN WITNESS WHEREOF, the undersigned general and limited partners of the
Partnership executed this Consent as of the 27th day of July, 1999.
GENERAL PARTNER:
MTH-TEXAS GP, INC.,
an Arizona corporation
By: /s/ Rick Morgan
------------------------------------
Name: Rick Morgan
Title: Vice President
LIMITED PARTNER:
MTH-TEXAS LP, INC.,
an Arizona corporation
By: /s/ Rick Morgan
------------------------------------
Name: Rick Morgan
Title: Vice President
<PAGE>
EXHIBIT A
(A copy of the Partnership Agreement follows this cover page.)
<PAGE>
LIMITED PARTNERSHIP AGREEMENT OF
LEGACY/MONTEREY HOMES L.P.
This Agreement is effective as of June 13, 1997, is entered into by and
among MTH-TEXAS GP, Inc., an Arizona corporation, as the General Partner, and
MTH-TEXAS LP, Inc., an Arizona corporation as the Limited Partner.
In consideration of the mutual covenants hereinafter set forth, the parties
hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1 As used in this Agreement, the following terms shall have the meanings
set forth below:
"ACQUISITION AGREEMENT" means as defined in Section 2.3.
"ACT" means Chapter 3 of Title 29 of the Arizona Revised Statutes, as
amended.
"ADJUSTED CAPITAL ACCOUNT BALANCE" means as defined in Section A.1 of
Appendix A.
"AGREEMENT" means this Agreement of Limited Partnership of
Legacy/Monterey Homes L.P., as amended from time to time, if
applicable.
"AVAILABLE CASH FLOW" means, for any period, the Partnership's gross
cash receipts derived from any source whatsoever (excluding the
receipts associated with a sale or other disposition of all or
substantially all of the Partnership's assets) less the portion
thereof used to pay or establish reasonable reserves for all
Partnership expenses, debt, payments, asset acquisitions, capital
improvements, expansions, repairs, replacements, contingencies, and
any other proper cash expenditure of the Partnership, whether
contingent or absolute, as determined from time to tune by the General
Partner.
"CAPIAL ACCOUNT" means as defined in Section A. I of Appendix A.
"CAPITAL CONTRIBUTIONS" means the contributions required pursuant to
Section 3.1.
<PAGE>
"CODE" means the Internal Revenue Code of 1986, as amended from time
to time (or any corresponding provisions of succeeding law).
"FISCAL YEAR" means the Partnership's fiscal year, which shall be a
calendar year except as otherwise required by law.
"GENERAL PARTNER" means MTH-TEXAS GP, Inc., an Arizona corporation, or
any other Person that becomes a General Partner in accordance with the
terms of this Agreement, until such time as such Person ceases to be a
General Partner pursuant to the terms of this Agreement.
"LIMITED PARTNER" means MTH-TEXAS LP, Inc., an Arizona corporation.
"LOSSES" means as defined in Section A.1 of Appendix A.
"PARTNER" means any Person who is a General Partner or Limited
Partner.
"PARTNERSHIP" means Legacy/Monterey Homes L.P.
"PERCENTAGE INTERESTS" means the percentage interests of the Partners
from time to time and shall be determined with respect to a particular
Partner at any particular time by dividing the number of Units owned
by such Partner by the aggregate number of outstanding Units.
"PERSON" means any individual, trust, partnership, corporation,
association, or other legal entity.
"REGULATIONS" means the regulations issued by the Treasury Department
under the Code.
"TRANSFER" means when used as a noun, any voluntary or involuntary
sale, assignment, gift, transfer, or other disposition and when used
as a verb, voluntarily or involuntarily to sell, assign, gift,
transfer, or otherwise dispose of.
"UNIT" means an interest in the capital, Profits, and Losses of the
Partnership originally issued to the Partners in exchange for Capital
Contributions.
"WITHDRAWAL EVENT" means, with respect to the General Partner, the
occurrence of any of those events and circumstances listed in Section
29-323 of the Act, including, without limitation, the General
Partner's withdrawal from the Partnership, dissolution, or bankruptcy.
-2-
<PAGE>
ARTICLE 2
FORMATION, PURPOSES AND TERM
2.1 FORMATION. The parties hereto hereby form the Partnership as a limited
partnership pursuant to the Act and in accordance with the provisions of this
Agreement.
2.2 NAME AND OFFICE. The name of the Partnership shall be Legacy/Monterey
Homes L.P. The principal office of the Partnership (and the office required to
be maintained for keeping Partnership records under Arizona law) shall be
located at 6613 North Scottsdale Road, Suite 200, Scottsdale, Arizona, 85250, or
such other place in the State of Arizona as the General Partner may from time to
time determine with written notice to the other Partners.
2.3. PURPOSES. The purposes of the Partnership shall be (a) to acquire
certain home building and related assets currently owned by Legacy Homes, Ltd.,
a Texas limited partnership, pursuant to the terms of that certain Agreement of
Purchase and Sale of Assets dated May 29, 1997, by and among Monterey Homes
Corporation, a Maryland corporation, Legacy Homes, Ltd., Legacy Enterprises,
Inc., a Texas corporation, and John Landon and Eleanor Landon (the "Acquisition
Agreement"), (b) to own a home building business in the State of Texas, (c) to
engage in such other businesses (related to the home building business specified
in clause (b) or otherwise) and purposes in such place or places, if any, as the
General Partner shall determine, and (d) to engage in any and all activities
necessary, convenient, or incidental, in the sole discretion of the General
Partner, to accomplish any of the foregoing purposes.
2.4 TERM. The term of the Partnership shall begin upon the filing of a
certificate of limited partnership for the Partnership in accordance with the
Act, and shall continue, unless earlier dissolved in accordance with Article IX
until December 31, 2099.
2.5 AGENT FOR SERVICE OF PROCESS. The initial statutory agent for the
Partnership and the address of such agent shall be CT Corporation System, 3225
N. Central Ave., Phoenix, Arizona 85012. The General Partner may change the
Partnership's statutory agent from time to time in accordance with Arizona law.
ARTICLE 3
CAPITAL CONTRIBUTIONS
3.1 CAPITAL CONTRIBUTIONS OF THE PARTNERS. Not later than June 30, 1997,
the Limited Partner shall contribute to the capital of the Partnership all of
the assets acquired by the Limited Partner pursuant to the terms of the
Acquisition Agreement and the General Partner shall contribute to the capital of
the Partnership cash and/or in kind assets the aggregate value of which shall
equal 1.01 % of the aggregate value of the assets contributed by the Limited
Partner pursuant to the preceding provisions of this sentence. In exchange
therefor, the General Partner shall be issued 10 Units and the Limited Partner
shall be issued 990 Units. Except as set forth in this Section 3.1, the Partners
shall be under no obligation to make contributions to the capital of the
Partnership.
-3-
<PAGE>
3.2 RETURN OF CAPITAL. Except as otherwise provided in this Agreement, no
Partner shall be entitled to the return of the Partner's Capital Contributions
to the Partnership. Further, it is expressly provided that the General Partner
shall have no personal liability for the repayment of the Capital Contributions
made by any Partner, it being agreed that any return of capital or Profits made
pursuant to this Agreement shall be made solely from the assets of the
Partnership.
ARTICLE 4
MANAGEMENT
4.1 GENERAL PARTNER. The General Partner shall have the sole and exclusive
right to manage the business of the Partnership and to accomplish the purposes
of the Partnership set forth in Section 2.3 with all powers necessary,
incidental, or convenient to the exercise of such management rights, including
all of the rights and powers that may be possessed by general partners under the
Act. The General Partner shall be authorized to delegate all or a portion of its
management authority to any Person.
4.2 RELIANCE UPON ACTIONS BY GENERAL PARTNER. Any Person dealing with the
Partnership may rely upon any action taken by the General Partner on behalf of
the Partnership and, accordingly, any and all contracts or instruments executed
by the General Partner on behalf of the Partnership shall be binding upon the
Partnership. All of the Partners agree that a copy of this Agreement may be
shown to the appropriate parties in order to confirm the same. Without limiting
the generality of the foregoing, any person dealing with the Partnership may
rely upon a certificate or written statement signed by the General Partner as
to:
(a) The identity of the General Partner or any Limited Partner;
(b) The existence or nonexistence of any fact or facts that constitute
a condition precedent to acts by the General Partner or that are in any other
manner germane to the affairs of the Partnership;
(c) The Persons who are authorized to execute and deliver any
instrument or documents of the Partnership; or
(d) Any act or failure to act by the Partnership on any other matter
whatsoever involving the Partnership, to the extent applicable.
4.3 DEVOTION OF TIME TO PARTNERSHIP ACTIVITIES. The General Partner shall
devote so much of its time to activities on behalf of the Partnership as the
General Partner determines to be necessary for the business and affairs of the
Partnership.
-4-
<PAGE>
4.4 REIMBURSEMENT OF EXPENSES OF GENERAL PARTNER. The Partnership shall pay
or reimburse the General Partner (or any Person providing services on behalf of
the General Partner) for all expenses reasonably incurred in connection with the
business and purposes of the Partnership.
ARTICLE 5
PRE-LIQUIDATION DISTRIBUTIONS
5.1 INTERIM DISTRIBUTIONS OF AVAILABLE CASH FLOW. The General Partner shall
have the sole discretion to determine the time, amount, and manner of
distributions of Available Cash Flow to the Partners prior to the liquidation of
the Partnership; provided, however, that any distributions of Available Cash
Flow to the Partners shall be made pro rata to all Partners of record on the
date of distribution in accordance with the Partners' Percentage Interests.
5.2 DISTRIBUTIONS OF CASH FLOW DURING LIQUIDATION. Following the
dissolution of the Partnership and the commencement of the winding up of its
business and affairs, the Available Cash Flow and remaining assets of the
Partnership shall be distributed in accordance with Section 9.2 hereof.
5.3 AMOUNTS WITHHELD. All amounts withheld pursuant to the Code or any
provision of any state or local tax law with respect to any distribution by the
Partnership to the Partners or any allocation of income shall be treated as
amounts distributed to the Partners pursuant to this Article V for all purposes
under this Agreement.
ARTICLE 6
ALLOCATION OF PROFITS AND LOSSES
6.1 PROFIT ALLOCATIONS. After making any special allocations required under
Appendix A, Profits for each Fiscal Year (and each item of income, gain, loss
and deduction entering into the computation thereof) shall be allocated among
the Partners (and credited to their respective Capital Accounts) in the
following order and priority:
(a) First, to the General Partner until the cumulative Profits
allocated pursuant to this Section 6.1(a) are equal to the cumulative Losses, if
any, previously allocated to the General Partner pursuant to Section 6.2(c) for
all prior periods;
(b) Second, to the Partners until the cumulative Profits allocated
pursuant to this Section 6.1 (b) are equal to the cumulative Losses, if any,
previously allocated to the Partners pursuant to Section 6.2(b) for all prior
periods in proportion to the Partners' respective shares of the Losses being
offset; and
(c) Third, to the Partners in accordance with their Percentage
Interests.
-5-
<PAGE>
6.2 LOSS ALLOCATIONS. After making any special allocations required under
Appendix A, Losses for each Fiscal Year (and each item of income, gain, loss and
deduction entering into the computation thereof) shall be allocated among the
Partners (and charged to their respective Capital Accounts) in the following
order and priority:
(a) First, to the extent that Profits have previously been allocated
to the Partners for prior, periods pursuant to Section 6.1 (c) hereof, Losses
shall be allocated to the Partners to offset such Profits in proportion to the
Partners' respective shares of the Profits being offset; provided, however, that
in no event shall any allocation pursuant to this Section 6.2(a) create or
increase a Partner's deficit in such Partner's Capital Account.
(b) Second, to the Partners in proportion to their respective Capital
Account balances until the Adjusted Capital Account balance of each Partner has
been reduced to zero; and
(c) Third, the balance, if any, to the General Partner.
6.3 TAX ALLOCATIONS.
(a) Except as otherwise provided in Section A.2(a) of Appendix A, for
income tax purposes, all items of income, gain, loss, deduction and credit of
the Partnership for any tax period shall be allocated among the Partners in
accordance with the allocations of Profit and Loss prescribed in this Article VI
and in Appendix A.
(b) The Partners are aware of the income tax consequences of the
allocations trade by this Article VI and Appendix A and hereby agree to be bound
by the provisions of this Article VI and Appendix A in reporting their
distributive shares of Partnership taxable income and loss for income tax
purposes.
6.4 MODIFICATION IN ALLOCATIONS. The General Partner shall be authorized to
modify the method of allocating Profits and Losses to the Partner upon receipt
of advice from counsel that such change is required by applicable law.
ARTICLE 7
RESTRICTIONS ON TRANSFERS
OF PARTNERSHIP INTERESTS
7.1 GENERAL. No Partner shall be authorized to Transfer all or a portion of
such Person's Units. Any purported Transfer of Units shall be null and void and
of no force and effect whatsoever.
7.2 LEGENDS. Each Partner agrees that the restrictions on Transfer set
forth in Section 7.1 may be placed upon any counterpart of this Agreement or any
other instrument or document evidencing ownership of Units.
-6-
<PAGE>
ARTICLE 8
BOOKS AND RECORDS
TAX MATTERS
8.1 BOOKS AND RECORDS. The General Partner, at the expense of the
Partnership, shall maintain the records of the Partnership required to be
maintained pursuant to A.R.S. 29-305. Any Partner or its designated
representative shall have the right, at any reasonable time, to have access to
and may inspect and copy the contents of such books o: records.
8.2 TAX INFORMATION. The General Partner shall instruct the Partnership's
accountants to prepare and deliver all necessary tax returns and information to
each Partner within a reasonable period following the end of each Fiscal Year.
The General Partner shall have sole authority relating to matters pertaining to
the preparation of tax returns and the administration of the tax affairs
relating to the Partnership and, in connection therewith, shall be authorized:
(a) To make any and all elections for federal, state and local tax
purposes, including, without limitation, any election, if permitted by
applicable law, to adjust the basis of Partnership property pursuant to Code
Sections 754, 734(b) and 743(b), or comparable provisions of state or local law,
in connection with the transfers or liquidations of Partnership interests;
(b) To act as the "tax matters partner" of the Partnership (within the
meaning of Section 6231 of the Code) and in any similar capacity with respect to
the Partnership under state or local law;
(c) To extend the statute of limitations for assessment of tax
deficiencies against Partners with respect to adjustments to the Partnership's
federal, state or local tax returns;
(d) To represent the Partnership and the Partners before taxing
authorities or courts of competent jurisdiction in tax matters affecting the
Partnership and the Partners in their capacity as Partners, and to execute any
agreements or other documents relating to or affecting such tax matters,
including agreements or other documents that bind the Partners with respect to
such tax matters.
ARTICLE 9
DISSOLUTION AND WINDING UP
9.1 DISSOLUTION. The Partnership shall dissolve upon the first to occur of
any of the following events:
(a) The unanimous written agreement of all of the Partners;
(b) The expiration of the term set forth in Section 2.4;
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(c) The entry of a decree of dissolution under Section 8.02 of the
Act;
(d) The sale or other disposition of all or substantially all of the
assets of the Partnership; or
(e) The failure of the Limited Partner, within ninety (90) days after
a Withdrawal Event with respect to the sole remaining General Partner, to
unanimously elect a new General Partner and to continue the Partnership without
dissolution pursuant to Section 10.3.
9.2 WINDING UP. Upon a dissolution of the Partnership, the General Partner
(or, if there is no General Partner, the Limited Partner or a Person designated
by the Limited Partner) shall take full account of the Partnership's liabilities
and assets, and the Partnership's assets shall be liquidated as promptly as is
consistent with obtaining the fair value thereof. The proceeds of liquidation,
to the extent sufficient therefor, shall be applied and distributed in the
following order:
(a) First, to the payment and discharge of all of the Partnership's
debts and liabilities owed or owing to creditors other than the Partners,
including the establishment of any necessary reserves;
(b) Second, to the payment and discharge of all of the Partnership's
debts and liabilities owed to the Partners;
(c) Third, to the Partners in accordance with the positive balance of
each Partner's Capital Account as determined after taking into account all
Capital Account adjustments for the Partnership's taxable year during which the
liquidation occurs. Any such distributions to the Partners in respect of their
Capital Accounts shall be made within the time requirements of Section
1.704-1(b)(3)(ii)(b)(2) of the Regulations.
9.3. COMPLIANCE WITH REGULATIONS.
(a) Distributions required by Section 9.2 may be distributed to a
trust established for the benefit of the Partners for the purposes of
liquidating Partnership property, collecting amounts owed to the Partnership,
and paying any contingent or unforeseen liabilities or obligations of the
Partnership or of the General Partner arising out of or in connection with the
Partnership. The assets of any such trust shall be distributed to the Partners
from time to time, in the discretion of the General Partner, in the same
proportions as the amount distributed to such trust by the Partnership would
otherwise have been distributed to the Partners pursuant to this Agreement.
(b) If any General Partner whose interest in the Partnership is
liquidated within the meaning of Treasury Regulation Section
1.704-1(b)(2)(ii)(g) has a negative balance in the General Partner's Capital
Account after such liquidation, such General Partner shall pay to the
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Partnership an amount equal to such negative Capital Account balance no later
than the end of the Partnership taxable year in which such liquidation occurs
(or, if later, within ninety (90) days after the date of such liquidation);
provided, however, that if such Person is and remains obligated after the
liquidation to contribute additional funds to the Partnership in the manner
described in Regulation Section 1.704-1(b)(2)(ii)(c), such Partner shall be
required to pay to the Partnership, within the time period set forth above, only
the amount, if any, by which the Partner's negative Capital Account balance
exceeds the amount of funds the Partner is so obligated to contribute. If any
Limited Partner has a negative balance in such Partner's Capital Account after
such liquidation, such Limited Partner shall have no obligation to make any
contribution to the capital of the Partnership with respect to such deficit, and
such deficit shall not be considered a debt owed to the Partnership or to any
other Person for any purpose whatsoever.
9.4 CERTIFICATE OF CANCELLATION. When all of the remaining property and
assets have been applied and distributed in accordance with Section 9.2, the
General Partner (or, if there is no General Partner, the Limited Partners or a
Person designated by the Limited Partners) shall cause to be executed and filed
a certificate of cancellation in accordance with the Act.
9.5 In Kind Distributions. A Partner shall have no right to demand and
receive any distribution from the Partnership in any form other than cash.
However, a Partner may be compelled to accept a distribution of an asset in kind
if the Partnership is unable to dispose of all of its assets for cash.
ARTICLE 10
EVENTS AFFECTING GENERAL PARTNER
10.1 CESSATION. A Person shall cease to be a General Partner upon the
occurrence of a Withdrawal Event affecting such Person. Except as otherwise
provided herein, upon the occurrence of any Withdrawal Event affecting the
General Partner, such Person or its transferee shall maintain the right to
receive distributions and allocations with respect to Units held by the General
Partner prior to the occurrence of the Withdrawal but shall not be authorized to
exercise any additional management rights.
10.2 RIGHT OF REMAINING GENERAL PARTNER. Following any Withdrawal Event
affecting a General Partner under Section 10.1 hereof, a remaining General
Partner (if any) may elect to continue the Partnership's business without
dissolution in conformity with the provisions of this Agreement.
10.3 ELECTION OF NEW GENERAL PARTNER. If no General Partner remains
following a Withdrawal Event affecting a General Partner under Section 10.1
hereof or the Act, any Limited Partner may nominate one or more Persons for
election as General Partner(s) to continue the Partnership business without
dissolution. No Person so nominated shall become a General Partner unless
elected by all of the Limited Partners within ninety (90) days after the
Withdrawal Event affecting the sole General Partner.
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ARTICLE 11
MISCELLANEOUS
11.1 BINDING EFFECT. Except as otherwise provided in this Agreement and by
applicable law, every covenant, term, and provision of this Agreement shall be
binding upon and inure to the benefit of the Partners and their respective
heirs, legatees, legal representatives, successors, transferees, and assigns.
11.2 CREDITORS AND OTHER THIRD PARTIES. None of the provisions of this
Agreement shall be for the benefit of or enforceable by any creditors of the
Partnership or by other third parties.
11.3 SECTION AND OTHER REFERENCES. Except as otherwise provided, any
reference herein to the term "Section," "Article," or "Appendix" shall refer to
the corresponding section, article, or appendix of this Agreement.
11.4 HEADINGS. Section and other headings contained in this Agreement are
for reference purposes only and are not intended to describe, interpret, define,
or limit the scope, extent or interest of this Agreement or any provision
hereof.
11.5 SEVERABILITY. Every provision of this Agreement is intended to be
severable. If any term or provision hereof is illegal or invalid for any reason
whatsoever, such illegality or invalidity shall not affect the validity or
legality of the remainder of this Agreement.
11.6 ADDITIONAL DOCUMENTS. Each Partner, upon the request of the General
Partner, agrees to perform all further acts and to execute, acknowledge, and
deliver any documents that may be reasonably necessary, appropriate, or
desirable-to carry out the provisions of this Agreement.
11.7 GOVERNING LAW. The laws of the State of Texas shall govern the
validity of this Agreement, the construction of its terms, and the
interpretation of the rights and duties of the Partners.
11.8 WAIVER OF ACTION FOR PARTITION. Each of the Partners irrevocably
waives any right that it tray have to maintain any action for partition with
respect to any of the Partnership's assets and properties.
11.9 SOLE AND ABSOLUTE DISCRETION. Except as otherwise provided in this
Agreement, all actions that the General Partner may take and all determinations
that the General Partner may make pursuant to this Agreement may be taken and
trade at the sole and absolute discretion of the General Partner.
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11.10 INVESTMENT REPRESENTATIONS. By execution of this Agreement below,
each Limited Partner represents and covenants as follows:
(a) The Partner has full legal right, power, and authority to enter
into this Agreement and to perform the obligations under this Agreement,
including the obligation to make the Capital Contributions set forth in Article
III;
(b) The Agreement constitutes the legal, valid, and binding obligation
of the Partner enforceable in accordance with its terms, except as the
enforcement thereof may be limited by bankruptcy and other laws of general
application relating to creditors' rights or general principles of equity;
(c) The Agreement does not violate, conflict with, result in a breach
of the terms, conditions or provisions of, or constitute a default or an event
of default under any other agreement of which the Partner is a party; and
(d) The acquisition of Units in the Partnership is made for the
Partner's own account for investment purposes only and not with a view to the
resale or distribution of such Units.
11.11 NOTICES. All notices under this Agreement shall be in writing and
shall be effective upon personal delivery, or, if sent by registered or
certified mail, postage repaid, addressed to the party at the address set forth
with respect to such party as reflected in the records of the Partnership n the
deposit of such notice in the United States mail.
11.12 COUNTERPART EXECUTION. This Agreement may be executed in any number
of counterparts with the same effect as if all of the Partners had signed the
same document. All counterparts shall be construed together and shall constitute
one agreement.
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APPENDIX A
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IN WITNESS WHEREOF, the parties have entered into this Agreement as of the
day first above set forth.
MTH-TEXAS GP, Inc.,
an Arizona corporation
By: /s/ William W. Cleverly
------------------------------------
Name: William W. Cleverly
Its: Chairman and Co-Chief Executive
Officer
and
By: /s/ Steven J. Hilton
------------------------------------
Name: Steven J. Hilton
Its: President and Co-Chief
Executive Officer
MTH-TEXAS LP, Inc.,
an Arizona corporation
By: /s/ William W. Cleverly
------------------------------------
Name: William W. Cleverly
Its: Chairman and Co-Chief Executive
Officer
and
By: /s/ Steven J. Hilton
------------------------------------
Name: Steven J. Hilton
Its: President and Co-Chief
Executive Officer
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Appendix A
SPECIAL TAX AND ACCOUNTING PROVISIONS
A.1 ACCOUNTING DEFINITIONS. The following terms, which are used
predominantly in this Appendix A, shall have the meanings set forth below for
all purposes under this Agreement:
"ADJUSTED CAPITAL ACCOUNT BALANCE" means, with respect to any Partner,
the balance of such Partner's Capital Account as of the end of the relevant
Fiscal Year, after giving effect to the following adjustments:
(a) Credit to such Capital Account any amounts which such Partner is
obligated to restore pursuant to this Agreement or as determined pursuant to
Regulations Section 1.704-1(b)(2)(ii)(Q), or is deemed to be obligated to
restore pursuant to the penultimate sentences of Regulations Sections
1.704-2(g)(1) and 1.704-2(i)(5); and
(b) Debit to such Capital Account the items described in clauses (4),
(5) and (6) of Section 1.704-1(b)(2)(ii)(d) of the Regulations.
The foregoing definition of Adjusted Capital Account Balance is intended to
comply with the provisions of Section 1.704-1(b)(2)(ii)(d) of the Regulations
and shall be interpreted consistently therewith.
"BOOK VALUE" means, with respect to any asset, the asset's adjusted
basis for federal income tax purposes, except as follows:
(a) The initial Book Value for any asset (other than money)
contributed by a Partner to the Partnership shall be the value as set forth in
this Agreement or, if not set forth in this Agreement, as reasonably determined
by the General Partner;
(b) The Book Value of all Partnership assets shall be adjusted to
equal their respective gross fair market values, as reasonably determined by the
General Partner as of the following times: (i) the acquisition of additional
Units in the Partnership by any new or existing Partner in exchange for more
than a de minimis Capital Contribution; (ii) the distribution by the Partnership
to a Partner of more than a de minimis amount of cash or property as
consideration for Units in the Partnership, if (m any such event) such
adjustment is necessary or appropriate, in the reasonable judgment of the
General Partner, to reflect the relative economic interests of the Partners in
the Partnership; or (iii) the liquidation of the Partnership for federal income
tax purposes pursuant to Regulations Section 1.704-1(b)(2)(ii)(g);
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(c) The Book Value of any Partnership asset distributed to any Partner
shall be adjusted to equal its gross fair market value on the date of
distribution, as reasonably determined by the General Partner;
(d) The Book Values of the Partnership's assets shall be increased (or
decreased) to reflect any adjustments to the adjusted basis of such assets
pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent
that such adjustments are taken into account in determining Capital Accounts
pursuant to Regulation Section 1.704-1(b)(2)(iv)(m) and Section A.2(g) hereof;
provided, however, that Book Values shall not be adjusted pursuant to this
subsection (d) to the extent that an adjustment pursuant to subsection (b) of
this definition is necessary or appropriate in connection with a transaction
that would otherwise result in an adjustment pursuant to this subsection (d);
and
(e) If the Book Value of an asset has been determined or adjusted
pursuant to subsection (a), (b) or (d) above, such Book Value shall thereafter
be adjusted by the Depreciation taken into account from time to time with
respect to such asset for purposes of computing Profits and Losses.
"CAPITAL ACCOUNT" means, with respect to any Partner or other owner of
Units in the Partnership, the Capital Account maintained for such Person in
accordance with the following provisions:
(a) To each such Person's Capital Account, there shall be credited the
amount of cash contributed to the capital of the Partnership and the initial
Book Value of any noncash assets contributed to the capital of the Partnership
by such Person, such Person's distributive share of Profits and any items in the
nature of income or gain that are specially allocated pursuant to Sections A.2
and A.3 hereof, and the amount of any Partnership liabilities assumed by such
person (excluding assumed liabilities that have been taken into account in
computing the Book Value of any Partnership property distributed to such
Person);
(b) To each such Person's Capital Account there shall be debited the
amount of cash and the Book Value of any Partnership property distributed to
such Person pursuant to any provision of this Agreement, such person's
distributive share of Losses, and any items in the nature of expenses or losses
that are specially allocated pursuant to Sections A.2 and A.3 hereof, and the
amount of any liabilities of such Person assumed by the Partnership;
(c) In the event any Units in the Partnership are transferred in
accordance with the terms of this. Agreement, the transferee shall succeed to
the Capital Account of the transferor to the extent it relates to the
transferred interest;
(d) Section 752(c) of the Code shall be applied in determining the
amount of any liabilities taken into account for purposes of this definition of
"Capital Account"; and
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(e) The foregoing provisions and the other provisions of this
Agreement relating to the maintenance of Capital Accounts are intended to COMPLY
with Sections 1.704-1(b) and 1.704-2 of the Regulations and shall be interpreted
and applied in a manner consistent with such Regulations. The General Partner
may modify the manner of computing the Capital Accounts or any debits or credits
thereto (including debits or credits relating to liabilities that are secured by
contributed or distributed property or that are assumed by the Partnership or
any Partner) in order to comply with such Regulations, provided that any such
modification is not likely to have a material effect on the amounts
distributable to any Partner upon the dissolution of the Partnership. Without
limiting the generality of the preceding sentence, the General Partner shall
make any adjustments that are necessary or appropriate to maintain equality
between the aggregate sum of the Capital Accounts and the amount of capital
reflected on the balance sheet of the Partnership, as determined for book
purposes in accordance with Section 1.704-1(b)(2)(iv)(g) of the Regulations. The
General Partner shall also make any appropriate modifications if unanticipated
events (for example, the availability of investment tax credits) might otherwise
cause this Agreement not to comply with Regulations Section 1.704-1(b).
"PARTNERSHIP MINIMUM GAIN" has the same meaning as the term
"partnership minimum gain" under Regulations Section 1.704-2(d) of the
Regulations.
"DEPRECIATION" means, for each Fiscal Year or other period, an amount
equal to the depreciation, amortization or other cost recovery deduction
allowable with respect to an asset for such year or other period, except that if
the Book Value of an asset differs from its adjusted basis for federal income
tax purposes at the beginning of such year or other period, Depreciation shall
be an amount that bears the same ratio to such beginning Book Value as the
federal income tax depreciation, amortization or other cost recovery deduction
for such year or other period bears to such beginning adjusted tax basis;
provided, however, that if such depreciation, amortization or other cost
recovery deductions with respect to any such asset for federal income tax
purposes is zero for any Fiscal Year, Depreciation shall be determined with
reference to the asset's BOOK Value at the beginning of such year using any
reasonable method selected by the General Partner.
"PARTNER NONRECOURSE DEBT" has the same meaning as the term "partner
nonrecourse debt" under Section 1.704-2(b)(4) of the Regulations.
"PARTNER NONRECOURSE DEBT MINIMUM GAIN" has the same meaning as the
term "partner nonrecourse debt minimum gain" under Section 1.704-2(i)(2) of the
Regulations and shall be determined in accordance with Section 1.704-2(i)(3) of
the Regulations.
"PARTNER NONRECOURSE DEDUCTIONS" has the same meaning as the term
"partner nonrecourse deductions" under Regulations Section 1.704-2(i)(1). The
amount of Partner Nonrecourse Deductions with respect to a Partner Nonrecourse
Debt for each Fiscal Year of the Partnership equals the excess (if any) of the
net increase (if any) in the amount of Partner Nonrecourse Debt Minimum Gain
attributable to such Partner Nonrecourse Debt during such Fiscal Year over the
aggregate amount of any distributions during such Fiscal Year to the Partner
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that bears the economic risk of loss for such Partner Nonrecourse Debt to the
extent that such distributions are from the proceeds of such Partner Nonrecourse
Debt which are allocable to an increase in Partner Nonrecourse Debt Minimum Gain
attributable to such Partner Nonrecourse Debt, determined in accordance with
Section 1.704-2(i)(2) of the Regulations.
"NONRECOURSE DEBT" or "NONRECOURSE LIABILITY" has the same meaning as
the term "nonrecourse liability" under Section 1.704-2(b)(3) of the Regulations.
"NONRECOURSE DEDUCTIONS" has the meaning set forth in Section
1.704-2(b)(1) of the Regulations. The amount of Nonrecourse Deductions for a
Partnership Fiscal Year equals the excess (if any) of the net increase (if any)
in the amount of Partnership Minimum Gain during that Fiscal Year over the
aggregate amount of any distributions during that Fiscal Year of proceeds of a
Nonrecourse Debt that are allocable to an increase in Partnership Minimum Gain,
determined according to the provisions of Section 1.704-2(c) of the Regulations.
"PROFITS" or "LOSSES" means, for each Fiscal Year or other period, the
taxable income or taxable loss of the Partnership as determined under Code
Section 703(x) (including in such taxable income or taxable loss all items of
income, gain, loss or deduction required to be stated separately pursuant to
Section 703(a)(1) of the Code) with the following adjustments:
(a) All items of gain or loss resulting from any disposition of the
Partnership's property shall be determined upon the basis of the Book Value of
such property rather than the adjusted tax basis thereof;
(b) Any income of the Partnership that is exempt from federal income
tax shall be added to such taxable income or loss;
(c) Any expenditures of the Partnership that are described in Code
Section 705(a)(2)(B), or treated as such pursuant to Regulations Section
1.704-1(b)(2)(iv)(j), and that are not otherwise taken into account in the
computation of taxable income or loss of the Partnership, shall be deducted in
the determination of Profits or Losses;
(d) If the Book Value of any Partnership asset is adjusted pursuant to
subsection (b) or (c) of the definition of "Book Value"- set forth in this
Appendix A, the amount of such adjustment shall be taken into account as gain or
loss from the disposition of such asset for purposes of computing Profits or
Losses unless such gain or loss is specially allocated pursuant to Section A.2
hereof;
(e) In lieu of the depreciation, amortization, and other cost recovery
deductions taken into account in determining such taxable income or loss, there
shall be deducted Depreciation, computed in accordance with the definition of
such term in this Appendix A; and
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(f) Notwithstanding any of the foregoing provisions, any items that
are specially allocated pursuant to Section A.2 or A.3 hereof shall not be taken
into account in computing Profits or Losses.
A.2 SPECIAL ALLOCATIONS. The allocation of Profits and Losses for each
Fiscal Year shall be subject to the following special allocations in the order
set forth below:
(a) Section 704(c) In accordance with Code Section 704(c) and the
Regulations thereunder, income, gain, loss and deduction with respect to any
in-kind property contributed to the capital of the Partnership, shall, solely
for tax purposes, be allocated among the Partners so as to take account of any
variation between the adjusted basis of such property to the Partnership for
federal income tax purposes and its initial Book Value. In the event the Book
Value of any Partnership asset is adjusted pursuant to subsection (b) of the
definition of "Book Value" in Section A.1 of Appendix A to this Agreement,
subsequent allocations of income, gain, loss and deduction with respect to such
asset shall take account of any variation between the adjusted basis of such
asset for federal income tax purposes and its Book Value in the same manner as
under Code Section 704(c) and the Regulations thereunder. Any elections or other
decisions relating to such allocations shall be made by the General Partner. in
any manner that reasonably reflects the purpose and intention of this Agreement.
Allocations pursuant to this Section are solely for purposes of federal, state
and local taxes and shall not affect, or in any way be taken into account in
computing, any person's Capital Account or share of Profits, Losses or other
items or distributions pursuant to any provision of this Agreement.
(b) Partner Minimum Gain Chargeback. If there is a net decrease in
Partnership Minimum Gain for any Fiscal Year, each Partner shall be specially
allocated items of income and gain for such year (and, if necessary, for
subsequent years) in an amount equal to such Partner's share of the net decrease
in Partnership Minimum Gain during such year, determined in accordance with
Regulations Section 1.704-2(g)(2). Allocations pursuant to the preceding
sentence shall be made among the Partners in proportion to the respective
amounts required to be allocated to each of them pursuant to such Regulation.
The items to be so allocated shall be determined in accordance with Regulations
Section 1.704-2(f)(6). Any special allocation of items of Partnership income and
gain pursuant to this Section A.2(a) shall be made before any other allocation
of items under this Appendix A. This Section A.2(a) is intended to comply with
the "minimum gain chargeback" requirement in Regulations Section 1.704-2(f) and
shall be interpreted consistently therewith.
(c) Partner Nonrecourse Debt. Minimum Gain Chargeback. If there is a
net decrease during a Fiscal Year in the Partner Nonrecourse Debt Minimum Gain
attributable to a Partner Nonrecourse Debt, then each Partner with a share of
the Partner Nonrecourse Debt Minimum Gain attributable to such debt, determined
in accordance with Regulations Section 1.704-2(i)(5), shall be specially
allocated items of income and gain for such year (and, if necessary, subsequent
years) an amount equal to such Partner's share of the net decrease in the
Partner Nonrecourse Debt Minimum Gain attributable to such Partner Nonrecourse
Debt, determined in accordance with Regulations Section 1.704-2(i)(4).
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Allocations pursuant to the preceding sentence shall be made among the Partners
in proportion to the respective amounts to be allocated to each of them pursuant
to such Regulation. Any special allocation of items of income and gain pursuant
to this Section A.2(b) for a Fiscal Year shall be made before any other
allocation of Partnership items under this Appendix A, except only for special
allocations required under Section A.2(a) hereof. The items to be so allocated
shall be determined in accordance with Regulations Section 1.704-2(i)(4). This
Section A.2(b) is intended to comply with the provisions of Regulations Section
1.704-2(i)(4) and shall be interpreted consistently therewith.
(d) QUALIFIED INCOME OFFSET. If any Partner other than the General
Partner receives any adjustments, allocations, or distributions described in
clauses (4), (5) or (6) of Regulations Section 1.704-1(b)(2)(ii)(d), items of
income and gain shall be specially allocated to each such Partner in an amount
and manner sufficient to eliminate as quickly as possible, to the extent
required by such Regulation, any deficit in such Partner's Adjusted Capital
Account Balance, such balance to be determined after all other allocations
provided for under this Appendix A have been tentatively made as if this Section
A.2(d) were not in this Agreement.
(e) GROSS INCOME ALLOCATION. In the event any Partner other' than a
General Partner has a deficit Capital Account at the end of any Fiscal Year
which is in excess of the sum of (i) the amount (if any) such Partner is
obligated to restore pursuant to any provision of this Agreement, and (ii) the
amount such Partner is deemed to be obligated to restore pursuant to the
penultimate sentences of Sections 1.704-2(g)(1) and 1.704-2(i)(5) of the
Regulations, each such Partner shall be specially allocated items of income and
gain in the amount of such excess as quickly as possible, provided that an
allocation pursuant to this Section A.2(e) shall be made only if and to the
extent that such Partner would have a deficit Capital Account in excess of such
sum after all other allocations provided for in this Appendix A have been made
as if Section A.2(d) hereof and this Section A.2(e) were not in this Agreement.
(t) NONRECOURSE DEDUCTIONS. Nonrecourse Deductions for any Fiscal Year
or other period shall be specially allocated to the Partners in proportion to
their Percentage Units.
(g) PARTNER NONRECOURSE DEDUCTIONS. Partner Nonrecourse Deductions for
any Fiscal Year or other period shall be specially allocated, in accordance with
Regulations Section 1.704-2(i)(1), to the Partner or Partners who bear the
economic risk of loss for the Partner Nonrecourse Debt to which such deductions
are attributable.
(h) CODE SECTION 754 ADJUSTMENTS. To the extent an adjustment to the
adjusted tax basis of any.Partnership asset under Code Section 734(b) or 743(b)
is required to be taken into account in determining Capital Accounts pursuant to
Regulations Section 1.704-1(b)(2)(iv)(m), the amount of such adjustment to the
Capital Accounts shall be treated as an item of gain (if the adjustment
increases the basis of the asset) or loss (if the adjustment decreases such
basis), and such gain or loss shall be specially allocated to the Partners in a
manner consistent with the manner in which their Capital Accounts are required
to be adjusted pursuant to such section of the Regulations.
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A.3 CURATIVE ALLOCATIONS. The allocations set forth in subsections (b)
through (h) of Section A.2 hereof ("Regulatory Allocations") are intended to
comply with certain requirements of Regulations Sections 1.704-1(b) and 1.704-2.
Notwithstanding any other provisions of this Appendix A (other than the
Regulatory Allocations and the next two following sentences), the Regulatory
Allocations shall be taken into account in allocating other Profits, Losses and
items of income, gain, loss and deduction among the Partners so that, to the
extent possible, the net amount of such allocations of other Profits, Losses and
other items and the Regulatory Allocations to each Partner shall be equal to the
net amount that would have been allocated to each such Partner if the Regulatory
Allocations had not occurred. For purposes of applying the preceding sentence,
Regulatory Allocations of Nonrecourse Deductions and Partner Nonrecourse
Deductions shall be offset by subsequent allocations of items of income and gain
pursuant to this Section A.3 only if (and to the extent) that: (a) the General
Partner reasonably determines that such Regulatory Allocations are not likely to
be offset by subsequent allocations under Section A.2(a) or Section A.2(b)
hereof, and (b) there has been a net decrease in Partnership Minimum Gain (in
the case of allocations to offset prior Nonrecourse Deductions) or a net
decrease in Partner Nonrecourse Debt Minimum Gain attributable to a Partner
Nonrecourse Debt (in the case of allocations to offset prior Partner Nonrecourse
Deductions). The General Partner shall apply the provisions of this Section A.3,
and shall divide the allocations hereunder among the Partners, in such manner as
will minimize the economic distortions upon the distributions to the Partners
that might otherwise result from the Regulatory Allocations.
A.4 GENERAL ALLOCATION RULES.
(a) Generally, all Profits and Losses allocated to the Partners shall
be allocated among them in proportion to their Percentage Interests, except as
otherwise specifically provided under the terms of this Agreement In the event
Partners are admitted to the Partnership on different dates during any Fiscal
Year, additional Units are issued during a Fiscal Year, or Units are
re-allocated during a Fiscal Year, the Profits (or Losses) allocated to the
Partners for each such Fiscal Year shall be allocated among the Partners in
proportion to the Percentage Interests that each Partner holds from time to time
during such Fiscal Year in accordance with Code Section 706, using any
convention permitted by law and selected by the General Partner.
(b) For purposes of determining the Profits, Losses or any other items
allocable to any period, Profits, Losses and any such other items shall be
determined on a daily, monthly or other basis, as determined by the General
Partner using any method permissible under Code Section 706 and the Regulations
thereunder.
(c) For purposes of determining the Partners' proportionate shares of
the "excess nonrecourse liabilities" of the Partnership within the meaning of
Regulations Section 1.752-3(a)(3), their respective interests in Partner profits
shall be in the same proportions as their Percentage Interests.
-7-
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "AGREEMENT") is made as of this 1st day of
July, 1998, by and between MONTEREY HOMES CORPORATION, a Maryland corporation
(the "Company") and Steven Hafener, an individual ("EXECUTIVE"). If Executive is
presently or subsequently becomes employed by a subsidiary of Company, the term
"Company" shall be deemed to refer collectively to Monterey Homes Corporation
and the subsidiary or subsidiaries which employs Executive, provided that
Monterey Homes Corporation shall remain responsible for performance hereof as
provided in Article 26, below.
RECITALS
A. COMPANY BUSINESS. The Company's principal business is homebuilding.
B. AGREEMENT PURPOSE. The Company desires to employ Executive, and
Executive desires to be employed by Company, on the terms and conditions set
forth herein.
NOW THEREFORE, in consideration of the mutual covenants, agreements,
representations, and warranties contained herein and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
1. DEFINITIONS. As used herein:
(a) CAPITALIZED TERMS. Capitalized terms used herein and not otherwise
defined shall have the same meanings as set forth in the Agreement of
Purchase and Sale of Assets by and among Company, Executive, Sterling
Communities, S.H. Capital, Inc. and others dated June 15, 1998
("Acquisition Agreement").
(b) "CAUSE" shall mean the following:
i) Employee's misappropriation of any money or other assets or
properties of the Company resulting or intended to result directly or
indirectly in personal gain or enrichment to Executive;
ii) Executive engages in conduct involving fraud, dishonesty,
embezzlement, theft, or similar matters that are detrimental to
Company;
iii) Executive's willful disregard of his primary duties (as
described in Section 3) to the Company.
(c) "COMPANY CONFIDENTIAL INFORMATION" shall mean confidential,
proprietary information or trade secrets of Company and its subsidiaries,
including, without limitation, the following: (1) customer and vendor
information as compiled by Company and its subsidiaries, including pricing,
sale and contract terms and conditions, contract expirations, and other
<PAGE>
compiled customer and vendor information; (2) Company's and its
subsidiaries' internal practices and procedures; (3) Company"s and its
subsidiaries' financial condition and financial results of operation; (4)
information relating to Company"s and its subsidiaries' real estate holding
or commitments, lot positions, strategic planning, sales, financing,
insurance, purchasing, marketing, promotion, distribution, and selling
activities, whether now existing, or acquired, developed, or made available
anytime in the future to or by Company or its subsidiaries; (5) all
information which Executive has a reasonable basis to consider confidential
or which is treated by Company or its subsidiaries as confidential; and (6)
any and all information having independent economic value to Company or its
subsidiaries that is not generally known to, and not readily ascertainable
by proper means by, persons who can obtain economic value from its
disclosure or use. Executive acknowledges that such information is Company
Confidential Information whether disclosed to or learned by Executive or
originated by Executive during his employment by Company or any of its
subsidiaries.
(d) "TERMINATION" shall mean termination of Executive's employment
with Company pursuant to Sections 16 through 19 hereof.
2. TERM OF AGREEMENT. This Agreement will commence as of July 1, 1998 and
shall terminate four (4) years from such date, unless earlier terminated in
accordance with, and subject to, the other provisions hereof (the "TERM"). For
the purposes of this Agreement a "year" shall mean the twelve month period
commencing on the date of this Agreement.
3. POSITION WITH COMPANY. During the Term, Executive shall serve as
[President or General Manager] of the NC Company, shall devote his full time and
efforts to the affairs of Company, and shall faithfully and diligently perform
all duties commensurate with such position, including, without limitation, those
duties reasonably requested by Company"s Board of Directors. Executive's primary
duties shall include the day to day management of the NC Company, including the
supervision of employees, the identification of new development projects,
advance planning and development of land acquired by NC Company, sales,
marketing and construction of new homes, warranty and customer service and
accounting for operations of the NC Company to the Company. As more particularly
provided in the Acquisition Agreement, it is contemplated that NC Company will
conduct all residential development activities and hold all residential real
estate of the Company and its affiliates in Northern California.
4. SALARY. Executive shall be entitled to receive a base salary from
Company in the amount of $150,000 per year, payable in equal installments in
accordance with Company's general salary payment policies in effect during the
Term hereof (the "MINIMUM BASE SALARY"). For each year thereafter during the
term hereof, the Minimum Base Salary shall be equal to 105% of the previous
Minimum Base Salary. All of Executive's compensation under this Agreement will
be subject to deduction and withholding authorized or required by applicable
law.
5. BONUS AND STOCK OPTION. The Company shall pay performance bonuses to
Executive or his assigns to the extent allowable by law, which shall be the
three percent (3%) of the Pre-Tax Net Income (determined prior to the deduction
-2-
<PAGE>
for any Earn-Out Payment) of the NC Company, up to his Minimum Base Salary (the
"Bonus"). The amount of Pre-Tax Income of NC Company shall be subject to
increase in the same manner as provided in the Acquisition Agreement (with
respect to the Earn-Out Payment) with respect to any residential real estate
holdings or operations of the Company and its affiliates in Northern California
which are not maintained and held in NC Company. The Bonus will be paid annually
in cash within sixty (60) days of the end of each Earn- Out Period. Executive
acknowledges that the Bonus, regardless of to whom payable, will be subject to
deduction and withholding authorized or required by applicable law. In addition,
the Company hereby grant Executive options to acquire 15,000 shares of common
stock pursuant to the Stock Option Agreement in the form of EXHIBIT A attached
hereto under the Company"s stock option plan. The exercise price of such options
shall be the closing price of a share of Company stock on the Closing of the
transactions contemplated in the Acquisition Agreement.
6. VACATION AND SICK LEAVE. Executive shall be entitled to take reasonable
vacation, holiday and sick leave, subject to the Company"s reasonable limits and
policies.
7. BENEFIT PLANS. Executive shall be eligible to participate in all benefit
plans made available to Company employees from time to time subject to any
applicable vesting periods. These benefits currently include a health plan and a
401(k) Plan. Nothing herein shall restrict Company's ability to terminate or
modify any benefit plan or arrangement.
8. EXPENSES. Company shall pay for or reimburse Executive for all ordinary
and necessary business expenses incurred or paid by Executive in furtherance of
Company's business, subject to and in accordance with Company's policies and
procedures of general application.
9. STAFF MANUAL. All other terms of Executives employment shall be governed
by the Company employee manual (the "Employee Manual"). The Company reserves the
right to amend the Employee Manual, from time to time, and Executive shall be
subject to changes made so long as such changes are applied to all Company
employees.
10. COVENANTS OF EXECUTIVE. In consideration of the agreement of the
Company (which shall include joint ventures (50% or more owned by Company),
subsidiaries and parent companies for purposes of Sections 10 and 11, whether in
corporate, partnership or other form) to employ Executive, until June 30, 2002,
and for the consideration provided to Executive pursuant to the Acquisition
Agreement, Executive hereby agrees that Executive will not, except in connection
with the performance of his duties hereunder, directly or indirectly, either as
an employee, partner, owner, director, adviser or consultant or in any other
capacity:
(a) Engage in the homebuilding or residential lot development business
(a "Competing Business") PROVIDED, HOWEVER, that the foregoing shall not
restrict (i) the ownership of less than 1% of a publicly-traded
homebuilding company, (ii) engaging in the homebuilding or residential lot
development business, in each case outside of Arizona, Texas, California,
and any other state which the Company develops operations in during the
term of this Agreement, or (iii) for a reasonable time period, the winding
up, settling, and closing of Sterling's business, including defending any
outstanding actions or proceedings involving Sterling, the Partners,
-3-
<PAGE>
Executive, or any entity in which the Executive, directly or indirectly,
have previously engaged in the homebuilding or residential lot development
business.
(b) Recruit, hire or discuss employment with any person who is, or
within the six month period preceding the date of such activity was, an
employee of the Company (other than as a result of a general solicitation
for employment);
(c) Solicit any customer or supplier of the Company for a Competing
Business or otherwise attempt to induce any such customer or supplier to
discontinue its relationship with the Company; or
(d) Executive represents to the Company that he is willing and able to
engage in businesses that are not Competing Businesses hereunder and that
enforcement of the restrictions set forth in this SECTION 10 would not be
unduly burdensome to Executive. Employee hereby agrees that the period of
time provided for in this SECTION 10 and the territorial restrictions and
other provisions and restrictions set forth herein are reasonable and
necessary to protect Company and its successors and assigns in the use and
employment of the goodwill of the business conducted by Executive prior to
the Closing Date and sold to Company pursuant to the Acquisition Agreement.
Executive further agrees that damages cannot compensate Company in the
event of a violation of this SECTION 10 and that, if such violation should
occur, injunctive relief shall be essential for the protection of Company
and its successors and assigns. Accordingly, Executive hereby covenants and
agrees that, in the event any of the provisions of this SECTION 10 shall be
violated or breached, Company shall be entitled to obtain injunctive relief
against the party or parties violating such covenants, without bond but
upon due notice, in addition to such further or other relief as may be
available at equity or law. Obtainment of such an injunction by Company
shall not be considered an election of remedies or a waiver of any right to
assert any other remedies which Company has at law or in equity. No waiver
of any breach or violation hereof shall be implied from forbearance or
failure by Company to take action thereof. Executive agrees to pay any and
all reasonable costs and expenses, including attorneys' fees, incurred by
Company in enforcing this provision if it is determined that Executive
breached this provision.
(e) Executive hereby agrees that upon the commencement by Executive of
employment with any third party during the period in which the terms of
this SECTION 10 are in effect, Executive shall promptly disclose to each
such new company the terms of this SECTION 10, and shall cause such company
to maintain such information in confidence. Executive further agrees and
authorizes Company to notify others, including customers of Company and any
such future employers of Executive, of the terms of this SECTION 10 and of
Executive's obligations hereunder.
11. CONFIDENTIALITY AND NONDISCLOSURE. It is understood that in the course
of Executive's employment with Company, Executive will become acquainted with
Company Confidential Information. Executive recognizes that Company Confidential
Information has been developed or acquired at great expense, is proprietary to
Company or its subsidiaries, and is and shall remain the exclusive property of
Company. Accordingly, Executive hereby covenants and agrees that he will not,
without the express written consent of Company, during Executive's employment
with Company or its subsidiaries and thereafter or until such time as Company
Confidential Information becomes generally known, or readily ascertainable by
-4-
<PAGE>
proper means, by persons unrelated to Company or its subsidiaries, disclose to
others, copy, make any use of, or remove from Company"s or its subsidiaries'
premises any Company Confidential Information, except as Executive's duties for
Company or its subsidiaries may specifically require. In the event of dispute or
litigation, Executive shall have the burden of proof that the Company
Confidential Information has become generally known, or readily ascertainable by
proper means, by persons unrelated to Company or its subsidiaries.
12. ACKNOWLEDGMENT; RELIEF FOR VIOLATION. Executive hereby agrees that the
period of time provided for in Section 10 and the territorial restrictions and
other provisions and restrictions set forth in Section 11 therein are reasonable
and necessary to protect Company, its subsidiaries and its and their successors
and assigns in the use and employment of the good will of the business conducted
by Company and its subsidiaries. Executive further agrees that damages cannot
compensate Company in the event of a violation of Section 10 or 11, and that, if
such violation should occur, injunctive relief shall be essential for the
protection of Company, its subsidiaries, and its and their successors and
assigns. Accordingly, Executive hereby covenants and agrees that, in the event
any of the provisions of Sections 10 and 11 shall be violated or breached,
Company shall be entitled to obtain injunctive relief against Executive, without
bond but upon due notice, in addition to such further or other relief as may
appertain at equity or law. Obtainment of such an injunction by Company shall
not be considered an election of remedies or a waiver of any right to assert any
other remedies which Company has at law or in equity. No waiver of any breach or
violation hereof shall be implied from forbearance or failure by Company to take
action thereon. Executive hereby agrees that he has such skills and abilities
that the provisions of Sections 10 and 11 will not prevent him from earning a
living. Each party agrees to pay its own costs and expenses in enforcing any
provision of this Agreement.
13. EXTENSION DURING BREACH. Executive agrees that the time period
described in Section 10 shall be extended for a period equal to the duration of
any breach of such provisions by Executive.
14. RETURN OF COMPANY MATERIALS AND COMPANY CONFIDENTIAL INFORMATION. Upon
Termination, Executive shall promptly deliver to Company the originals and all
copies of any and all materials, documents, notes, manuals, or lists containing
or embodying Company Confidential Information or relating directly or indirectly
to the business of Company in the possession or control of Executive.
15. NO AGREEMENT WITH OTHERS. Executive represents, warrants, and agrees
that Executive is not a party to any agreement with any other person or business
entity, including former employers, that in any way affects Executive's
employment by Company or relates to the same subject matter of this Agreement or
conflicts with his obligations under this Agreement, or restricts Executive's
services to Company.
16. TERMINATION FOR CAUSE. The Company may terminate this Agreement for
Cause by giving written notice of Termination and, with respect to a purported
violation of Section 1(b)(iii) of this Agreement that is curable in such time
period, shall afford Executive an opportunity to cure or disprove the purported
-5-
<PAGE>
violation for the thirty-day period following such notice. The Company may
immediately terminate this Agreement for Cause with respect to a violation of
Section 1(b)(i) or (ii). Upon Termination of Executive for Cause, Executive
shall be entitled to receive only the Minimum Base Salary, the amount of any
unpaid performance bonus earned in any complete fiscal year of the Company
preceding the date of termination, and any benefits as are due Executive through
the effective date of such Termination. No prorated Bonus shall be paid to
Executive upon a Termination for Cause. If this Agreement is terminated for a
violation of Section 1(b)(i) or (ii) Executive shall not receive any portion of
its Earn-Out pursuant to the Acquisition Agreement.
17. TERMINATION BY COMPANY WITHOUT CAUSE. If Executive is terminated
without Cause, Executive shall be entitled to receive Executive's Minimum Base
Salary for the remainder of the terms of this Agreement, payable pursuant to
normal payroll practices, the amount of any unpaid Bonus earned in any complete
fiscal year of the Company preceding the date of Termination, the prorated
portion of any current year Bonus, and any benefits including any disability
benefits provided to Executive under Company"s standard policies as in effect as
are due through July 1, 2002. In addition, the vesting of Executive's stock
options, if any, shall be accelerated, as if the Executive had served through
the end of the fiscal year of his Termination.
18. TERMINATION UPON DEATH OF EXECUTIVE. If during the term of this
Agreement Executive dies, then this Agreement shall terminate and Company shall
pay to the estate of Executive only the Minimum Base Salary, the amount of any
unpaid Bonus earned in any complete fiscal year of the Company preceding the
date of Termination, the prorated portion of any objectively determined current
year bonus, and any benefits (including any life insurance benefits provided to
Executive's estate under Company's standard policies as in effect) as are due
through the date of his death. In addition, the vesting of Executive's stock
options, if any, shall be accelerated, as if the Executive had served through
the end of the fiscal year of his Termination.
19. TERMINATION UPON DISABILITY OF EXECUTIVE. If during the term of the
Agreement Executive is unable to perform the services required of Executive
pursuant to this Agreement, with or without reasonable accommodation, for a
continuous period of ninety (90) days due to disability or incapacity by reason
of any physical or mental illness (as reasonably determined by Company by its
Board of Directors), then Company shall have the right to terminate this
Agreement at the end of such ninety-day period by giving written notice to
Executive. Executive shall be entitled to receive only the Minimum Base Salary
the amount of any unpaid Bonus earned in any complete fiscal year of the Company
preceding the date of Termination, the prorated portion of any current year
Bonus, and any benefits (including any disability benefits provided to Executive
under Company's standard policies as in effect) as are due through the date of
his disability. In addition, the vesting of Executive's stock options shall be
accelerated, as if the Executive had served through the end of the fiscal year
of his Termination.
20. INDEMNITY. The Company shall indemnify Executive (a) to the extent set
forth in the Company's Bylaws (provided such Bylaws do not treat Executive
differently from any other executive officer of the Company or its affiliates),
and (b) without restriction by the Company's Bylaws, as provided in the
Indemnification Agreement. Such indemnification shall survive the termination of
this Agreement.
-6-
<PAGE>
21. ARBITRATION. Any dispute, controversy, or claim, whether contractual or
non-contractual, between the parties hereto arising directly or indirectly out
of or connected with this Agreement, relating to the breach or alleged breach of
any representation, warranty, agreement, or covenant under this Agreement,
unless mutually settled by the parties hereto, shall be resolved by binding
arbitration in accordance with the Commercial Arbitration Rules of the American
Arbitration Association (the "AAA"). Any arbitration shall be conducted by
arbitrators approved by the AAA and mutually acceptable to Company and
Executive. All such disputes, controversies, or claims shall be conducted by a
single arbitrator, unless the dispute involves more than $50,000 in the
aggregate in which case the arbitration shall be conducted by a panel of three
arbitrators. If the parties hereto are unable to agree on the arbitrator(s),
then the AAA shall select the arbitrator(s). The resolution of the dispute by
the arbitrator(s) shall be final, binding, nonappealable, and fully enforceable
by a court of competent jurisdiction under the Federal Arbitration Act. The
arbitrator(s) shall award compensatory damages to the prevailing party. The
arbitrator(s) shall have no authority to award consequential or punitive or
statutory damages, and the parties hereby waive any claim to those damages to
the fullest extent allowed by law. The arbitration award shall be in writing and
shall include a statement of the reasons for the award. The arbitration shall be
held in San Francisco, California. The arbitrator(s) shall award reasonable
attorneys" fees and costs to the prevailing party.
22. SEVERABILITY; REFORMATION. In the event any court or arbiter determines
that any of the restrictive covenants in this Agreement, or any part thereof, is
or are invalid or unenforceable, the remainder of the restrictive covenants
shall not thereby be affected and shall be given full effect, without regard to
invalid portions. If any of the provisions of this Agreement should ever be
deemed to exceed the temporal, geographic, or occupational limitations permitted
by applicable laws, those provisions shall be and are hereby reformed to the
maximum temporal, geographic, or occupational limitations permitted by law. In
the event any court or arbiter refuses to reform this Agreement as provided
above, the parties hereto agree to modify the provisions held to be
unenforceable to preserve each party"s anticipated benefits thereunder.
23. NOTICES. All notices and other communications hereunder shall be in
writing and shall be sufficiently given if made by hand delivery, by telecopier,
or by registered or certified mail (postage prepaid and return receipt
requested) to the parties at the following addresses (or at such other address
for a party as shall be specified by it by like notice):
If to Company : Monterey Homes Corporation
6613 N. Scottsdale Road
Suite 200
Scottsdale, Arizona 85250
Phone: (602) 998-8700
Fax: (602) 998-9162
Attn: President
-7-
<PAGE>
With a copy to: Snell & Wilmer L.L.P.
One Arizona Center
Phoenix, Arizona 85004-0001
Phone: (602) 382-6252
FAX: (602) 382-6070
Attn: Steven D. Pidgeon, Esq.
If to Executive: Steve Hafener
1655 N. Main Street, Suite 240
Walnut Creek, California 94596
With a copy to: Miller Starr & Regalia
1331 N. California Blvd., Suite 500
Walnut Creek, California 94596
Phone: (925) 935-9400
Fax: (925) 933-4126
Attn: Karl Geier, Esq.
All such notices and other communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered; three business days
after being deposited in the mail, postage prepaid, if delivered by mail; and
when receipt is acknowledged, if telecopied.
24. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, and each counterpart shall constitute an original instrument, but
all such separate counterparts shall constitute one and the same agreement.
25. GOVERNING LAW. The validity, construction, and enforceability of this
Agreement shall be governed in all respects by the laws of the State of
California, without regard to its conflict of laws rules.
26. ASSIGNMENT. This Agreement shall not be assigned by operation of law or
otherwise, except that Company may assign all or any portion of its rights under
this Agreement to any Company entity, but no such assignment shall relieve
Monterey Homes Corporation, a Maryland corporation, or its Corporate Successor
(herein defined) of its primary liability of all obligations of the Company
hereunder, and except that this Agreement may be assigned to any corporation or
entity (a "Corporate Successor") with or into which Company may be merged or
consolidated or to which Company transfers all or substantially all of its
assets, and such corporation or entity assumes this Agreement and all
obligations and undertakings of Company hereunder.
27. FURTHER ASSURANCES. At any time on or after the date hereof, the
parties hereto shall each perform such acts, execute and deliver such
instruments, assignments, endorsements and other documents and do all such other
things consistent with the terms of this Agreement as may be reasonably
necessary to accomplish the transaction contemplated in this Agreement or
otherwise carry out the purpose of this Agreement.
-8-
<PAGE>
28. GENDER, NUMBER AND HEADINGS. The masculine, feminine, or neuter
pronouns used herein shall be interpreted without regard to gender, and the use
of the singular or plural shall be deemed to include the other whenever the
context so requires.
29. WAIVER OF PROVISIONS. The terms, covenants, representations,
warranties, and conditions of this Agreement may be waived only by a written
instrument executed by the party waiving compliance. The failure of any party at
any time to require performance of any provisions hereof shall, in no manner,
affect the right at a later date to enforce the same. No waiver by any party of
any condition, or breach of any provision, term, covenant, representation, or
warranty contained in this Agreement, whether by conduct or otherwise, in any
one or more instances, shall be deemed to be or construed as a further or
continuing waiver of any such condition or of the breach of any other provision,
term, covenant, representation, or warranty of this Agreement.
30. ATTORNEYS" FEES AND COSTS. If any legal action or any arbitration or
other proceeding is brought for the enforcement of this Agreement, or because of
an alleged dispute, breach, default, or misrepresentation in connection with any
of the provisions of this Agreement, the successful or prevailing party or
parties shall be entitled to recover reasonable attorneys" fees, accounting
fees, and other costs incurred in that action or proceeding, in addition to any
other relief to which it or they may be entitled.
31. SECTION AND PARAGRAPH HEADINGS. The Article and Section headings in
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement.
32. AMENDMENT. This Agreement may be amended only by an instrument in
writing executed by all parties hereto.
33. EXPENSES. Except as otherwise expressly provided herein, each party
shall bear its own expenses incident to this Agreement and the transactions
contemplated hereby, including without limitation, all fees of counsel,
consultants, and accountants.
34. ENTIRE AGREEMENT. This Agreement constitutes and embodies the full and
complete understanding and agreement of the parties hereto with respect to the
subject matter hereof, and supersedes all prior understandings or agreements,
whether oral or in writing.
35. WITHHOLDING. Executive acknowledges and agrees that payments made to
Executive by Company pursuant to the terms of this Agreement may be subject to
tax withholding and that Company may withhold against payments due Executive any
such amounts as well as any other amounts payable by Executive to Company.
36. RELEASE. Receipt by Executive of any of the severance benefits noted in
paragraphs 16, 17, 18 and 19 hereof following termination of Executive's
employment hereunder shall be subject to Executive's compliance with any
reasonable and lawful policies or procedures of Company relating to employee
severance including the execution and delivery by Executive of a release
reasonably satisfactory to Company and Executive of any and all claims that
Executive may have against Company or any related person, except for the
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<PAGE>
continuing obligations provided herein, and except for any claims arising out of
Company's fraudulent or criminal conduct, and an agreement that Executive shall
not disparage Company or any of its directors, officers, employees or agents.
Concurrent with the termination of Executive's employment hereunder pursuant to
paragraphs 16, 17, 18 or 19 hereof, and receipt of a release reasonably
satisfactory to the Company and Executive, the Company shall execute and deliver
to Executive a release, reasonably satisfactory to Company and Executive, of any
and all claims that Company may have against Executive, except for any claims
arising out of Executive's fraudulent or criminal conduct, and an agreement that
Company shall not disparage Executive.
[The Remainder of this Page Left Intentionally Blank]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement or
caused this Agreement to be duly executed on their respective behalf, by their
respective officers thereunto duly authorized, all as of the day and year first
above written.
MONTEREY HOMES CORPORATION, a
Maryland corporation
By: /s/ Larry W. Seay
-------------------------------------
Name: Larry W. Seay
-----------------------------------
Its: Vice President Finance & CFO
------------------------------------
/s/ Steve Hafener
----------------------------------------
Steve Hafener
SH CAPITAL, INC., a
California corporation
for the limited purpose of acknowledging
and agreeing to the provisions of
Section 16
By: /s/ Steve Hafener
-------------------------------------
Its: President
------------------------------------
-11-
AMENDMENT TO EMPLOYMENT AGREEMENT
The Employment Agreement (the "Agreement") dated July 7, 1998 by and
between Meritage Corporation (formerly Monterey Homes Corporation) and Steven
Hafener, is hereby modified as follows:
The performance bonus contained in paragraph 5 of the Agreement shall be
calculated and paid on a calendar year basis. The first bonus due shall be for
the period from July 1, 1998 to December 31, 1998 and shall be payable prior to
June 30, 1999. Thereafter, each bonus shall be calculated on a calendar year
basis, payable within 60 days of the calendar year end.
All other terms of the Employment Agreement remain in full force and
affect.
IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment to
the Agreement or caused this Amendment to the Agreement to be duly executed on
their respective behalf, by their respective officers thereto duly authorized,
all as of June 10, 1999.
MERITAGE CORPORATION, a
Maryland corporation
By: /s/ LARRY W. SEAY
------------------------------------
Name: Larry W. Seay
-----------------------------------
Its: Vice President Finance & CFO
-----------------------------------
/s/ STEVE HAFENER
----------------------------------------
Steve Hafener
SH CAPITAL, INC., a
California corporation
for the limited purpose of acknowledging
and agreeing to the provisions of
Section 16
By: /s/ STEVE HAFENER
------------------------------------
Name: Steve Hafener
-----------------------------------
Its: President
------------------------------------
CONSENT OF KPMG LLP
The Board of Directors
Meritage Corporation:
We consent to incorporation by reference in Registration Statement No. 333-58793
on Form S-3 and Registration Statements Nos. 33-38230 and 333-37859 and
333-75629 on Forms S-8 of Meritage Corporation of our report dated February 4,
2000, relating to the consolidated balance sheets of Meritage Corporation and
subsidiaries as of December 31, 1999 and 1998 and the related consolidated
statements of earnings, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1999 which appears in the
December 31, 1999 annual report on Form 10-K of Meritage Corporation.
/s/ KPMG LLP
Phoenix, Arizona
March 23, 2000
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 13,422,016
<SECURITIES> 0
<RECEIVABLES> 1,643,187
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<INVENTORY> 171,012,405
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0
0
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<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,945,353
<EPS-BASIC> 3.49
<EPS-DILUTED> 3.14
</TABLE>
