<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from____________ to _________
COMMISSION FILE NUMBER 0-21378
INCO HOMES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 33-0534734
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
1282 WEST ARROW HIGHWAY
UPLAND, CALIFORNIA 91786
(Address of principal executive offices)(Zip code)
(909) 981-8989
Registrant's telephone number, including area code
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK
(Title of class)
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 the 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.____
The aggregate market value of the voting stock held by non-affiliates
of the registrant on March 31, 1997 was $2,878,037.
The number of shares outstanding of each of the registrant's classes of
common stock on March 31, 1997 was as follows:
COMMON STOCK (PAR VALUE $.01 PER SHARE) 1,637,096 shares
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement relating to the Company's 1997 Annual
Meeting to be filed hereafter (incorporated into Part III hereof).
<PAGE> 2
PART I
ITEM 1. BUSINESS.
Except for historical information contained herein, the matters
discussed in this report contain forward-looking statements that involve risks
and uncertainties that could cause results to differ materially, including the
land valuation write-downs, changing market conditions, and other risks detailed
in this report.
GENERAL
Inco Homes Corporation ("Inco Homes" or the "Company") is a developer
and builder of affordably priced single-family detached homes. Historically, its
markets have been in Southern California, primarily in San Bernardino and
Riverside Counties, and to a lesser extent, in Los Angeles County. The Company's
homes are primarily targeted to the first time buyer and also to the first time
move-up buyer where the Company believes there is significant long-term demand.
The Company strives to deliver superior value to its homebuyers by aggressively
pricing its homes while providing a high quality product.
In 1994, Inco Homes entered the Phoenix, Arizona and Las Vegas, Nevada
markets as part of a diversification and growth strategy. During the fourth
quarter of 1994, the Company consolidated its two Southern California
homebuilding divisions, the High Desert Division and the Inland Division, into
one Southern California operation due to the reduced sales activity in the high
desert market and to realize the benefit of certain cost savings. In December
1995 the Company sold its Phoenix and Las Vegas homebuilding divisions to an
unrelated third party in order to raise needed capital and refocus on its
historical core markets in Southern California.
During 1996, prices for the Company's homes ranged from $59,990 to
$219,000, with an average sales price of $136,000. The Company believes that its
focus on affordable housing and history of developing and delivering these types
of homes since 1976 has helped it to develop a positive reputation in this
market with homebuyers.
The Company's business strategy in evaluating new projects includes
such factors as (i) the strength of the demand for affordable housing, (ii) the
existence and type of competition, (iii) the availability of relatively low-cost
land, (iv) the availability of utilities and zoning and (v) the receptiveness of
local government and community to growth in the housing sector. The Company
considers the demand for affordable housing by evaluating such statistical
information as (i) the projected growth of the population, (ii) the number of
new jobs created or projected to be created, (iii) the number of housing starts
in previous periods, (iv) housing inventory and (v) sales absorption rates.
The Company places great emphasis on customer service and relations and
maintaining favorable visibility in the markets in which the Company builds
homes. This emphasis on customer service and relations and the Company's
value-driven product have earned the Company substantial referrals and a
favorable reputation among homebuyers and local governments. The Company
believes that customer service and relations is an integral part of its
strategy. See " -- Customer Service and Relations."
The Company was incorporated in October 1992 to succeed to the
homebuilding business of its predecessors (the "Predecessor Subsidiaries")
operating under the "Inco Homes" name through several limited partnerships and
various corporations under the control of Ira C. Norris, the Company's founder
(the "Reorganization"). Pursuant to an exchange offer made to the shareholders
and partners of the Predecessor Subsidiaries which was effected in April 1993 at
the time of the Company's initial public offering (the "Initial Public
Offering") of its Common Stock, the Company (i) acquired the outstanding capital
stock or partnership interests of the Predecessor Subsidiaries and (ii)
consolidated ownership of all of the Company's projects and businesses, except
those related to Inco Land Acquisition Company and Palmdale Vistas Housing
Developments, L.P. ("Palmdale Vistas"), into the Company. Under the terms of the
Reorganization, the consideration paid to acquire the outstanding capital stock
and partnership interests of the Predecessor Subsidiaries consisted of shares of
Common Stock. Inco Homes(R) and the Company's logo are registered trademarks of
the Company.
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<PAGE> 3
THE HOMEBUILDING INDUSTRY
The homebuilding industry is cyclical and is significantly affected by
changes in general and local economic conditions, such as employment levels,
availability of land, availability and cost of financing land acquisition,
development and construction, interest rates, consumer confidence and housing
demand, as well as changes in elected officials and changes in government
regulation. A variety of other factors affect the housing industry and demand
for new homes, including changes in costs associated with home ownership such as
increases in property taxes and energy costs, changes in consumer preferences,
demographic trends and the availability of and changes in mortgage financing
programs. Homebuilders are subject to various risks, including conditions of
supply and demand in local markets, availability and cost of land, building
materials and labor, weather conditions, delays in construction schedules, cost
overruns, the entitlement process, the effect of moratoriums and environmental
controls, decreased availability of homeowners insurance, and increases in real
estate taxes and other local government fees. The Company's business could be
adversely affected in the event the Company is not able to attract qualified
subcontractors for its projects. Although the Company generally believes its
relationships with its subcontractors have been good, recently relationships
with certain subcontractors have weakened due to its inability to pay all of its
subcontractors on a current basis. Numerous subcontractors and suppliers have
filed liens, and some are pursuing further legal action, including the filing of
complaints. The Company has negotiated payment arrangements, as appropriate, in
an effort to settle these claims and release the liens. Certain of the Company's
projects are long-term in nature and are particularly susceptible to cyclical
real estate conditions and the other risks outlined above due to the significant
up-front expenditures required and the length of time required to achieve
profits from these projects.
During 1996, the Company's financial results were particularly affected
by certain factors, including but not limited to the continued low sales
activity in Southern California, higher mortgage interest rates during a portion
of the year, and the 1995 sale of its Phoenix and Las Vegas divisions.
SOUTHERN CALIFORNIA HOUSING MARKETS
As a result of the 1995 sale of the Company's Phoenix and Las Vegas
divisions, the Company currently conducts all of its business in the Southern
California Counties of San Bernardino, Riverside and Los Angeles. The Company
believes that the depressed economic and real estate conditions in California
over the last several years have adversely affected its results of operations,
most particularly in the high desert region of San Bernardino County. Due to the
large number of defense contractors and major corporations located in
California, the state's economy has been adversely affected by military spending
cutbacks. The prolonged economic downturn in California has had and could
continue to have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company continues to conduct detailed reviews of its land holdings,
which include land costs, capitalized costs and related seller financing. This
has resulted in various writedowns and allowances in current and prior years.
Additionally, in both 1995 and 1994 the Company concluded that certain
seller-financed parcels were no longer economically viable based on current
financing terms. Accordingly, several measures were initiated, including
requests that certain sellers substantially restructure the terms of their debt,
including extending the maturity date, reducing or eliminating payment and
accrual of interest and deferring principal payments. The Company also
identified certain properties that should be deeded back to the sellers in full
satisfaction of the remaining debt outstanding. There can be no assurance that
there will be no write-off of additional costs in the future.
The areas in which the Company operates in California are subject to
earthquakes and other natural disasters. Damage to the Company's projects or
highway access to such projects from such earthquakes or other natural
disasters, or the perception of potential homebuyers as to the possible damage
to a home in these areas, could have a material adverse effect on the Company's
business, financial condition and results of operations. To the Company's
knowledge, the Company has never suffered any physical damage to its projects as
a result of an earthquake, including the Northridge earthquake in January 1994.
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SUMMARY OF RESIDENTIAL PROJECTS
Table I presents information relating to the Company's projects
completed since 1987. All homes are single-family detached homes.
TABLE I - PROJECTS COMPLETED SINCE 1987
<TABLE>
<CAPTION>
TOTAL
NUMBER
YEAR OF SALES PRICE
PROJECT CITY COUNTY COMPLETED HOMES RANGE (1)
- ------- ---- ------ --------- ----- ---------
<S> <C> <C> <C> <C> <C>
Liberty Village Victorville San Bernardino 1987 784 $49,990-$85,990
Moreno Del Rey Moreno Valley Riverside 1987 119 89,990-123,990
Atlantic Village Palmdale Los Angeles 1988 127 92,990-105,990
Catalina Collection Moreno Valley Riverside 1989 124 99,990-155,990
Southlake Moreno Valley Riverside 1989 185 104,990-154,990
Pacific Village Palmdale Los Angeles 1991 283 112,990-210,990
Liberty Village Victorville San Bernardino 1991 446 80,990-108,990
Country Village Victorville San Bernardino 1991 189 85,990-135,990
Mustang Series at Northfork Murrieta San Bernardino 1992 123 129,990-198,990
Hunter Classic at Northfork Murrieta San Bernardino 1992 77 194,990-255,990
Paloverde at Eagle Ranch Victorville San Bernardino 1992 116 112,990-147,990
American Traditions Palmdale Los Angeles 1993 89 99,990-127,990
Estates of Chaparral at Eagle Ranch Victorville San Bernardino 1994 88 169,990-219,990
Summerplace Indio Riverside 1994 156 84,990-108,990
Dakota at Eagle Ranch Victorville San Bernardino 1995 79 102,990-133,490
Spirit at Eagle Ranch Victorville San Bernardino 1995 104 119,990-153,990
Pride at Eagle Ranch Victorville San Bernardino 1995 39 89,990-127,990
American Traditions Adelanto San Bernardino 1995 401 79,990-100,990
Harmony Adelanto San Bernardino 1995 25 97,990-130,990
Hometown Adelanto San Bernardino 1995 526 72,990-85,990
Victory Lenwood Lenwood San Bernardino 1995 24 53,990-63,990
Pride at Wildrose Corona Riverside 1995 102 126,990-151,490
Spirit Murrieta Riverside 1995 261 133,990-171,990
Pride at Tradition East Chandler Maricopa 1995 73(2) 91,990-121,990
Reunion at Tradition East Chandler Maricopa 1995 103(2) 85,990-110,990
Victory at Amberlea Phoenix Maricopa 1995 55(2) 66,990-91,990
Hometown Las Vegas Clark 1995 63(2) 84,990-105,990
Reunion Las Vegas Clark 1995 58(2) 99,990-122,990
Victory Las Vegas Clark 1995 22(2) 72,990-94,990
Ventana Victorville San Bernardino 1996 196 136,990-169,990
======
Total 5,037
======
</TABLE>
- -----------------
(1) Sales price range reflects base price, excluding any lot premiums,
buyer-selected options and incentives, which vary from project to project.
(2) Reflects homes closed by the Company prior to the December 1995 sale of
the Phoenix and Las Vegas divisions.
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Table II presents information as of December 31, 1996 relating to the
Company's projects in which construction is either in progress or is in the
planning process. All homes are single-family detached homes. In all cases the
Company either owns the land or has a contract or option to acquire the land,
and all such land is entitled.
TABLE II - CURRENT AND PLANNED PROJECTS
<TABLE>
<CAPTION>
ANTICIPATED
HOMES HOME SITES OR ACTUAL
ESTIMATED NUMBER CLOSED REMAINING YEAR
OF HOMES AT AS OF AS OF OF INITIAL SALES PRICE
PROJECT LOCATION (1) COMPLETION(2) 12/31/96 12/31/96 CLOSINGS(3) RANGE(4)
------- ------------ ---------------- -------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
HIGH DESERT
Eagle Ranch
Freedom (5) Victorville 166 0 166 1997 $106,990 - 128,540
Additional Land (6) Victorville 993 0 993 n/a n/a
----- --- -----
Total Eagle Ranch 1,159 0 1,159
----- --- -----
Adelanto
Victory Lane Adelanto 331 311 20 1993 59,990 - 82,990
Reunion Adelanto 72 70 2 1994 91,990 - 118,990
Winners Circle (7) Adelanto 162 1 161 1996 91,990 - 114,990
Land to be deeded
back(8) Adelanto 527 0 527 n/a n/a
----- --- -----
Total Adelanto 1,092 382 710
----- --- -----
Other
Spirit (9) Palmdale 261 51 210 1995 139,000 - 163,000
Triumph (10) Lancaster 78 3 75 1996 72,990 - 90,990
Vista Verde (6) Victorville 756 0 756 n/a n/a
Vista Verde-Land to be
deeded back (11) Victorville 56 56 n/a n/a
----- --- -----
0
Total Other 1,151 54 1,097
----- --- -----
Total High Desert 3,402 436 2,966
----- --- -----
INLAND
Bella Vita (12) Fontana 83 0 83 1997 179,990 - 219,990
Hometown (formerly Lake Elsinore 63 36 27 1995 99,990 - 141,990
Reunion)
Hometown-Land to be
deeded back (13) Lake Elsinore 115 0 115 n/a n/a
Desert Pride (formerly La Quinta 150 10 140 1995 119,990 - 146,990
Reunion)
Spirit (14) Corona 144 80 64 1995 170,000 - 219,000
----- --- -----
Total Inland 555 126 429
----- --- -----
TOTAL COMPANY 3,957 562 3,395
===== === =====
</TABLE>
- -----------
(1) Victorville, Adelanto and Fontana are located in San Bernardino County.
Palmdale and Lancaster are located in Los Angeles County. Lake Elsinore,
La Quinta and Corona are located in Riverside County.
(2) Estimated number of homes at completion is subject to change and there can
be no assurance that the Company will build these homes.
(3) Anticipated year of initial closing is based on the Company's current
planning estimates and forecasts, new orders and the status of
construction at these projects, and therefore is subject to change.
(4) Sales price range reflects estimated base price, excluding any lot
premiums, buyer-selected options and incentives, which vary from project
to project.
(5) The Company is the managing general partner of, and has a 50% interest in,
Freedom-Eagle Ranch Housing Partners ("FERHP"), the limited partnership
that owns this project. One of the owners of two entities that own
approximately 12.2% of the Company's outstanding common stock and a
warrant to acquire approximately an additional 10.9%, respectively, is a
partner of FERHP. See "Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters" and "Item 8. Financial Statements and
Supplementary data, Note 8" herein. See also "Certain Relationships and
Related Transactions" in the Company's Proxy Statement for its 1997 Annual
Meeting of Stockholders (the "1997 Proxy Statement"), which, when filed
pursuant to Regulation 14A under the Securities Act of 1934, will be
incorporated by reference in this Annual Report on Form 10-K. (6)
Represents additional land owned by the Company which will be used for
future projects.
(7) 45% of project net income from the sale of 151 of these homes will be paid
by the Company to ALG 1996-1 ("ALG"), the holder of a Secured
Participation Note. Thomas E. Gibbs, Jr., a member of the Company's Board
of Directors, holds a 25% general partner's interest in ALG. See "Item 8.
Financial Statements and Supplementary Data, Note 9" herein, and "Certain
Relationships and Related Transactions" in the Company's 1997 Proxy
Statement.
5
<PAGE> 6
(8) This land, which is subject to seller financing aggregating $1.0 million
at December 31, 1996, is anticipated to be deeded back to the sellers in
satisfaction of the related debt. See " -- Southern California Housing
Markets."
(9) The Company is the managing general partner of, and has a 51.295% interest
in, Palmdale Vistas Housing Developments, Ltd. ("Palmdale Vistas"), the
limited partnership that owns this project. Mr. Gibbs holds a 1.295%
limited partner's interest in Palmdale Vistas, and also a 23% general
partner's interest and a 1.376% limited partner's interest in Palmdale
Vistas Housing Investments, a limited partnership which holds a 47.41%
limited partner's interest in Palmdale Vistas. See "Item 8. Financial
Statements and Supplementary Data, Note 9" herein, and "Certain
Relationships and Related Transactions" in the Company's 1997 Proxy
Statement.
(10) The Company is the managing general partner of, and has a 50% interest in,
Triumph-Lancaster Housing Partners ("Triumph"), the limited partnership
that owns this project. The Gibbs Family Trust, of which Mr. Gibbs is a
beneficiary and a trustee, holds a 50% limited partner's interest in
Triumph. See "Item 8. Financial Statements and Supplementary Data, Note 9"
herein, and "Certain Relationships and Related Transactions" in the
Company's 1997 Proxy Statement.
(11) This land, which is subject to seller financing aggregating $0.3 million
at December 31, 1996, was deeded back to the sellers in January 1997 in
satisfaction of the related debt. See " -- Southern California Housing
Markets."
(12) 50% of project net income from the sale of these homes will be paid by the
Company to Hunters Ridge Investment Partners ("HRIP"), the holder of a
Secured Participation Note. Mr. Gibbs is the managing general partner of
HRIP, with a 56.25% interest. See "Item 8. Financial Statements and
Supplementary Data, Note 9" herein, and "Certain Relationships and Related
Transactions" in the Company's 1997 Proxy Statement.
(13) This land, which is subject to seller financing aggregating $0.4 million
at December 31, 1996, is anticipated to be deeded back to the sellers in
satisfaction of the related debt. See " -- Southern California Housing
Markets."
(14) The Company is the general partner of, and has a 50% interest in, Spirit
Corona 77, L.P. ("Spirit 77"), the limited partnership that is developing
77 of these home sites. The Company purchased 31 developed lots from this
partnership in 1996, 10 additional lots in February 1997, and expects to
purchase the remaining lots. However, the Company is in default on the
Purchase Agreement since the Company has not purchased all of the required
minimum number of lots from Spirit 77. The Company and Spirit 77 are
currently negotiating a modification to the Purchase Agreement.
Additionally, the Company is in default on two notes payable to Spirit 77
related to the purchase of lots in 1996. The Company and Spirit 77 are
currently negotiating extensions to the due dates of these notes.
LAND ACQUISITION AND DEVELOPMENT
The Company generally purchases land that has the necessary
entitlements to enable the Company to begin development or construction as
market conditions warrant. In addition, as the Company becomes familiar with
local entitlement and zoning procedures, or when the location and/or price is
attractive, the Company may buy unentitled land upon completion of a feasibility
analysis. The term "entitlements" refers to development agreements and/or
tentative maps, pursuant to which a developer has the right to obtain building
permits upon compliance with conditions which are usually within the developer's
control. Even if entitlements are obtained prior to the Company's purchase of
the land, however, the Company is still required to obtain a variety of
governmental approvals and permits during the development process. The Company
strives to acquire land as economically as possible, and to negotiate land
purchase contracts which allow the Company to defer payment for parcels until it
is ready to begin construction.
The Company selects its land for development based upon a variety of
additional factors, including: (i) internally and externally generated
demographic and marketing studies; (ii) soil and other physical conditions of
the site; (iii) financial and legal reviews as to the feasibility of the
proposed project, including projected profitability; (iv) the ability to secure
necessary financing and additional governmental approvals and entitlements; (v)
environmental due diligence; (vi) competition; (vii) proximity to local traffic
corridors and community facilities; (viii) infrastructure requirements for
grading, drainage, utilities and streets; and (ix) management's judgment as to
the real estate market, economic trends and the Company's experience in a
particular market.
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<PAGE> 7
In some cases, the Company purchases finished lots which are ready for
construction. In other instances, the Company purchases land or obtains an
option to purchase land that may require certain site improvements prior to
construction. The Company then undertakes the development activities that
include site planning and engineering, as well as constructing roads, sewer,
water, utilities and drainage facilities and other amenities. The activities are
carefully managed, with the phases geared to anticipated demand.
The Company historically has conducted some residential development
activities through partnerships in order to fund a portion of the Company's land
acquisition, model complex development costs and initial marketing expenditures.
The Company will continue to utilize such partnership arrangements when
management perceives a favorable opportunity. In 1996 the Company formed three
such limited partnerships, FERHP, Triumph and Spirit 77, for certain projects in
which the Company is the general partner and has a 50% interest. Additionally,
in 1996 the Company was the maker of Secured Participation Notes with ALG and
HRIP, providing the holders with 45% and 50%, respectively, of a certain
project's net income. Thomas E. Gibbs, Jr., a member of the Company's Board of
Directors, holds partnership interests in each of Triumph, ALG and HRIP. Also,
one of the owners of two entities which own approximately 12.2% of the Company's
outstanding common stock and a warrant to acquire approximately an additional
10.9%, respectively, is a partner of FERHP. See "Item 8. Financial Statements
and Supplementary Data, Notes 8 and 9" herein, and "Certain Relationships and
Related Transactions" in the Company's 1997 Proxy Statement.
With respect to its landholdings, the Company maintains the flexibility
to sell parcels of land adjacent to existing phases of a project to other
builders in a single transaction or a series of transactions. Sales of land and
lots, which are not the Company's principal business focus, are made to take
advantage of market opportunities that might exist from time to time.
Accordingly, these sales vary from year to year depending on market conditions.
Land sales were $373,000 in 1994. The Company had no land sales in 1996 or 1995.
In addition, parcels of land owned by the Company and adjacent to its
residential projects may be zoned for commercial use. To date, the Company has
never built on commercial land, and does not intend to build on such land, but
may later sell, lease or joint venture such land with commercial property
developers. In December 1996, in consideration of a $50,000 payment, the Company
gave an exclusive option to a third party to purchase approximately 71 acres of
commercial property located in one of the Company's high desert projects. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations."
CONSTRUCTION
The Company strives to develop a design and marketing concept for each
of its housing subdivisions, which includes determination of size, style and
price range of the homes, layout of streets, layout of individual lots and
overall community design. The product line offered in a particular subdivision
depends upon many factors, including the housing generally available in the
area, the needs of a particular market and the Company's cost of lots in the
subdivision.
The development, construction and closing of each project generally is
managed at the various stages by Company employees reporting to persons
responsible for the various disciplines. Projects move through a series of
stages, departmentally organized, beginning with the entitlement process, if
applicable, and ending with the closing and post-closing stages. The Company
believes this strategy, as opposed to assigning each project to a manager who is
responsible for all stages of development, is more efficient, providing for
standardized procedures, quality service and considerable cost savings.
The Company utilizes what it considers to be a "manufacturer's
approach" to home construction, always seeking to increase production efficiency
and position itself to be among the lowest-cost producers in each of its
markets. The Company (i) generally adheres to strict construction schedules and
standardized plans, (ii) generally pre-sells a majority of its homes before
commencing construction of a phase of a project, and (iii) generally purchases
land that has necessary entitlements. See " -- Land Acquisition and
Development."
7
<PAGE> 8
The Company acts as the general contractor for the construction of its
residential projects. The Company's employees supervise the construction of each
project, coordinate the activities of subcontractors and suppliers, subject
subcontractors' work to quality and cost controls and assure compliance with
zoning and building codes, but do no actual construction. The Company specifies
that high-quality, durable materials be used in the construction of its homes.
The Company's subcontractors follow design plans prepared by architects who are
retained by the Company and whose designs are geared to the local market.
Subcontractors typically are retained on a project-by-project basis to complete
construction at a fixed price. Agreements with the Company's subcontractors are
generally entered into after competitive bidding.
The Company generally believes its relationships with its
subcontractors has been good. However, as a result of the limited amount of
available working capital, relationships with certain subcontractors have
weakened due to the Company's inability to pay all of its subcontractors and
their suppliers on a current basis. Numerous subcontractors and suppliers have
filed liens, and some are pursuing further legal action, including the filing of
complaints. The Company has negotiated payment arrangements, as appropriate, in
an effort to settle these claims and release the liens. The Company does not
believe that any of these claims, in the aggregate, will have a material adverse
financial effect on the Company's business. However, if the Company continues to
have disputes with its subcontractors and suppliers, in the future it may be
difficult for the Company to attract and retain qualified subcontractors and
suppliers who are willing to work with the Company and the Company's business
could be adversely affected.
Generally, the Company "pre-sells" (execution of a sales contract,
receipt of a deposit, and generally an indication of the buyer's ability to
qualify for a mortgage) a majority of the homes to be built in a phase before
construction in that phase is commenced. Construction lenders typically specify
minimum pre-sale requirements. The Company attempts to minimize cancellations by
requiring a refundable cash deposit of approximately $500 to $2,500 and by
training its sales force to assess the qualification of potential homebuyers.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The Company generally adheres to strict construction schedules and
standardized plans. Construction time for the Company's homes depends on the
availability of labor, materials and supplies, product type and location, but
the Company historically has completed construction of a home within three to
six months from commencement. Homes are designed to promote efficient use of
space and materials and to minimize construction costs and time.
Materials used in the construction of the Company's homes are available
from a number of sources, but material prices may fluctuate due to various
factors, including demand or supply shortages. Construction labor and materials
have generally been available to the Company, although in 1994 there was a
strike by the employees of one of the Company's cabinet suppliers. While the
strike was eventually settled, it had the effect of delaying approximately 50
closings from the third quarter to the fourth quarter of 1994. Although there is
presently an adequate supply of labor and materials it is possible that future
shortages of skilled workers and/or materials may occur. See " -- The
Homebuilding Industry."
The Company generally provides a one-year limited warranty of
workmanship and materials with each of its homes. In addition, California law
provides a ten-year period during which consumers can seek redress for
structural defects in new homes. The Company reserves against the possibility of
charges relating to its one-year warranty. In 1994, certain homeowners in one of
the Company's Southern California projects filed a complaint against the Company
alleging construction defects. See "Item 3. Legal Proceedings."
MARKETING AND SALES
The Company develops marketing programs tailored to the specific buyers
and markets in which the Company operates. The Company takes a consumer product
approach to marketing its homes, conducting product research and developing
buyer and visitor profiles on each project. Techniques employed by the Company
include referral incentives, customer testimonials, direct mail, television,
radio and print advertisements.
8
<PAGE> 9
The Company normally builds, decorates, furnishes and landscapes model
homes for each project and maintains on-site sales offices, which typically are
open seven days a week. The Company believes that model homes and the selection
of interior designs play a particularly important role in the Company's
marketing efforts. Consequently, the Company expends a significant effort in
creating an attractive atmosphere at its model homes. Interior decorations vary
among the Company's models and are carefully selected based upon the lifestyles
of targeted buyers.
Structural changes in design from the Company's standard plans are not
generally permitted, but homebuyers may select various optional amenities.
Additionally, the Company has designed a number of homes offering an options
program that gives homebuyers numerous opportunities to customize the interior
design without significant additional cost. For example, these options may
provide for the ability to tailor a room according to a homebuyer's needs such
as a third garage space, an extended family room, or an additional den, bedroom
or bonus room.
In June 1994, the Company opened a design center in Southern California
to provide homebuyers with a greater visual presentation of the available
amenities and options, primarily in the area of flooring and window treatments.
Most of the Company's homebuyers that have upgraded their flooring and window
treatments have utilized the Company's design center.
The Company sells its homes primarily through its internal sales force,
who typically work from the sales offices located at the model homes used in
each subdivision. In January 1997, the Company contracted with an independent
sales and marketing company to manage its sales force. The Company also uses
independent and cooperative brokers. Company personnel are available to assist
prospective buyers by providing them with floor plans, price information and
tours of model homes and by assisting them with the selection of options. The
Company's selection of interior features is a principal component of its
marketing and sales efforts. Sales personnel are trained by the Company and
attend periodic meetings to be updated on sales techniques, competitive products
in the area, the variety of financing programs available, construction schedules
and marketing and advertising plans, which management believes results in
reduced training costs and a more motivated sales force with extensive knowledge
of the Company's operating policies and housing products.
Through a customer referral program, persons referring homebuyers to
the Company may receive $250 or more from the Company at the closing of a home
sale.
The Company has developed a savings program to assist homebuyers in
saving the money required to close the sale of their home. Under the savings
program, the Company determines the monthly contribution required to be put into
escrow so that the homebuyer has sufficient money in escrow to close the
purchase of the home when it is completed. The Company monitors the homebuyer's
contributions to escrow under the savings program.
CUSTOMER FINANCING
The Company seeks to assist its homebuyers in obtaining financing by
arranging with independent mortgage lenders to offer qualified buyers a variety
of financing options and to process their loans. When necessary, the Company
provides prospective homebuyers free credit counseling and prequalification to
determine the price of the home they are able to afford. These services had been
provided through the Company's wholly-owned mortgage brokerage subsidiary,
Freedom Mortgage, Inc. ("Freedom"). In the third quarter of 1995, the Company
transferred the California and Las Vegas operations of Freedom to an unrelated
third party and in December 1995 transferred the Phoenix operations in
connection with the sale of its Phoenix division.
Substantially all homebuyers utilize long-term mortgage financing to
purchase a home and lenders generally make loans only to borrowers who earn
three to four times the total amount of the mortgage payment plus insurance and
property taxes. Therefore, adverse economic conditions such as increases in
unemployment and high mortgage interest rates can eliminate a substantial number
of potential homebuyers from the market. When necessary, the Company will pay a
fee to subsidize interest rates to assist homebuyers with financing. Under such
programs, lower interest rates on mortgages are provided to the Company's
homebuyers than would otherwise prevail under then-current market conditions.
Although mortgage financing for qualified homebuyers was readily available
during 1996, there can
9
<PAGE> 10
be no assurance that mortgage financing will remain readily available to the
Company's customers as a result of changing general economic conditions and any
restrictions of the ability of mortgage finance markets to provide financing for
the purchase of homes by homebuyers. The Company attempts to minimize its
exposure to interest rate fluctuations by purchasing mortgage financing
commitments that lock in the availability of funds and interest rates at
specified levels for a certain period of time and by entering into hedging
contracts, as it deems necessary. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Most of the Company's current projects meet applicable Federal Housing
Administration ("FHA") or Veteran's Administration ("VA") requirements. In 1996,
1995 and 1994, FHA or VA financing was provided to a substantial number of
purchasers of the Company's homes. FHA and VA financing generally enables
homebuyers to purchase homes with lower down payments than the down payments
required by conventional mortgage lenders. The principal reason why certain of
the Company's projects may not meet applicable FHA or VA requirements is that
the base price of homes in those projects exceeds established FHA or VA maximum
home prices. The Company believes that the availability of FHA and VA financing
broadens the group of potential purchasers for the Company's homes. The VA
financing limit is $203,000. The FHA financing limit is $152,362 in San
Bernardino and Riverside Counties, and $160,950 in Los Angeles County. The FHA
generally permits loans for up to 97% of the value of the home.
In general, housing demand is adversely affected by increases in
interest rates. If mortgage interest rates increase significantly, affecting
prospective buyers' ability to adequately finance home purchases, the Company's
business, financial condition and results of operations could be materially
effected. The Company's homebuilding activities are also dependent upon the
availability and cost of mortgage financing for (i) potential customers who
purchase a home from the Company, and (ii) buyers of homes owned by potential
customers so they can sell their existing homes and purchase new homes from the
Company, to the extent they are not first time buyers. In addition, the Company
believes that the availability of FHA or VA mortgage financing is an important
factor in marketing its homes. Any limitations or restrictions on the
availability of such financing could have a material adverse effect on the
Company's business, financial condition and results of operations.
CUSTOMER SERVICE AND RELATIONS
The Company believes that providing a high level of customer service is
a key component of its homebuilder strategy. Salespeople are encouraged to
develop a personal relationship with the homebuyers and offer encouragement and
guidance throughout the homebuying process. The Company has developed video
brochures for some of the Company's projects which provide information about the
homebuying process, emphasizing the advantages of home ownership, and
reinforcing why homebuyers should purchase one of the Company's homes. These
videos are designed to motivate potential homebuyers on an emotional level,
presenting an image of community and orienting potential homebuyers to local
shopping, hospitals, industry, schools and recreation. The videos also
familiarize homebuyers with the loan and escrow procedures, as well as the final
home inspection process.
The Company provides each homebuyer with a Homebuyer's Information
Booklet describing area amenities and services, such as schools, health services
and emergency services. A Warranty and Information Guide identifies the
appliances, fixtures and heating/cooling and other systems installed in the
house, and provides information on warranties, maintenance and manufacturer
information. The Company's utilization of these sales and closing programs are
designed to reduce the prospective homebuyer's anxiety over relocating and to
help the homebuyer settle into the new neighborhood.
Approximately thirty days after closing, every homebuyer is asked to
complete a questionnaire that evaluates all aspects of the buying experience,
including questions about the home itself, the salespeople, the escrow process,
mortgage financing assistance, the closing process and customer service. The
Company uses the responses to identify any problem areas, as well as to evaluate
and improve the floor plans and amenities offered in the Company's projects.
The Company believes that its commitment to customer service has earned
the Company substantial referrals and an excellent reputation among homebuyers.
10
<PAGE> 11
COMPETITION AND MARKET FORCES
The development and sale of residential properties is highly
competitive. Homebuilders, such as the Company, compete for desirable
properties, financing, raw materials and skilled labor. The Company competes for
residential sales on the basis of a number of interrelated factors, including
location, reputation, amenities, design, quality and price, with numerous large
and small homebuilders, including some homebuilders with nationwide operations
and greater financial resources than the Company. The Company also competes for
residential sales with individual resales of existing homes and condominiums and
with available rental housing. Entrants into the markets in which the Company
operates increases competition in those markets. In response to declining
overall home sales, the Company has been required to provide homebuyers with
price discounts and other sales incentives in order to remain competitive. This
has resulted in reduced profitability or losses for the homes that the Company
has sold. In addition, sales of homes and land at deeply discounted prices by
competitors, lenders and similar institutions in the markets where the Company
operates could have a material adverse effect on the Company's business,
financial condition and results of operation. Competition for the acquisition of
desirable real estate on which to build homes is also intense.
The housing industry is cyclical and affected by consumer confidence
levels and prevailing economic conditions in general and by job availability and
interest rate levels in particular. A variety of other factors affect the
housing industry and demand for new homes, including changes in costs associated
with home ownership such as increases in property taxes and energy costs,
changes in consumer preferences, demographic trends and the availability of and
changes in mortgage financing programs.
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
The Company is subject to a variety of statutes and rules regulating
certain environmental and developmental matters, as well as building design and
site design.
The Company generally purchases land with entitlements, giving it the
right to obtain building permits upon compliance with specified conditions which
are within the Company's control. Upon compliance with such conditions, the
Company must seek building permits for each house. In developing a project, the
Company must obtain the approval of numerous governmental authorities regulating
such matters as permitted land uses and levels of density and the installation
of utility services such as electricity, water and waste disposal. The length of
time necessary to obtain permits and approvals increases the carrying costs of
unimproved property acquired for the purpose of development and construction.
Several governmental authorities in California have imposed fees as a means of
defraying the cost of providing certain governmental services to developing
areas. To date, the governmental approval processes discussed above have not had
a material adverse effect on the Company's development activities. In addition,
because the Company generally purchases land that has already been zoned for
residential development, restrictive zoning issues also have not had a material
adverse effect on the Company's development activities. However, there is no
assurance that these and other restrictions will not adversely affect the
Company in the future.
The Company may also be subject to additional costs or periodic delays
or may be precluded entirely from developing communities due to building
moratoriums or "slow-growth" or "no-growth" initiatives, building permit
allocation ordinances or similar governmental regulations that could be
implemented in the future in the areas in which it operates. Because the Company
usually purchases land with entitlements, the moratoriums generally would only
adversely affect the Company if they arose from unforeseen health, safety and
welfare issues. Local and state governments also have broad discretion regarding
the imposition of development fees for projects in their jurisdiction.
The Company is also subject to a variety of local, state and federal
statutes, ordinances, rules and regulations concerning protection of the
environment. The particular environmental laws which apply to any given
community vary greatly according to the community site, the site's environmental
conditions and the present and former uses of the site. These laws may result in
delays, cause the Company to incur substantial compliance costs, and prohibit or
severely restrict development in certain environmentally sensitive regions or
areas. Homebuilding projects in California are especially susceptible to
restrictive government regulations and environmental laws. Environmental
regulations can also have an adverse impact on the availability and price of
certain raw materials such as lumber.
11
<PAGE> 12
BONDS AND OTHER OBLIGATIONS
The Company is frequently required, in connection with the development
of its projects, to post performance, maintenance and other bonds. The amount of
these bonds outstanding at any time varies in accordance with the Company's
pending development activities. In the event any such obligations are drawn upon
because of the Company's failure to build required infrastructure, the Company
would be obligated to reimburse the issuing surety company or bank. The Company
has never defaulted on any such bond. At December 31, 1996, there were
approximately $8.9 million in outstanding bonds for such purposes.
EMPLOYEES
At December 31, 1996, the Company employed 63 persons. None of the
Company's employees are covered by collective bargaining agreements. The Company
believes that its relations with its employees are good. Certain of the
subcontractors that the Company engages are represented by labor unions or are
subject to collective bargaining arrangements. During 1994, there was a strike
by the employees of one of the Company's cabinet suppliers. While the strike was
eventually settled, it had the effect of delaying approximately 50 closings from
the third quarter to the fourth quarter of 1994.
The Company's success is highly dependent upon the performance of its
senior management and, in particular, Ira C. Norris, President of the Company,
who is well recognized in California's homebuilding industry. The loss of key
personnel or an inability to attract, retain and motivate key personnel could
have a material adverse effect on the Company's business. Mr. Norris intends to
continue to devote his full time to the affairs of the Company.
At March 31, 1997, Ira C. Norris and Ronald L. Neeley, directors of the
Company, own beneficially approximately 25% and 8% of the Company's outstanding
Common Stock, respectively. Due to this ownership position, Mr. Norris and Mr.
Neeley may be able to control the affairs and policies of the Company and may be
able to elect a sufficient number of directors to control the Company's Board of
Directors and to approve or disapprove any matter submitted to a vote of
stockholders. Furthermore, Mr. Norris and Mr. Neeley may have conflicts of
interest with other stockholders with respect to the affairs and policies of the
Company. The ownership positions of Mr. Norris and Mr. Neeley, together with the
anti-takeover effect of certain provisions contained in the Company's Restated
Certificate of Incorporation and Restated Bylaws, may have the effect of
delaying, deferring or preventing a change in control of the Company. These
factors could have an adverse effect on the market price of the Company's Common
Stock.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following are the names and respective ages as of December 31, 1996
of the executive officers of the Company. The Company's executive offers are
elected by, and serve at, the discretion of the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Ira C. Norris.......................... 60 Chairman of the Board, President and Chief
Executive Officer
Robert H. Daskal....................... 55 Executive Vice President, Chief Financial
Officer and Director (1)
Norman B. Gold......................... 44 Vice President, Chief Financial Officer (1)
Lynn C. Parkes......................... 44 Controller
</TABLE>
(1) Robert H. Daskal stepped down from his positions as Executive Vice
President and Chief Financial Officer on January 15, 1997 to pursue other
professional interests. He will remain a member of the Company's board of
12
<PAGE> 13
directors and will be available to the Company on a consulting basis. Norman B.
Gold was elected by the Company's Board of Directors as Vice President and Chief
Financial Officer on January 15, 1997.
Ira C. Norris founded the Company in 1976, and has served as the
Chairman of the Board, President and Chief Executive Officer since that time.
From 1968 to 1976, Mr. Norris served as a Corporate Vice President and Division
Operating Manager of Kaufman and Broad, Inc., a company engaged in the real
estate and life insurance business. From 1960 to 1968, he was an independent
builder/developer in Los Angeles and the San Fernando Valley suburbs.
Robert H. Daskal was Executive Vice President and Chief Financial
Officer from October 1994 until his resignation in January 1997. Prior to
joining the Company, Mr. Daskal was Executive Vice President-Finance and Chief
Financial Officer of UDC Homes, Inc., a homebuilder in Tempe, Arizona, from 1985
to 1994.
Norman B. Gold has been affiliated with the Company since September
1994 in various capacities, most recently as Director of Finance and Accounting.
Prior to joining the Company, Mr. Gold was Financial Vice President of Barclay
Associates, Inc., a builder/developer in Newport Beach, California, from 1985 to
1994.
Lynn C. Parkes has been the Controller since June 1992. She served as
the Director of Human Resources from early 1989 until she became Assistant
Controller in December 1989, and served in that position until she was promoted
to Controller. Ms. Parkes joined the Company in 1980, serving in various
capacities.
ITEM 2. PROPERTIES.
At December 31, 1996, the Company had leased 8,187 square feet of
office space in Southern California, for its corporate headquarters and design
center operations. These two leases expire in May 1997 and September 2000,
respectively. The Company believes that in general its facilities are sufficient
to meet its needs for the next year.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in routine litigation arising in the ordinary
course of business. Such matters, if decided adversely to the Company, would
not, in the opinion of management, have a material adverse effect on the
financial condition of the Company. In addition, from time to time, the Company
could be involved in litigation in connection with claims of development or
construction defects, which matters, if decided adversely to the Company, could
have a material adverse effect on the financial condition of the Company.
In 1994, a former employee initiated litigation against the Company for
wrongful termination and other employment related claims. The parties agreed to
a final settlement of cash, notes payable through April 1997, and restricted
stock and the litigation was dismissed. The full amount of the settlement was
accrued in 1994.
In May 1994, the owners of 11 homes sold by the Company at its 201-home
Northfork project located in Murrieta, California filed a complaint against Inco
Development Corporation, a wholly-owned subsidiary of the Company ("Inco
Development"), in the Superior Court of California in Riverside County. In June
1994, the owners of six additional homes filed a separate complaint. These two
complaints were consolidated into one action. Subsequent to the consolidation,
one of the homeowners dismissed the lawsuit due to the Company's repair of the
alleged defects. In August 1994, one additional homeowner filed a complaint. In
October 1996, an additional eighteen homeowners filed a separate complaint. The
complaint was subsequently amended to include an additional four homeowners. The
Company is attempting to have this complaint consolidated with the previously
consolidated complaints. The complaints each allege, among other things,
negligence, nuisance, strict liability, breach of warranty, negligent infliction
of emotional distress and fraud based on alleged design and construction defects
and inadequate soils conditions. The plaintiffs are seeking general, special,
and punitive damages in an unspecified amount, and attorney fees. The causes of
action for fraud were dismissed by the court in 1994 with respect to the
complaints filed in 1994, and accordingly, there are no claims for punitive
damages. The Company believes that the claims made against it are without merit
and intends to continue to vigorously defend itself in this action. The Company
believes that this litigation will not have a material adverse effect on the
Company's business. Additionally, the Company believes it has adequate insurance
coverage to pay the majority of claims and the costs related to these
complaints, if any. However, as
13
<PAGE> 14
this litigation is still in process, it is not possible to predict with
certainty the ultimate outcome and the impact on the Company, and therefore no
assurances can be given with respect thereto.
As a result of the limited amount of available working capital,
relationships with certain subcontractors have weakened due to the Company's
inability to pay all of its subcontractors and their suppliers on a current
basis. Numerous subcontractors and suppliers have filed liens, and some are
pursuing further legal action, including the filing of complaints. The Company
has negotiated payment arrangements, as appropriate, in an effort to settle
these claims and release the liens. The Company does not believe that any of
these claims, in the aggregate, will have a material adverse financial effect on
the Company's business. However, if the Company continues to have disputes with
its subcontractors and suppliers, in the future it may be difficult for the
Company to attract and retain qualified subcontractors and suppliers who are
willing to work with the Company and the Company's business could be adversely
affected.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
On December 16, 1996, a "Notice of Special Meeting of Stockholders To
Be Held on January 15, 1997" was sent to stockholders of record as of December
11, 1996. At the special meeting, a majority of the stockholders approved an
amendment to the Company's Restated Certificate of Incorporation to effect a
reverse stock split of the Company's Common Stock such that every six (6) shares
of Common Stock outstanding would be converted into one (1) share of Common
Stock. The amendment became effective January 16, 1997.
14
<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock was quoted on the Nasdaq National Market
tier of the Nasdaq Stock Market under the symbol "INHM" from April 2, 1993 to
November 10, 1996. Effective November 11, 1996, the Common Stock became listed
on the Nasdaq SmallCap Market tier of the Nasdaq Stock Market under the same
symbol. Subsequent to the Company's reverse stock split, on January 16, 1997 the
Company's symbol was changed to "INHMD". The following table shows the high and
low closing sales prices for the Common Stock of the Company for the periods
indicated, as reported by the Nasdaq National Market through November 10, 1996
and reported by the Nasdaq SmallCap Market thereafter. These prices do not
include retail markups, markdowns or commissions.
<TABLE>
HIGH LOW
---- ---
<S> <C> <C>
Quarter ended March 31, 1995...................................... 12.75 7.50
Quarter ended June 30, 1995....................................... 15.378 6.75
Quarter ended September 30, 1995.................................. 11.25 6.00
Quarter ended December 31, 1995................................... 8.25 4.125
Quarter ended March 31, 1996...................................... 8.25 5.25
Quarter ended June 30, 1996....................................... 6.375 3.00
Quarter ended September 30, 1996.................................. 5.625 2.625
Quarter ended December 31, 1996................................... 4.095 1.125
Quarter ended March 31, 1997 ..................................... 5.25 1.75
</TABLE>
Prices listed above have been restated as if the reverse stock split on
January 16, 1997 was in effect for all periods presented. See "Item 4.
Submission of Matters to a Vote of Security-Holders".
The closing sale price of the Company's Common Stock as reported on the
Nasdaq SmallCap Market on March 31, 1997 was $2.625 per share. As of March 31,
1997, there were approximately 154 holders of record of the Company's Common
Stock.
DIVIDENDS
The Company has not declared or paid any cash dividends on its Common
Stock since the Initial Public Offering. The Company anticipates that all
earnings in the foreseeable future will be retained to finance the continuing
development of its business and does not anticipate paying cash dividends on its
Common Stock in the foreseeable future. The payment of any future dividends will
be at the discretion of the Company's Board of Directors and will depend upon,
among other things, future earnings, the success of the Company's business
activities, capital requirements, the general financial condition of the Company
and general business conditions.
RECENT SALES OF UNREGISTERED SECURITIES
In December 1996, the Company entered into a Common Stock Purchase
Agreement with a third party to sell 200,000 shares (restated for reverse stock
split) of the Company's common stock in a private transaction. The stock was
issued subsequent to year end for a total purchase price of $750,000. The
Company also granted the third party the right to require the Company to
register the stock for public sale with the Securities and Exchange Commission.
At that time, in consideration of a $50,000 payment, the third party was also
given an exclusive option to purchase approximately 71 acres of commercial
property located in one of the Company's high desert projects. Additionally, in
December 1996, the Company issued a warrant to purchase 200,000 shares (restated
for reverse stock split) of common stock in a private transaction to an entity
related to this third party. The warrant was
15
<PAGE> 16
issued as compensation for all services to be performed pursuant to a Consulting
Agreement entered into in December 1996. The Consulting Agreement is for a term
of two years during which the related entity, on a non-exclusive basis, shall
seek out, investigate and pursue residential development projects and present
them to the Company for its consideration and approval. The warrant may be
exercised within eighteen months of the date of the agreement at a price of
$5.25 per share (restated for reverse stock split). If at least half of the
warrant shares are not exercised during this period, then half of the warrant
shares will expire, with the balance exercisable over an additional eighteen
month period at $9.75 per share (restated for reverse stock split). The related
entity may also convert the warrant shares or any portion thereof into shares of
common stock using a formula based upon the fair market value of the Company's
common stock on the conversion date. These transactions were exempt pursuant to
Rule 505 under Regulation D. One of the owners of this third party and the
related entity is a partner in FERHP, one of the Company's consolidated
partnerships, and is a general partner of the owner of land in which the Company
has entered into a Development and Marketing Agreement. See "Item 8. Financial
Statements and Supplementary Data, Note 8."
16
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data of the Company are qualified by
reference to and should be read in conjunction with the financial statements,
related notes thereto and other financial data included elsewhere herein. These
historical results are not necessarily indicative of the results to be expected
in the future. Common stock shares and per share data have been restated to give
effect to the Company's reverse stock split.
See "Item 4. Submission of Matters to a Vote of Security Holders."
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------
CONSOLIDATED COMBINED
-------------------------------------------- ---------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue from home sales $ 19,591 $ 71,317 $ 71,168 $ 85,189 $ 69,483
Revenue from land and lot sales -- -- 373 -- --
-------- -------- -------- -------- --------
Total 19,591 71,317 71,541 85,189 69,483
-------- -------- -------- -------- --------
Cost of homes sold 18,260 61,836 63,388 67,381 53,987
Cost of land and lots sold -- -- 205 -- --
-------- -------- -------- -------- --------
Total 18,260 61,836 63,593 67,381 53,987
Gross profit 1,331 9,481 7,948 17,808 15,496
Selling and marketing expenses 3,039 8,034 13,004 8,587 6,537
General and administrative expenses 2,066 3,825 7,858 4,071 4,270
-------- -------- -------- -------- --------
Operating income (loss) (3,774) (2,378) (12,914) 5,150 4,689
Other income 77 353 112 376 208
Sale of divisions - net -- 31 -- -- --
Mortgage brokerage income (loss) -- net -- (355) (320) 436 157
Provision for write-down of real estate (785) (11,043) (6,714) -- --
Settlement of compensation for services
and severance arrangements (1) -- -- -- 1,043 (2,392)
-------- -------- -------- -------- --------
Income (loss) before minority partners'
share and provision (benefit) for
income taxes (4,482) (13,392) (19,836) 7,005 2,662
Minority partners' share (214) -- (28) 859 4,083
-------- -------- -------- -------- --------
Income (loss) before provision
(benefit) for income taxes (4,268) (13,392) (19,808) 6,146 (1,421)
Provision (benefit) for income taxes -- 2,284 (7,718) 1,330 408
-------- -------- -------- -------- --------
Net income (loss) $ (4,268) $(15,676) $(12,090) $ 4,816 $ (1,829)
======== ======== ======== ======== ========
Net income (loss) per common share
(restated for reverse stock split) $ (3.01) $ (11.68) $ (9.08)
======== ======== ========
PRO FORMA STATEMENT OF OPERATIONS DATA
(UNAUDITED)(2):
Pro forma net income $ 4,303 $ 3,045
======== ========
Pro forma net income per common share
(restated for reverse stock split) $ 3.45 $ 3.05
======== ========
Weighted average number of common
shares outstanding (restated for
reverse stock split) 1,418 1,342 1,331 1,248 998
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------------
CONSOLIDATED COMBINED
---------------------------------------------- --------
BALANCE SHEET DATA: 1996 1995 1994 1993 1992
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Real estate inventories $36,752 $40,535 $72,371 $69,199 $ 59,021
Total assets 40,632 45,774 81,771 79,325 63,227
Notes payable secured by real estate 15,360 16,660 30,577 23,244 29,475
Lines of credit 4,303 4,840 5,000 2,750 --
Notes to stockholder 676 -- -- -- 2,498
Minority partners' investment in
consolidated partnerships 876 -- -- 29 23,483
Stockholders' equity (deficit) 12,284 15,532 31,058 43,148 (1,950)
</TABLE>
- ----------
(1) During the year ended December 31, 1992, settlement of compensation for
services and severance arrangements reflects an estimated non-cash
charge for the value of certain shares of Common Stock issued
17
<PAGE> 18
in connection with the Reorganization. During the year ended December
31, 1993, the Company recognized income in the amount of approximately
$1,043,000 which was attributable to the adjusted final settlement of
the estimated charge from the previous year.
(2) The pro forma statement of operations data reflect the effects on the
historical statements of operations data for the years ended December
31, 1993 and 1992 as if (i) the Reorganization had taken place on
January 1, 1992, (ii) settlement of compensation for services and
severance arrangements was eliminated and (iii) the amount of
compensation paid to Ira C. Norris was limited to the $750,000 maximum
compensation arrangements effective during 1993 and 1994. The pro forma
statement of operations data also reflects provisions for federal and
state income taxes assuming a 40% effective tax rate.
18
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Except for historical information contained herein, the matters
discussed in this report contain forward-looking statements that involve risks
and uncertainties that could cause results to differ materially, including the
land valuation write-downs, changing market conditions, and other risks detailed
in this report.
OVERVIEW
The Company's results of operations for the periods presented reflect
the cyclical nature of the homebuilding industry and the Company's historical
focus on the Southern California housing market. The most recent peak in the
industry cycle occurred in 1988 and 1989, which was followed by a downturn in
1990, coinciding with the general national recession and the depressed economic
and real estate conditions in Southern California. These conditions continued in
1996 and have had an adverse impact on the Company's results of operations.
The Company's financial results have been adversely affected by the
continuing weakness in the Southern California new home market. In response to
declining overall home sales in this market, the Company has been required to
provide homebuyers with price discounts and other sales incentives in order to
remain competitive. This has resulted in reduced profitability or losses on the
homes that the Company has sold.
In 1994 the Company entered the Phoenix and Las Vegas markets, and
expanded its operations in Riverside County of Southern California.
Additionally, in 1994 the Company implemented cost reduction measures including
(i) consolidation of its High Desert Division with its Inland Division and (ii)
closing or reducing the scope of several communities in the high desert region.
These cost reduction efforts continued in 1995 and 1996. In 1995, the Company
closed an additional underperforming project in the high desert region and
reduced the current scope of development of a project in Riverside County.
During the third quarter of 1995, the Company further consolidated all
of its Southern California operations and personnel in one location, closing its
Inland Division operating office and relocating the division into office space
at the Company's headquarters in Upland. The Company also sold its insurance
services operations to an unrelated third party and transferred the California
and Las Vegas operations of its mortgage brokerage subsidiary to an unrelated
third party.
In December 1995 the Company sold its Phoenix and Las Vegas operations,
including its Phoenix mortgage operations, to an unrelated third party. The
sales price was $14.5 million, of which the purchaser assumed $12.0 million of
bank indebtedness, and accounts payable and accrued liabilities. This sale was
consummated as a result of the Company's continuing efforts to raise needed
capital, and enabled the Company to focus its efforts and capital on its
historical core business in Southern California. However, the sale initially has
resulted in a reduced level of closings and revenues, and has had an adverse
effect on earnings.
As a result of cost controls and the consolidation of offices, the
Company reduced its total personnel from 162 at December 31, 1994 to 63 at
December 31, 1996.
As a result of the impact of the sale of the Phoenix and Las Vegas
operations on future earnings, the land deed backs and write-downs, and current
business operations, pursuant to Statement of Financial Accounting Standards No.
109 ("SFAS No. 109") "Accounting for Income Taxes", as of December 31, 1996 the
Company has recorded reductions of the deferred tax asset with a cumulative
valuation allowance of $11.7 million to reflect the uncertainties created
regarding the timing of the realization of the deferred tax asset. No assurances
can be given that the Company will not have to record a further valuation
allowance against future tax benefits.
In 1994, the Company recorded charges of approximately $2.8 million
related to costs associated with a proposed debt offering, certain post-warranty
work at one of its projects and other litigation costs and the settlement of an
outstanding lumber purchase commitment. The Company had pursued a private debt
offering that was terminated
19
<PAGE> 20
due to unfavorable market conditions. The post-warranty work was performed in an
effort to mitigate construction defect claims by homeowners at the affected
project.
RESULTS OF OPERATIONS
The following discussion of results of operations and financial
condition should be read in conjunction with the Selected Financial and
Operating Data and the Financial Statements and Notes thereto.
The following table sets forth, for the periods indicated, selected
information of the Company as of and for each of the three years ended December
31, 1996, 1995, and 1994:
<TABLE>
<CAPTION>
For Year Ended December 31,
---------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING DATA:
Number of Homes Closed 144 595 600
Average Sales Price $ 136,000 $ 119,900 $ 118,600
Revenue from Home Sales $19,591,000 $71,317,000 $71,168,000
</TABLE>
The following table sets forth, for the periods indicated, the
percentage of the Company's revenue represented by each line item:
<TABLE>
<CAPTION>
For Year Ended December 31,
-----------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Gross Margin from Homes Closed 6.8% 13.3% 10.9%
Selling, Marketing and General and
Administrative Expenses 26.1% 16.7% 29.2%
Operating Loss (19.3)% (3.3)% (18.1)%
</TABLE>
Revenue from Home Sales
Revenue from home sales in 1996 was $19.6 million, a decrease of $51.7
million from revenue of $71.3 million during 1995. The total number of homes
closed in 1996 was 144 at an average sales price of $136,000, compared to 595
homes closed at an average sales price of $119,900 in 1995, a decrease of 75.8%
in number of homes closed and a 13.4% increase in average sales prices.
The following table sets forth, for the periods indicated, the number
of homes closed by the Company's three operating divisions:
<TABLE>
<CAPTION>
For Year Ended December 31,
---------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Southern California Division
High Desert 89 144 316
Riverside County 55 124 237
Phoenix Division (1) -- 184 47
Las Vegas Division (1) -- 143 --
--- --- ---
Total: 144 595 600
=== === ===
</TABLE>
- ----------
(1) In December 1995 the Company sold its Phoenix and Las Vegas home
building divisions to an unrelated third party. See "Item 1. Business
-- General."
20
<PAGE> 21
The decrease in revenue and number of homes closed during the year
ended December 31, 1996 is attributable to the close-out of two successful
subdivisions in Riverside County in 1995, the sale of the Phoenix and Las Vegas
divisions and a decrease in demand combined with declining inventory available
for sale in Southern California. The increased average sales price is
attributable to a change in the mix of homes offered for sale.
Revenue from home sales in 1995 was $71.3 million, an increase of
$100,000 from revenue of $71.2 million during 1994. The total number of homes
closed in 1995 was 595 at an average sales price of $119,900, compared to 600
homes closed at an average sales price of $118,600 in 1994, a decrease of 0.8%
in number of homes closed and a 1.1% increase in average sales prices. The
Company estimates that the sale of its Phoenix and Las Vegas divisions
eliminated approximately 40 to 50 potential December 1995 new home closings in
these two markets.
Revenue From Land and Lot Sales
Revenue from land and lot sales, which are not the Company's principal
business focus, is generated when such sales are made to take advantage of
market opportunities that might exist from time to time. Accordingly, these
sales vary from year to year. The $373,000 of land sales revenue in 1994
represents the sale of a 10 acre parcel in the Company's Eagle Ranch master
planned community in Southern California to a local school district and the sale
of a land contract in Las Vegas. The Company had no land sales in 1996 or 1995.
Cost of Homes Sold
Cost of homes sold includes land acquisition, development,
construction, direct and indirect costs, job-site supervision, customer service,
warranty costs, capitalized interest, property taxes and other capitalized
indirect costs.
Cost of homes sold during the year ended December 31, 1996 was $18.3
million, a decrease of $43.5 million, or 70.5%, from $61.8 million during the
year ended December 31, 1995. Cost of homes sold as a percentage of revenue
increased to 93.2% in the year ended December 31, 1996 from 86.7% in the same
period in 1995. The increase in cost of homes sold as a percentage of revenue
for the year ended December 31, 1996 is the result of a number of factors
including price discounts and other sales incentives due to continuing
competitive pressures, the close out of certain high desert communities and
certain fixed costs included in cost of homes sold.
Cost of homes sold during the year ended December 31, 1995 was $61.8
million, a decrease of $1.6 million, or 2.5%, from $63.4 million during the year
ended December 31, 1994. Cost of homes sold as a percentage of revenue decreased
to 86.7% in the year ended December 31, 1995 from 89.1% in the same period in
1994. The primary reasons for the decrease in cost of homes sold as a percentage
of revenue were increased lumber costs in 1994, and a lower percentage of home
closings in the high desert market in 1995, partially offset by a write-off of
capitalized costs associated with the operation of the Company's Phoenix and Las
Vegas divisions.
The Company believes that, since the prices of lumber, other building
materials and related services are subject to fluctuation, its gross margins in
future periods may be significantly affected by changes in prevailing prices. In
late 1992 and throughout 1993, the Company encountered a significant increase in
the price of lumber purchased for use in its homes. In response, the Company in
the fourth quarter of 1993 entered into a lumber purchase contract for 600 homes
in 1994 at specified pre-established prices. The Company purchased lumber for
approximately 100 homes under the contract. In February 1995, the Company
reached an agreement with the lumber company to settle its outstanding lumber
purchase commitment for $800,000, $645,000 of which was paid during 1995, with
the balance paid during 1996.
For a description of certain risks associated with the homebuilding
industry, see "Item 1. Business -- The Homebuilding Industry."
21
<PAGE> 22
Selling and Marketing Expenses
Selling expenses include loan discount points, internal and third party
sales commissions, escrow fees, title insurance fees and other closing costs.
Selling expenses were $1.5 million and $3.3 million for the years ended
December 31, 1996 and 1995, respectively, a decrease of $1.8 million or 56.3%.
Selling expenses as a percentage of revenue were 7.5% and 4.7% for the years
ended December 31, 1996 and 1995, respectively. The decrease in the dollar
amount of selling expenses was a result of the sale of the Phoenix and Las Vegas
divisions, a smaller number of active projects in Southern California and the
implementation of cost reduction measures to further reduce selling expenses.
The increase in selling expenses as a percentage of revenue is primarily due to
financing and sales incentives granted to homebuyers as a result of higher
interest rates and low sales activity, and the low level of closing revenues.
Selling expenses were $3.3 million and $3.4 million for the years ended
December 31, 1995 and 1994, respectively, a decrease of $100,000, or 2.9%. The
decrease is directly related to the slight decrease in the number of homes
closed. Selling expenses as a percentage of revenue were 4.7% and 4.8% for the
years ended December 31, 1995 and 1994, respectively.
Marketing expenses include advertising and promotion and costs
associated with maintaining model homes and sales offices. Marketing expenses in
any given period may be significantly influenced by the number of grand openings
and the number of projects which are being actively marketed during the period.
Marketing costs associated with items such as establishing the sales offices and
upgrading standard homes to model homes are capitalized when incurred and are
expensed as revenue is earned, while other marketing costs are expensed as
incurred.
Marketing expenses were $1.6 million and $4.7 million for the years
ended December 31, 1996 and 1995, respectively, representing a 66.4% decrease.
As a percentage of revenue, marketing expenses were 8.0% and 6.6% for the years
ended December 31, 1996 and 1995, respectively. The decrease in the dollar
amount of marketing costs was a result of the sale of the Phoenix and Las Vegas
divisions, a smaller number of active projects in Southern California and the
continuation of cost reduction measures to further reduce marketing expenses.
The increase in marketing costs as a percentage of revenues is due to the low
level of closing revenues. During 1996, the Company had grand openings for three
new projects and was delivering homes from nine active projects compared with
four grand openings and fourteen active projects in 1995.
Marketing expenses were $4.7 million and $9.6 million for the years
ended December 31, 1995 and 1994, respectively, representing a 51.0% decrease.
As a percentage of revenue, marketing expenses were 6.6% and 13.4% for the years
ended December 31, 1995 and 1994, respectively. The decrease in marketing costs
was a result of a number of factors. During 1995, the Company had grand openings
for four new projects and was delivering homes from fourteen active projects,
compared with nine grand openings and seventeen active projects in 1994.
Marketing expenses in 1994 included increased marketing programs and sales
incentives in the high desert and the accelerated write-off of previously
capitalized marketing costs of $2.2 million due to closing or reducing the scope
of seven projects in the high desert. In 1995 the Company accelerated the
write-off of $600,000 of previously capitalized marketing costs relating to one
project in the high desert and one project in Riverside County. Additionally, in
1995 the Company implemented cost reduction measures to further reduce its
marketing expenses.
General and Administrative Expenses
General and administrative expenses include payroll and related
benefits, insurance, financial reporting, general office expense and other
corporate and division level expenses.
General and administrative expenses were $2.1 million and $3.8 million
for the years ended December 31, 1996 and 1995, respectively, a decrease of $1.7
million or 46.0%. As a percentage of total revenue, general and administrative
expenses were 10.5% and 5.4% for the years ended December 31, 1996 and 1995,
respectively. The decrease in the dollar amount of general and administrative
expenses primarily reflects the sale of the Phoenix and Las
22
<PAGE> 23
Vegas divisions and the Company's continuing cost reduction measures. The
increase as a percentage of revenues is due to the low level of closing
revenues.
General and administrative expenses were $3.8 million and $7.9 million
for the years ended December 31, 1995 and 1994, respectively, a decrease of $4.1
million or 51.9%. As a percentage of total revenue, general and administrative
expenses were 5.4% and 11.0% for the years ended December 31, 1995 and 1994,
respectively. General and administrative expenses for 1995 decreased as a result
of the consolidation of the Southern California operating divisions, the
subsequent relocation of this division into office space at the Company's
headquarters, the cessation of its insurance services operations and the results
of other cost reduction measures. The Company also recorded approximately $2.2
million of charges in 1994 including costs associated with a proposed debt
offering that was terminated due to unfavorable market conditions, charges
related to post warranty work at one of its projects performed to potentially
mitigate construction defect claims by homeowners and other litigation costs
(See "Item 3. Legal Proceedings."), and costs associated with closing the High
Desert Division in 1994.
Other Income
Other income includes the interest earned on cash balances related to
certain projects, miscellaneous income and revenue from the Company's insurance
services operation. Other income was $77,000 and $353,000 for the years ended
December 31, 1996 and 1995, respectively a decrease of 78.2%. Other income was
$353,000 and $112,000 for the years ended December 31, 1995 and 1994,
respectively, an increase of 215.2%. Changes in other income from 1996 to 1995
and from 1995 to 1994 are primarily attributable to the sale of the Company's
insurance services operations in the third quarter of 1995 to an unrelated third
party.
Mortgage Brokerage Income (Loss) - Net
Mortgage brokerage income (loss) - net of Freedom, the Company's prior
mortgage brokerage business, reflects revenue earned from loan origination,
discount and servicing release fees, net of costs.
In the third quarter of 1995, the Company transferred the California
and Las Vegas operations of Freedom to an unrelated third party, and recorded a
write-off for unamortized start-up costs and the undepreciated portion of
certain fixed assets of Freedom in the amount of $100,000, and in December 1995
the Company transferred its Phoenix operations in conjunction with the sale of
its Phoenix division.
Freedom realized a net loss of $355,000 and $320,000 for the years
ended December 31, 1995 and 1994, respectively. The net losses are primarily
attributable to Freedom's low capture rate and its high general and
administrative costs.
Provision for Write-Down of Real Estate Assets
Effective January 1, 1996, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 121 ("SFAS No. 121") "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of", which requires impairment losses to be recorded on long-lived assets being
developed, based on fair value, when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount. Assets held for sale are to be carried at the
lower of cost or fair value less the costs to sell.
Prior to 1996, real estate inventories are carried at the lower of
historical cost or estimated net realizable value. Net realizable value is the
price obtainable in the future for parcels as improved with a completed housing
unit, net of disposal and holding costs (including interest), without provision
for future profit and without discounting future cash receipts to present value.
The estimation process in determining the value of real estate
inventories is inherently uncertain and relies to a considerable extent on
current and future economic and market conditions, the availability of suitable
financing
23
<PAGE> 24
to fund holding, development and construction activities, and the
repayment or refinancing of existing indebtedness. Such economic and market
conditions may affect management's development and marketing plans. Accordingly,
the ultimate realization of the Company's real estate inventories is dependent
upon future events and conditions that may cause realizations to differ from
amounts presently estimated.
In 1996, the Company determined that the undiscounted cash flows
estimated to be generated by various real estate holdings were less than the
assets' carrying amounts. An impairment allowance, which writes these assets
down to fair value was established at December 31, 1996 totaling $785,000, of
which $255,000 relates to properties in the high desert and $530,000 relates to
a property in Riverside County. Additionally, in both 1995 and 1994, the Company
determined that it was necessary to reflect a reduction in the estimated future
cost recovery of various real estate holdings and established an allowance for
net realizable value. Write-downs of real estate totaling $5.8 million were
recorded as of December 31, 1995, of which $4.4 million related to properties in
the high desert and $1.4 million related to properties in Riverside County.
Write-downs of real estate totaling $2.6 million were recorded as of December
31, 1994, all of which related to properties in the high desert.
The Company also concluded in 1995 and 1994 that certain
seller-financed parcels were no longer economically viable based on current
financing terms. Accordingly, several measures were initiated, including
requests that certain sellers substantially restructure the terms of their debt
(including extending the maturity date, reducing or eliminating payment and
accrual of interest and deferring principal payments). The Company also
identified certain properties that should be deeded back to the sellers in full
satisfaction of the remaining debt outstanding. In 1995 the Company commenced
negotiations with six land sellers from whom the Company purchased land in the
high desert. The Company owned these properties subject to seller loans that had
current or approaching maturity dates. In this regard, the Company recorded a
charge to operations in 1995 of $5.3 million. The balance of the related real
estate inventories and indebtedness at December 31, 1995 was $3.1 million. In
1996, the Company deeded property with a book value of $2.1 million back to four
of these land sellers in satisfaction of $2.1 million in indebtedness.
Continuing negotiations may result either in extensions of maturity dates and/or
other adjustments to the seller notes, or deedbacks of the two remaining
properties with a book value of $1.0 million to the sellers in satisfaction of
$1.0 million in indebtedness outstanding at December 31, 1996.
During 1995 the Company also reduced the scope of one community in
Riverside County which resulted in the write-off of approximately $300,000 of
previously capitalized costs associated with architectural development and
marketing activities. As of December 31, 1996, the Company was still in the
process of deeding back land to the seller from whom the Company purchased the
property that will result in a reduction of real estate inventories of $0.4
million in satisfaction of $0.4 million of indebtedness outstanding at December
31, 1996.
In 1995, the Company established a reserve in the amount of $300,000 to
cover the write-off of previously capitalized costs associated with an under
performing subdivision in the high desert area. Also in 1995, the balance of the
land in this subdivision was returned to the original seller pursuant to the
terms of the purchase contract and the remaining debt of $240,000 was deemed
satisfied.
In 1994, the Company commenced the process of deeding property back to
nine other land sellers from whom the Company purchased land in the high desert.
In this regard, the Company recorded a charge to operations in 1994 of $4.1
million. The balance of the related real estate inventories and indebtedness at
December 31, 1994 was $3.2 million. Deed backs of real estate with a book value
and related indebtedness of $1.4 million and $1.5 million occurred in 1995 and
1996, respectively. As of December 31, 1996, the Company was still in the
process of deeding back land to one of these land sellers that will result in a
reduction of real estate inventories of $0.3 million in satisfaction of $0.3
million of indebtedness outstanding at December 31, 1996. This land was deeded
back in January 1997. During 1994 the Company also closed four communities and
reduced the scope of three other communities in the high desert which resulted
in the acceleration of the write-off of previously capitalized costs associated
with its regional development and marketing activities of approximately $4.0
million.
There can be no assurance that there will be no additional write-downs
of land inventory or write-offs of costs in the future.
24
<PAGE> 25
Minority Partners' Share
Minority partners' share represents the interest of affiliated limited
partners in partnerships consolidated in the Company's financial statements.
Pursuant to the Reorganization in April 1993, all interests of minority partners
were eliminated except for the interest of partners in Palmdale Vistas. In 1996,
the Company formed three new limited partnerships, FERHP, Triumph and Spirit 77.
FERHP and Triumph are consolidated in the Company's financial statements.
The minority partners' share of losses was $214,000, $0, and $28,000
for the years ended December 31, 1996, 1995, and 1994, respectively.
Provision (Benefit) for Income Taxes
Provision (benefit) for income taxes represents federal income taxes
based on net income (loss) computed at the effective federal tax rate plus state
income taxes computed at the effective tax rate, net of federal tax benefit, as
adjusted for regulations affecting net operating losses.
In 1996, the Company recorded an income tax provision of $0 consisting
of a deferred tax benefit of $3.9 million and a valuation allowance of $3.9
million. In 1995, the Company recorded an income tax provision of $2.3 million
consisting of a deferred tax benefit of $5.5 million and a valuation allowance
of $7.8 million. In 1994, the Company recorded an income tax benefit of $7.7
million, consisting of income taxes receivable of $2.1 million due to the
carryback of the Company's net operating loss and a deferred tax benefit of $5.6
million. In order to fully realize the recorded net deferred tax asset of $13.9
million, the Company will need to generate future taxable income of
approximately $34.8 million. The deferred tax asset is based on current
applicable corporate income tax rates. Future changes in tax rates will be
reflected in the valuation of the deferred tax asset in the period of change.
Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"),
"Accounting for Income Taxes" requires, among other things, the recognition of
deferred tax assets for the estimated future tax effects attributable to net
deductible temporary differences and net operating loss carryforwards. SFAS No.
109 further requires the reduction of deferred tax assets by a valuation
allowance if, based on the weight of available evidence, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
The future realization of the deferred tax asset must be evaluated along with
the accumulated differences caused by other tax and book basis differences.
Uncertainties exist due to the reduced level of closings, revenues and earnings
resulting from the sale of the Company's Phoenix and Las Vegas divisions, the
need to raise capital for new land acquisitions and current business operations.
Accordingly, the Company has provided a cumulative $11.7 million valuation
allowance at December 31, 1996 to reserve against the deferred tax asset as a
result of these uncertainties. At such time as it becomes more likely than not
that portions of the additional tax asset will be realized in the future, the
valuation allowance can be adjusted. The Company believes that during the time
period in which the deferred tax asset can be utilized it will generate
sufficient income to realize the net deferred tax asset. It is difficult to
assess the ultimate timing of the realization of the deferred tax asset. No
assurances can be given regarding the realization of the deferred tax asset or
that the Company will not have to record a further valuation allowance against
future tax benefits.
BACKLOG
The Company's homes are offered for sale in advance of their construction.
Historically, the Company has entered into standard sales contracts for a
majority of the homes to be built in the phase of a project before construction
commences. Such sales contracts are usually subject to certain contingencies
such as the buyer's ability to qualify for financing and/or the sale of an
existing home. Homes covered by such sales contracts, as well as completed homes
covered by such sales contracts, are considered by the Company as its backlog.
The Company does not recognize revenue on homes covered by such contracts until
the escrows are closed and title is transferred. The following table sets forth
the Company's backlog at the dates indicated:
25
<PAGE> 26
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Southern California Division
High Desert 52 45 69
Riverside County 30 32 83
Phoenix Division (1) -- -- 88
Las Vegas Division (1) -- -- 33
----------- ----------- -----------
Number of Homes 82 77 273
=========== =========== ===========
Aggregate Sales Value $10,316,000 $10,833,000 $34,072,000
=========== =========== ===========
Average Sales Price $ 125,800 $ 140,700 $ 124,800
=========== =========== ===========
</TABLE>
(1) In December 1995 the Company sold its Phoenix and Las Vegas home
building divisions to an unrelated third party. See "Item 1. Business
-- General."
The Company's backlog at any particular date is subject to substantial
variation and is dependent upon several factors including the number of homes
then available for sale, prevailing market conditions and the length of time
necessary to complete the closing of home sales subject to pending contracts.
The Company has generally experienced a rapid increase in backlog during periods
in which it holds a grand opening for one of its projects. In 1996 the Company
had three grand openings compared to four grand openings in 1995. The Company's
backlog changed insignificantly in 1996 from 1995 due to a fewer number of grand
openings and active projects, and declining inventory available for sale. The
aggregate sales value of the units in backlog decreased by $0.5 million or 4.8%,
and the average sales price of homes in backlog decreased by $14,900 or 10.6%
due to a change in the mix of homes offered for sale.
During the latter part of 1995, the Company opened no new projects,
compared with six in 1994. Also, the Company sold its Phoenix and Las Vegas
divisions in December 1995, which contributed 121 units to its backlog at
December 31, 1994. As a result, the Company's backlog decreased to 77 from 273
units at December 31, 1995 and 1994, respectively, a decrease of 196 units or
71.8%. The aggregate sales value of homes in backlog was $10.8 million and $34.1
million at December 31, 1995 and 1994, respectively, a decrease of $23.3 million
or 68.3%.
No assurances can be given that homes in backlog will result in
actual closings because cancellations vary from period to period. The Company
believes that cancellations have been relatively high in recent periods,
reflecting the weak economic conditions that have existed in the Southern
California markets, increased competition, higher interest rates and the
inability of certain potential homebuyers to qualify for mortgage financing.
NET ORDERS
Net orders represents the number of homes for which the Company has
received signed sales contracts and purchase deposits during the period, net of
cancellations.
The following table sets forth the Company's net orders by region for
the dates indicated:
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Southern California Division
High Desert 96 120 308
Riverside County 53 73 267
Phoenix Division (1) -- 176 135
Las Vegas Division (1) -- 189 33
--- --- ---
Total 149 558 743
=== === ===
</TABLE>
(1) In December 1995 the Company sold its Phoenix and Las Vegas home
building divisions to an unrelated third party. See "Item 1. Business
-- General."
26
<PAGE> 27
Net new orders declined 73.3% to 149 homes from 558 homes for the years
ended December 31, 1996 and 1995, respectively. The decrease in Southern
California net orders was 44 homes or 22.8% in 1996. The decrease in Southern
California net orders is attributable to market weakness as well as fewer
subdivisions and declining inventory available for sale.
Net new orders declined 24.9% to 558 homes from 743 homes for the years
ended December 31, 1995 and 1994, respectively. The Company experienced
substantial decreases in net orders in both its Southern California markets
partially offset by increases in net orders in Phoenix and Las Vegas during the
first eleven months of 1995. The decrease in Southern California net orders was
attributable to continued market weakness in the high desert region, as well as
fewer subdivisions and declining inventory available for sale in both the high
desert and Riverside County. The increase in Phoenix and Las Vegas was
attributable to having more homes available for sale during 1995.
VARIABILITY IN QUARTERLY RESULTS
The Company has experienced, and expects to continue to experience,
significant variability in its operating results. See "Item 8. Financial
Statements and Supplementary Data, Note 13." This variability may cause the
Company's overall results of operations to fluctuate significantly on a
period-to-period basis, and revenues anticipated to occur in a fiscal period may
not be earned until subsequent fiscal periods. Many factors that contribute to
this variability, including: (i) the timing and mix of home deliveries; (ii) the
Company's ability to continue to acquire additional land on favorable terms for
future developments; (iii) the condition of the real estate markets and the
economy in general; (iv) the cyclical nature of the home building industry and
changes in prevailing interest rates; (v) cost and availability of materials and
labor; and (vi) delays in construction schedules caused by timing of inspections
and approvals by regulatory agencies, strikes at subcontractors and adverse
weather conditions. The Company's historical financial results are not
necessarily a meaningful indicator of future results and, in general, the
Company expects its financial results to vary from project to project. The
Company's revenue and net income may also vary substantially as a result of
variations in the number of projects at which the Company is closing the sale of
homes at any one time. In addition, the 1995 sale of operations in Phoenix and
Las Vegas has resulted in a reduction in the level of closings and revenues, and
has had an adverse effect on earnings.
INFLATION
The Company, as well as the homebuilding industry in general, may be
adversely affected during periods of high inflation, primarily because of higher
land acquisition, land development, construction and interest costs. In
addition, higher interest rates may significantly affect the affordability of
permanent mortgage financing to prospective purchasers and the cost of financing
the Company's land acquisition, development of real estate and construction of
homes. The Company believes that higher mortgage interest rates during much of
1995 that increased again in the second quarter and the early part of the third
quarter of 1996, has had a negative impact on home sales, particularly on
entry-level buyers. The Company attempts to pass any increases in its costs due
to inflation to its buyers through increased selling prices of its homes.
However, there is no assurance that inflation will not have a material adverse
impact on the Company's future results of operations.
ADOPTION OF ACCOUNTING STANDARDS
There were no new accounting pronouncements that could have a
significant effect on the Company's financial statements for any period
presented.
LIQUIDITY AND CAPITAL RESOURCES
The homebuilding industry is capital intensive and often involves high
leverage and significant up-front expenditures to acquire land and begin
development. Accordingly, the Company incurs substantial indebtedness to finance
its homebuilding activities and its business and earnings are substantially
dependent on its ability to obtain bank or other debt financing on acceptable
terms. The financial statements set forth in "Item 8. Financial Statements and
Supplementary Data" have been prepared assuming the Company will continue as a
going concern.
27
<PAGE> 28
In addition, the Company's business plan calls for substantial future
expenditures relating to the acquisition and construction of new projects. No
assurances can be given that anticipated cash flows from operations and the
Company's ability to borrow from various lenders will be sufficient to fund most
of its planned expenditures. The Company currently is attempting to raise
additional needed capital for both ongoing working capital and the acquisition
of land for future projects in Southern California. The Company is in active
discussions with certain capital sources and is optimistic that it can
successfully complete a transaction in 1997. However, no agreements between the
Company and these potential capital sources have been signed, and no assurances
can be given whether or when the Company will enter into a definitive agreement
with any source or, if entered into, what the precise terms of the agreement
will be.
If the Company is not successful in obtaining sufficient capital in
1997 to fund its planned expenditures, some or all of its projects may be
significantly delayed or abandoned. Any such delay or abandonment could result
in cost increases and have a material adverse effect on the Company's business,
financial condition and results of operations. The Company is unable to predict
whether it will be successful in raising such capital, nor can any assurances be
given that, if successful, the capital will be raised on terms favorable to the
Company. Accordingly, absent raising capital, the Company's ability to continue
its current level of business operations and finance the acquisition of
additional land for the delivery of future homes will be greatly impaired.
Additionally, as a result of the limited amount of available working capital,
the Company has not paid all of its subcontractors and suppliers on a current
basis. Numerous subcontractors and suppliers have filed liens, and some are
pursuing further legal action, including the filing of complaints. The Company
has negotiated payment arrangements, as appropriate, in an effort to settle
these claims and release the liens.
During 1996 the Company entered into common stock purchase agreements
for 90,878 shares (restated for reverse stock split) of common stock with
certain subcontractors, suppliers and other creditors, including a director and
former directors of the Company. These shares were issued in exchange for
relieving the Company of debt owed to the respective creditors in the aggregate
amount of $539,000. In March 1996, the Company filed a Registration Statement on
Form S-3 in accordance with the terms of the common stock purchase agreement
that granted registration rights to these stockholders. The Registration
Statement was declared effective by the Securities and Exchange Commission in
April 1996. None of the proceeds from the sale of the shares by the selling
stockholders under that Registration Statement will be received by the Company.
The Company agreed to bear all expenses (other than underwriting discounts and
commissions) in connection with the registration.
In December 1996, the Company entered into a Common Stock Purchase
Agreement with a third party to sell 200,000 shares (restated for reverse stock
split) of the Company's common stock in a private transaction. The stock was
issued subsequent to year end for a total purchase price of $750,000. The
Company also granted the third party the right to require the Company to
register the stock for public sale with the Securities and Exchange Commission.
At that time, in consideration of a $50,000 payment, the third party was also
given an exclusive option to purchase approximately 71 acres of commercial
property located in one of the Company's high desert projects. Additionally, in
December 1996, the Company issued a warrant to purchase 200,000 shares (restated
for reverse stock split) of common stock in a private transaction to an entity
related to this third party. The warrant was issued as compensation for all
services to be performed pursuant to a Consulting Agreement entered into in
December 1996. The Consulting Agreement is for a term of two years during which
the related entity, on a non-exclusive basis, shall seek out, investigate and
pursue residential development projects and present them to the Company for its
consideration and approval. The warrant may be exercised within eighteen months
of the date of the agreement at a price of $5.25 per share (restated for reverse
stock split). If at least half of the warrant shares are
28
<PAGE> 29
not exercised during this period, then half of the warrant shares will expire,
with the balance exercisable over an additional eighteen month period at $9.75
per share (restated for reverse stock split). The related entity may also
convert the warrant or any portion thereof into shares of common stock using a
formula based upon the fair market value of the Company's common stock on the
conversion date. One of the owners of this third party and the related third
party is a partner in FERHP, one of the Company's consolidated partnerships and
is a general partner of the owner of land in which the Company has entered into
the Development and Marketing Agreement described below.
In November 1996, the Company entered into a Development and Marketing
Agreement with a third party to develop, construct, and market 163 lots owned by
the third party in Victorville, California. All financing and bonding will be
the responsibility of the third party. The Company will receive compensation in
the form of overhead draws, development fees and sales and marketing fees
totaling approximately 8.0% of the gross sales price of the homes. The Company
will assume the home warranty costs for which it will be paid $750 per house.
In May 1996, the Company assigned its $293,000 receivable from Victor
Valley Commercial Properties to Ira C. Norris in exchange for a cash payment of
$293,000. Victor Valley Commercial Properties is a limited partnership owned 50%
by G&N Investments, Ltd., its sole general partner. Mr. Norris and his wife own
a 70% general partner's interest in G&N Investments, Ltd. See "Item 8. Financial
Statements and Supplementary Data, Note 9" herein, and "Certain Relationships
and Related Transactions" in the Company's 1997 Proxy Statement. Additionally,
during 1996 Mr. Norris provided the Company with various unsecured loans
totaling $755,000 for working capital purposes. $92,000 was paid back to Mr.
Norris in 1996. Subsequent to year end, the Company received an additional
$537,000 from Mr. Norris and paid back $220,000 to him. The Company has issued
several notes to Mr. Norris bearing interest at 10%, all of which mature June
30, 1997. All of these transactions were unanimously approved by the
disinterested members of the Company's board of directors.
In April 1996, the Company entered into a letter of intent with an
unaffiliated privately held home builder primarily doing business in Southern
California relating to a potential combination of the Company and the home
builder and certain of the home builders' affiliates. After conducting due
diligence relating to the proposed combination, negotiations were mutually
terminated. Subsequently, at the request of the unaffiliated home builder,
informal discussions have resumed. No assurances can be given whether or when
the Company and the home builder may enter into a definitive agreement or, if
entered into, what the precise terms of the transactions will be and whether any
conditions to the consummation of such a transaction will be satisfied.
The Company has historically financed its operations from a combination
of limited partner capital contributions, cash generated from operations, land
seller financing and borrowings from various banking institutions. In addition,
the Company completed its Initial Public Offering in April 1993, which resulted
in net proceeds to the Company of $17.1 million. The Company also received an
income tax refund of $2.2 million in the first quarter of 1995 from the
carryback of its 1994 net operating loss to prior years.
In 1996, the Company formed FERHP, Triumph and Spirit 77 limited
partnerships and entered into participating note agreements with ALG and HRIP,
providing total capital of approximately $4.0 million. These partnerships and
participating note agreements typically fund a portion of the land acquisition,
model complex development costs and initial marketing expenditures of specific
projects. Thomas E. Gibbs, Jr., a member of the Company's Board of Directors,
holds partnership interests in each of Triumph, ALG and HRIP. Also, one of the
owners of two entities which own approximately 12.2% of the Company's
outstanding common stock and a warrant to acquire approximately an additional
10.9%, respectively, is a partner of FERHP. See "Item 8. Financial Statements
and Supplementary Data, Notes 8 and 9" herein, and "Certain Relationships and
Related Transactions" in the Company's 1997 Proxy Statement.
The Company often acquires land with an initial down payment, with the
balance financed by seller non-recourse notes. The notes typically include
partial reconveyance provisions, that allow the Company to obtain the necessary
development financing on a phased basis. The Company also occasionally uses
options to acquire property. At December 31, 1996 and 1995, the Company had
outstanding land seller indebtedness of $1.8 million and $5.5 million,
respectively. See " -- Results of Operations -- Provision for Write-Down of Real
Estate Assets".
29
<PAGE> 30
The Company typically obtains its infrastructure, development and
construction funding from commercial banks and other financing sources. Lenders
generally provide interim construction loans for each phase of homes within a
project for a term of up to 12 months, with extension provisions. The
development loans typically are repaid with proceeds from these interim
construction loans. Commercial banks provided most of the Company's project
financing for the years ended December 31, 1996, 1995, and 1994. Interest rates
on these loans ranged from the prime rate plus 1.0% to the prime rate plus 3.0%.
The loan agreements include customary representations and covenants. All
outstanding indebtedness under these facilities is secured by a lien on the
project real property. At December 31, 1996, aggregate bank borrowings of
approximately $13.6 million were outstanding under these facilities and
approximately $8.7 million was available for further qualified project finance
borrowing. At December 31, 1996 some of these loans with a commercial bank were
in default (see below). The weighted average interest rate was approximately
10.13% during 1996 and approximately 9.82% as of December 31, 1996.
The Company also has secured lines of credit with banks as follows: (i)
a $3.0 million line that bears annual interest at the prime rate plus 1% that
matures December 1999, and provides for quarterly principal payments of $500 for
each home closed, commencing with the fourth quarter of 1995 and scheduled
principal payments of $400,000, $500,000 and $600,000 in calendar years 1997,
1998 and 1999, respectively. In connection with the extension and modification
of this line of credit, the Company issued a warrant to the lender to purchase
41,667 shares (restated for reverse stock split) of the Company's common stock
at $6.00 per share (restated for reverse stock split) that expires June 30,
2000; and (ii) a $1.5 million line that bears interest at the prime rate plus
2.5% that matured March 1996, is now in default, and the Company is negotiating
the terms of an extension (see below). The net outstanding balance under these
lines of credit at December 31, 1996 was $4.3 million.
At December 31, 1996, total indebtedness secured by real estate totaled
$19.7 million. Peak month-end borrowing during 1996 was $20.9 million.
In December 1996, a commercial bank filed notices of default relating
to matured loans with principal balances totaling $2.8 million secured by one of
the Company's projects. In February 1997, the Company obtained new financing
that provided approximately $2.3 million to pay the loans in full pursuant to a
Discounted Loan Payoff Agreement. In January 1997, this same bank filed separate
notices of default relating to matured loans with principal balances totaling
$3.5 million secured by an estimated 1,140 lots and 71 commercially zoned acres
of the Company's Eagle Ranch project in the high desert. The law permits the
bank to proceed with a non-judicial sale of the property as of April 9, 1997, 90
days after the notices of default were filed. Although the Company is currently
in negotiations with the bank to amend the terms of the loans and remove the
notices of default, there can be no assurances that the Company will be
successful in its negotiations with the bank or that the bank will not commence
with a non-judicial sale of the property. The final settlement could result in
writedowns in 1997 in amounts ranging from minimal to approximately $6.0
million.
At December 31, 1996, the Company did not satisfy a certain financial
covenant pursuant to a loan to Spirit 77 related to minimum net worth levels.
The Company has received a waiver from the lender. Based on the anticipated
results for 1997, the Company may be in violation of certain financial covenants
under this loan agreement for the quarter ending March 31, 1997 and subsequent
quarters. Although the Company believes these covenants could continue to be
modified or waived, it is not certain that such modifications or waivers will be
obtained.
The Company is currently in default on the Purchase Agreement with
Spirit 77 since the Company has not purchased all of the required minimum number
of lots from Spirit 77. The Company and Spirit 77 are currently negotiating a
modification to the Purchase Agreement. The Company is also in default on two
notes payable to Spirit 77 related to the purchase of lots in 1996. The Company
and Spirit 77 are currently negotiating extensions of the due dates of these
notes.
The availability of borrowed funds for homebuilders, especially for
land acquisition and construction financing is variable, and at times has been
severely restricted and in some cases eliminated entirely. Currently such
30
<PAGE> 31
financings are generally available, but lenders have been requiring borrowers to
invest increased amounts of equity in a project in connection with both new
loans and the extension of existing loans.
During the year ended December 31, 1993, the Company entered into a
loan agreement with a principal investor in certain of the limited partnerships
discussed above who became a principal stockholder and director of the Company,
pursuant to which the Company borrowed $1,760,000. Ten percent of the rights and
obligations under this agreement were assigned by the investor to another
limited partner in certain of the limited partnerships who became a stockholder
of the Company. On April 2, 1993, the loan was paid in full. In connection with
this loan, the Company issued warrants to these stockholders, which expire on
April 12, 1998, to purchase up to 8,800 shares (restated for reverse stock
split) of the Company's Common Stock in the aggregate at an exercise price per
share of $60.00 (restated for reverse stock split).
In late 1992 and throughout 1993, the Company encountered a significant
increase in the price of lumber purchased for use in its homes. In response, the
Company in the fourth quarter of 1993 entered into a lumber purchase contract
for 600 homes in 1994 at specified pre-established prices. The Company purchased
lumber for approximately 100 homes under the contract. In February 1995, the
Company reached an agreement with the lumber company to settle its outstanding
lumber purchase commitment for $800,000, $645,000 of which was paid during 1995,
with the balance paid in 1996.
31
<PAGE> 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants (Price Waterhouse LLP)........................................................F-2
Independent Auditors' Report (Ernst & Young LLP)................................................................F-3
Consolidated Balance Sheets as of December 31, 1996 and 1995....................................................F-4
Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994......................F-5
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994............F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994......................F-7
Notes to Financial Statements...................................................................................F-9
</TABLE>
F-1
<PAGE> 33
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Inco Homes Corporation
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Inco Homes Corporation at December 31, 1996 and the results of their operations
and their cash flows for the year in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for real estate inventories. Effective
January 1, 1996, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of."
PRICE WATERHOUSE LLP
Costa Mesa, California
March 27, 1997
F-2
<PAGE> 34
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Inco Homes Corporation
We have audited the consolidated balance sheet of Inco Homes
Corporation as of December 31, 1995 and the related consolidated statements of
operations, stockholders' equity, and cash flows for the years ended December
31, 1995 and 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
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 audits 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 financial statements referred to above present
fairly in all material respects, the consolidated financial position of Inco
Homes Corporation as of December 31, 1995 and the consolidated results of its
operations and its consolidated cash flows for the years ended December 31, 1995
and 1994 in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
March 19, 1996, except as to Note 12,
Second paragraph, which the date is
March 20, 1996
F-3
<PAGE> 35
INCO HOMES CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Dollars in thousands, except share data) December 31,
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Cash $ 586 $ 420
Receivable from sale of divisions - Note 1 9 1,722
Real estate inventories - Note 3 36,752 40,535
Deferred tax asset - Note 7 2,200 2,200
Investment in non-consolidated partnership - Note 2 428 -
Other assets - Note 9 657 897
-------- --------
Total assets $ 40,632 $ 45,774
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 7,133 $ 8,742
Notes payable secured by real estate - Note 4 15,360 16,660
Lines of credit - Note 5 4,303 4,840
Notes to stockholder - Note 6 676 -
-------- --------
Total liabilities 27,472 30,242
-------- --------
Minority partners' investment in consolidated
partnerships - Note 2 876 -
Commitments and contingencies - Note 8
Stockholders' Equity
Common stock - $.01 par value; 20,000,000 shares
authorized, 1,437,096 and 1,346,218 shares
issued and outstanding for 1996 and 1995,
respectively (restated for reverse stock
split) - Note 1 86 81
Additional paid in capital 41,691 40,676
Deficit (29,493) (25,225)
-------- --------
Total stockholders' equity 12,284 15,532
-------- --------
Total liabilities and stockholders' equity $ 40,632 $ 45,774
======== ========
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE> 36
INCO HOMES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) For the Years Ended December 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenue from home sales $ 19,591 $ 71,317 $ 71,168
Revenue from land and lot sales - - 373
----------- ----------- -----------
19,591 71,317 71,541
----------- ----------- -----------
Cost of homes sold 18,260 61,836 63,388
Cost of land and lots sold - - 205
----------- ----------- -----------
18,260 61,836 63,593
----------- ----------- -----------
Gross profit 1,331 9,481 7,948
----------- ----------- -----------
Selling and marketing expenses 3,039 8,034 13,004
General and administrative expenses 2,066 3,825 7,858
----------- ----------- -----------
5,105 11,859 20,862
----------- ----------- -----------
Operating loss (3,774) (2,378) (12,914)
Other income 77 353 112
Sale of divisions - net - Note 1 - 31 -
Mortgage brokerage loss - net - (355) (320)
Provision for write-down of real estate - Note 3 (785) (11,043) (6,714)
----------- ----------- -----------
Loss before minority partners' share
and provision (benefit) for income taxes (4,482) (13,392) (19,836)
Minority partners' share (214) - (28)
----------- ----------- -----------
Loss before provision (benefit) for income taxes (4,268) (13,392) (19,808)
Provision (benefit) for income taxes - Note 7 - 2,284 (7,718)
----------- ----------- -----------
Net loss $ (4,268) $ (15,676) $ (12,090)
=========== =========== ===========
Net loss per common share (restated for reverse stock
split)- Note 1 $ (3.01) $ (11.68) $ (9.08)
=========== =========== ===========
Weighted average number of common shares
outstanding (restated for reverse stock
split) - Note 1 1,417,794 1,341,582 1,330,833
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE> 37
INCO HOMES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
--------------------
Shares Additional Retained
(restated for reverse Paid-in Treasury Earnings
(Dollars in thousands) stock split) - Note 1 Amount Capital Stock (Deficit) Total
--------------------- ------ ------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1993 1,330,833 $80 $40,527 -- $ 2,541 $ 43,148
Net loss - 1994 -- -- -- -- (12,090) (12,090)
--------- --- ------- ----- -------- --------
Balance - December 31, 1994 1,330,833 80 40,527 -- (9,549) 31,058
Common stock issued 15,385 1 149 -- -- 150
Net loss - 1995 -- -- -- -- (15,676) (15,676)
--------- --- ------- ----- -------- --------
Balance - December 31, 1995 1,346,218 81 40,676 -- (25,225) 15,532
Common stock issued - Note 8 90,878 5 523 -- -- 528
Value of warrants issued to bank
pursuant to extension of line of
credit - Note 5 -- -- 111 -- -- 111
Value of warrants issued pursuant to
consulting agreement - Note 8 -- -- 131 -- -- 0
Cash received from common stock
subscription - Note 8 -- -- 250 -- -- 250
Net loss - 1996 -- -- -- -- (4,268) (4,268)
--------- --- ------- ----- -------- --------
Balance - December 31, 1996 1,437,096 $86 $41,691 -- $(29,493) $ 12,153
========= === ======= ===== ======== ========
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE> 38
INCO HOMES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------
(Dollars in thousands) 1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (4,268) $(15,676) $(12,090)
Adjustment to reconcile net loss to net cash provided by
(used in) operating activities:
Gain on sale of divisions -- (31) --
Provision for write-down of real estate 785 11,043 6,714
Minority partners' share (214) -- (28)
Proceeds from sale of divisions 1,713 895 --
(Increase) decrease in income taxes receivable -- 2,230 (2,078)
(Increase) decrease in deferred tax asset -- 2,284 (4,484)
(Increase) decrease in notes receivable secured by real estate -- -- 584
(Increase) decrease in real estate inventories (711) 5,562 (9,886)
(Increase) decrease in other assets 371 129 (171)
Increase (decrease) in accounts payable and accrued liabilities (1,019) (1,715) 6,187
Increase (decrease) in current income taxes payable -- -- (80)
Increase (decrease) in deferred income taxes payable -- -- (1,127)
-------- -------- --------
Net cash provided by (used in) operating activities (3,343) 4,721 (16,459)
-------- -------- --------
Cash flow from financing activities:
Proceeds from notes payable secured by real estate 19,008 53,950 84,095
Repayments on notes payable secured by real estate (16,716) (58,838) (76,761)
Proceeds from lines of credit -- 6,000 11,777
Repayments on lines of credit (444) (6,160) (9,527)
Proceeds from notes to stockholder 768 -- --
Repayments on notes to stockholder (92) -- --
Contribution to non-consolidated partnership (355) -- --
Contributions from minority partners 1,090 -- --
Proceeds from common stock subscription 250 -- --
-------- -------- --------
Net cash provided by (used in) financing activities 3,509 (5,048) 9,584
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 166 (327) (6,875)
Cash and cash equivalents at beginning of year 420 747 7,622
-------- -------- --------
Cash and cash equivalents at end of year $ 586 $ 420 $ 747
======== ======== ========
</TABLE>
See accompanying notes to financial statements
F-7
<PAGE> 39
INCO HOMES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental schedule of non-cash activities
[1] During 1996, the Company deeded back property with a book cost basis of
$3.6 million to land sellers in satisfaction of $3.6 million in
indebtedness - see Note 3.
[2] During 1996, the Company issued 90,878 shares of common stock (restated
for reverse stock split) to creditors in exchange for relieving the
Company of $539,000 of accounts payable - see Note 8.
[3] During 1996, the Company issued a warrant to purchase 41,667 shares of
common stock (restated for reverse stock split) to a lender in
connection with the extension of a line of credit - see Note 5. The
value of this warrant was estimated at $111,000.
[4] During 1996, the Company issued a warrant to purchase 200,000 shares of
common stock (restated for reverse stock split) to a third party as
compensation for all services to be performed pursuant to a consulting
agreement - see Note 8. The value of this warrant was estimated at
$131,000.
[5] During 1995, the Company sold its Phoenix and Las Vegas divisions as
follows -SEE NOTE 1:
<TABLE>
<CAPTION>
<S> <C>
Sales Price $ 14,545,000
Assumptions of liabilities:
Accounts payable and accrued liabilities (4,529,000)
Notes payable secured by real estate (7,399,000)
Receivable due from buyer (1,722,000)
--------------
Cash received $ 895,000
==============
</TABLE>
[6] During 1995, the Company deeded back property with a book cost basis of
$1.6 million to land sellers in satisfaction of $1.6 million in
See accompanying notes to financial statements
F-8
<PAGE> 40
INCO HOMES CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 1. BACKGROUND AND ORGANIZATION
Inco Homes Corporation, a Delaware corporation, ("Inco" or the
"Company") is a developer and builder of affordably priced single-family
detached homes. In 1994, the Company expanded into Phoenix, Arizona and Las
Vegas, Nevada. In December 1995, the Company sold its Phoenix and Las Vegas
divisions, including its Phoenix mortgage operations, to an unrelated third
party. The sales price was $14.5 million, of which the purchaser assumed $12.0
million of bank indebtedness, and accounts payable and accrued liabilities. As a
result, the Company's sole market is in Southern California and it is
substantially dependent on local economic factors.
The Company was incorporated in October 1992 to consolidate the
business conducted by various partnerships and corporations (the "Predecessor
Entities") under the control of Ira C. Norris ("Norris" or the "Stockholder").
In April 1993, the Company effected a reorganization (the "Reorganization") of
its operations, which involved an exchange offer (the "Exchange Offer") with the
shareholders and partners of the Predecessor Entities and an initial public
offering (the "IPO" or the "Initial Public Offering").
Pursuant to the Exchange Offer made to the shareholders and partners of
the Predecessor Entities that was effected immediately prior to the consummation
of the IPO, the Company (i) acquired the outstanding capital stock of the
corporations under Inco Enterprises, and the outstanding partnership interests,
and (ii) consolidated ownership of all of the Company's projects and businesses,
except those related to Inco Land Acquisition Company which has been liquidated.
The partners in Palmdale Vistas Housing Developments Ltd. ("Palmdale Vistas"),
other than Norris, did not participate in the Exchange Offer and the Company
continues to maintain its investment in this partnership. Norris transferred his
12.5% interest in this partnership to the Company upon consummation of the
offering.
Under the terms of the Reorganization, the consideration to acquire the
outstanding capital stock and partnership interests consisted of 5,850,139
shares of common stock of the Company. The total number of shares of common
stock issued in the Reorganization was determined by dividing the value (the
"Exchange Value") assigned to each of the corporations and partnerships by
$10.00. The Exchange Values for each corporation and partnership were determined
by the Company, based in part on independent appraisals, and were not the result
of arm's-length negotiations.
On April 2, 1993, the Company sold 2,000,000 shares of common stock at
$10.00 per share through an Initial Public Offering, raising $20.0 million less
offering costs of approximately $2.9 million.
On January 16, 1997, a stockholder approved amendment to the Company's
Restated Certificate of Incorporation effecting a one-for-six reverse stock
split ("the reverse stock split") became effective.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The accompanying consolidated financial
statements include the accounts of the Company, all wholly-owned subsidiaries,
and the Company's general partnership interests in Palmdale Vistas,
Freedom-Eagle Ranch Housing Partners ("FERHP") and Triumph-Lancaster Housing
Partners ("Triumph"). All significant intercompany transactions have been
eliminated.
The investment in non-consolidated partnership represents the Company's
investment in Spirit Corona 77, L.P. ("Spirit 77") and its share of profits and
losses allocated to the Company in accordance with the provisions of the
Partnership Agreement, based upon the equity method of accounting.
F-9
<PAGE> 41
The minority partners' investment in consolidated partnerships
represents the limited partners' net equity in the real estate projects.
Pursuant to the terms of the partnership agreements, losses are generally
allocated 99% to the limited partners, and their net equity will be repaid to
the extent the partnerships generate sufficient funds. Due to previous estimated
losses of Palmdale Vistas, future losses, if any, from operations will be
substantially borne by the Company.
Use of Estimates. The preparation of the Company's consolidated
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the financial statement dates and the reported amounts of
revenues and expenses during the reporting periods. Due to uncertainties
inherent in the estimation process, it is reasonably possible that actual
results could differ from the estimates.
Basis of Presentation. The Company has incurred net operating losses
which have significantly impacted its working capital levels and its ability to
pay its obligations. The accompanying financial statements have been prepared
assuming the Company will continue as a going concern. Management's current
business plan reflects that, in addition to future profits, sales of real estate
inventories provide a return of equity in the form of cash flow to the Company
to help meet operating requirements. During 1997, the Company will need to
extend the maturity dates of certain notes payable and to raise capital for
acquisitions of land for future projects and working capital needs. Management's
plans and anticipated results are dependent on future events and economic market
conditions which are inherently uncertain. No assurances can be given that
anticipated cash flows from operations and the Company's ability to borrow from
various lenders will be sufficient to fund most of its planned expenditures. The
Company currently is attempting to raise additional needed capital for both
ongoing working capital and the acquisition of land for future projects in
Southern California. The Company is in active discussions with certain capital
sources and is optimistic that it can successfully complete a transaction in
1997. However, no agreements between the Company and these potential capital
sources have been signed, and no assurances can be given whether or when the
Company will enter into a definitive agreement with any source or, if entered
into, what the precise terms of the agreement will be.
If the Company is not successful in obtaining sufficient capital in
1997 to fund its planned expenditures, some or all of its projects may be
significantly delayed or abandoned. Any such delay or abandonment could result
in cost increases and have a material adverse effect on the Company's business,
financial condition and results of operations The Company is unable to predict
whether it will be successful in raising such capital, nor can any assurances be
given that, if successful, the capital will be raised on terms favorable to the
Company. Accordingly, absent raising capital, the Company's ability to continue
its current level of business operations and finance the acquisition of
additional land for the delivery of future homes will be greatly impaired.
Cash and Cash Equivalents. Cash equivalents represent short-term,
highly liquid investments with a maturity of three months or less when acquired.
The Company maintains some of its cash in bank deposit accounts which, at times,
may exceed the federally insured limits. Based on the quality of the financial
institutions, the Company does not believe it is exposed to any significant
concentrations of credit risk on cash and cash equivalents.
Real Estate Inventories. Costs incurred which are included in inventory
consist of land, land development costs, direct and indirect costs of
construction, other overhead costs, interest and
F-10
<PAGE> 42
property taxes. Interest and property taxes are capitalized to real estate
inventories when development activities begin, and capitalization ends when the
qualifying assets are ready for their intended use.
Effective January 1, 1996, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 121 ("SFAS No. 121") "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of", which requires impairment losses to be recorded on long-lived assets being
developed, based on fair value, when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount. Assets held for sale are to be carried at the
lower of cost or fair value less the costs to sell.
Prior to 1996, real estate inventories are carried at the lower of
historical cost or estimated net realizable value. Net realizable value is the
price obtainable in the future for parcels as improved with a completed housing
unit, net of disposal and holding costs (including interest), without provision
for future profit and without discounting future cash receipts to present value.
The estimation process in determining the value of real estate
inventories is inherently uncertain and relies to a considerable extent on
current and future economic and market conditions, the availability of suitable
financing to fund holding, development and construction activities, and the
repayment or refinancing of existing indebtedness. Such economic and market
conditions may affect management's development and marketing plans. Accordingly,
the ultimate realization of the Company's real estate inventories is dependent
upon future events and conditions that may cause realizations to differ from
amounts presently estimated.
Sales and Profit Recognition. Revenue from the sale of homes, land and
lots is recognized when closings have occurred and a buyer has met down payment
requirements. At the time of revenue recognition, cost of sales is charged with
direct costs of construction, and an allocation of a project's total estimated
costs of land, land development, indirect construction, other overhead costs,
interest and property taxes.
Earnings Per Share. Primary and fully diluted weighted average number
of common shares outstanding was 1,417,794, 1,341,582, and 1,330,833 for the
years ended December 31, 1996, 1995, and 1994, respectively. On January 16,
1997, a stockholder approved amendment to the Company's Restated Certificate of
Incorporation effecting a one-for-six reverse stock split became effective. The
amount of shares has been restated to give effect to the reverse stock split.
Common share equivalents include dilutive stock options and warrants using the
treasury stock method. There were no dilutive options or warrants for any of the
periods covered.
Fair Value of Financial Instruments. The carrying amounts reported on
the balance sheet for the Company's cash equivalents and accounts payable and
accrued liabilities approximate fair value due to the short-term nature of these
items. The carrying amounts of the Company's notes payable secured by real
estate, lines of credit, and notes to stockholder approximate fair value based
on a comparison with current market rates for loans of similar risks and
maturities.
F-11
<PAGE> 43
NOTE 3. REAL ESTATE INVENTORIES
Real estate inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Land $ 24,299,000 $ 30,379,000
Land development and construction in progress 25,520,000 28,497,000
Completed inventory not subject to pending sales
contracts (unsold) 2,030,000 1,084,000
Allowances for write-down of real estate (15,097,000) (19,425,000)
------------ -----------
Total $ 36,752,000 $ 40,535,000
============ ============
</TABLE>
As of December 31, 1996 and 1995, the Company owned title to
approximately 3,300 and 4,200 lots, respectively. As of December 31, 1996 and
1995, approximately 700 lots and 1,400 lots, respectively, were in the process
of being deeded back to land sellers (see below).
In 1996, the Company determined that the undiscounted cash flows
estimated to be generated by various real estate holdings were less than the
assets' carrying amounts. An impairment allowance, which writes these assets
down to fair value was established at December 31, 1996 totaling $785,000, of
which $255,000 relates to properties in the high desert and $530,000 relates to
a property in Riverside County. Additionally, in both 1995 and 1994, the Company
determined that it was necessary to reflect a reduction in the estimated future
cost recovery of various real estate holdings and established an allowance for
net realizable value. Write-downs of real estate totaling $5.8 million were
recorded as of December 31, 1995, of which $4.4 million related to properties in
the high desert and $1.4 million related to properties in Riverside County.
Write-downs of real estate totaling $2.6 million were recorded as of December
31, 1994, all of which related to properties in the high desert.
The Company also concluded in 1995 and 1994 that certain
seller-financed parcels were no longer economically viable based on current
financing terms. Accordingly, several measures were initiated, including
requests that certain sellers substantially restructure the terms of their debt
(including extending the maturity date, reducing or eliminating payment and
accrual of interest and deferring principal payments). The Company also
identified certain properties that should be deeded back to the sellers in full
satisfaction of the remaining debt outstanding. In 1995 the Company commenced
negotiations with six land sellers from whom the Company purchased land in the
high desert. The Company owned these properties subject to seller loans that had
current or approaching maturity dates. In this regard, the Company recorded a
charge to operations in 1995 of $5.3 million. The balance of the related real
estate inventories and indebtedness at December 31, 1995 was $3.1 million. In
1996, the Company deeded property with a book value of $2.1 million back to four
of these land sellers in satisfaction of $2.1 million in indebtedness.
Continuing negotiations may result either in extensions of maturity dates and/or
other adjustments to the seller notes, or deedbacks of the two remaining
properties with a book value of $1.0 million to the sellers in satisfaction of
$1.0 million in indebtedness outstanding at December 31, 1996.
During 1995 the Company also reduced the scope of one community in
Riverside County which resulted in the write-off of approximately $300,000 of
previously capitalized costs associated with architectural development and
marketing activities. As of December 31, 1996, the Company was still in the
process of deeding back land to the seller from whom the Company purchased the
property that will result in a reduction of real estate inventories of $0.4
million in satisfaction of $0.4 million of indebtedness outstanding at December
31, 1996.
In 1994, the Company commenced the process of deeding property back to
nine other land sellers from whom the Company purchased land in the high desert.
In this regard, the Company recorded a charge to operations in 1994 of $4.1
million. The balance of the related real estate inventories and indebtedness at
December 31, 1994 was $3.2 million. Deed backs of real estate with a book value
and related indebtedness of $1.4 million and $1.5 million occurred in 1995 and
1996, respectively. As of December 31, 1996, the Company was still in the
process of deeding back land
F-12
<PAGE> 44
to one of these land sellers that will result in a reduction of real estate
inventories of $0.3 million in satisfaction of $0.3 million of indebtedness
outstanding at December 31, 1996. This land was deeded back in January 1997.
During 1994 the Company also closed four communities and reduced the scope of
three other communities in the high desert which resulted in the acceleration of
the write-off of previously capitalized costs associated with its regional
development and marketing activities of approximately $4.0 million.
The Company incurred interest that was capitalized. The following table
shows the components of interest:
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------
1996 1995 1994
---------- ---------- ---------
<S> <C> <C> <C>
Interest incurred and capitalized $1,635,000 $3,287,000 $3,607,000
========== ========== ==========
Amortization of capitalized interest included in
cost of homes, land and lots sold, and sale
of divisions $1,153,000 $6,621,000 $4,100,000
========== ========== ==========
Unamortized capitalized interest included in
real estate inventories at year end $2,713,000 $2,231,000 $5,565,000
========== ========== ==========
</TABLE>
NOTE 4. NOTES PAYABLE SECURED BY REAL ESTATE
Notes payable secured by real estate consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1996 1995
---------- -------------
<S> <C> <C>
Various land acquisition loans bearing interest at fixed rates ranging from 7.0%
to 11.0% per annum. Principal payments are required on fixed schedules or
as land is taken down. The loan balance at December 31, 1996 can be reduced
by approximately $1.7 million as
properties are deeded back to land sellers (see Note 3). $1,796,000 $ 5,498,000
Various construction loans with an aggregate maximum amount of $22.3 million of
which $8.7 million is available as of December 31, 1996 to finance
construction. The notes generally bear interest at variable rates based on
the prime rate plus 1.0% to 3.0%, per annum and are due primarily in 1997.
Principal payments are generally required as homes are closed. The prime
rate as of December 31, 1996 was 8.25%. At December 31, 1996,
some of these loans were in default (see Note 8). 13,564,000 11,162,000
----------- ------------
$15,360,000 $ 16,660,000
=========== ============
</TABLE>
Included in construction loans is a $600,000 secured participation note
payable to ALG 1996-1 ("ALG") and a $900,000 secured participation note payable
to Hunters Ridge Investment Partners ("HRIP") (see Note 9).
The weighted average short term borrowing rate for construction loans
was 10.13% and 10.47% for the years ended December 31, 1996 and 1995,
respectively.
F-13
<PAGE> 45
The minimum future principal payments due on the notes payable secured
by real estate at December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997 $13,161,000
1998 1,879,000
1999 --
2000 --
2001 320,000
-----------
$15,360,000
===========
</TABLE>
NOTE 5. LINES OF CREDIT
The Company has secured lines of credit with banks as follows: (i) a
$3.0 million line that bears annual interest at the prime rate plus 1% that
matures December 1999, and provides for quarterly principal payments of $500 for
each home closed, commencing with the fourth quarter of 1995 and scheduled
principal payments of $400,000, $500,000 and $600,000 in calendar years 1997,
1998 and 1999, respectively. In connection with the extension and modification
of this line of credit, the Company issued a warrant to the lender to purchase
41,667 shares (restated for reverse stock split) of the Company's common stock
at $6.00 per share (restated for reverse stock split) that expires June 30,
2000; and (ii) a $1.5 million line that bears interest at the prime rate plus
2.5% that matured March 1996, is now in default, and the Company is negotiating
the terms of an extension (see Note 8). The net outstanding balance under these
lines of credit at December 31, 1996 was $4.3 million.
NOTE 6. NOTES TO STOCKHOLDER
At December 31, 1996, the Company had received from Ira C. Norris
unsecured advances net of paybacks totaling $676,000 (which includes accrued
interest of $13,000). Subsequent to year end, the Company received an additional
$537,000 from Mr. Norris and paid back $220,000 to him. The Company has issued
several notes to Mr.
Norris, bearing interest at 10.0% , all of which mature June 30, 1997.
NOTE 7. INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax
return and combined state income tax returns.
The accompanying financial statements reflect provision (benefit) for
federal and state income taxes as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Current provision (benefit) $ -- $ -- $(2,107,000)
Deferred provision (benefit) (3,946,000) (5,475,000) (5,611,000)
Valuation allowance 3,946,000 7,759,000 --
----------- ----------- -----------
Total $ 0 $ 2,284,000 $(7,718,000)
=========== =========== ===========
</TABLE>
Statement of Financial Accounting Standards No. 109 ("SFAS 109")
"Accounting for Income Taxes", requires, among other things, the recognition of
deferred tax assets for the estimated future tax effects attributable to net
deductible temporary differences and net operating loss carryforwards. SFAS No.
109 further requires the reduction of deferred tax assets by a valuation
allowance if, based on the weight of available evidence, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
The future realization of the deferred tax asset must be evaluated along with
the accumulated differences caused by other tax and book basis differences.
Uncertainties exist due to the reduced level of closings, revenues and earnings
resulting from the sale of
F-14
<PAGE> 46
the Company's Phoenix and Las Vegas divisions, the need to raise capital for new
land acquisitions and current business operations. Accordingly, the Company has
provided a cumulative $11.7 million valuation allowance at December 31, 1996 to
reserve against the deferred tax asset as a result of these uncertainties. At
such time as it becomes more likely than not that additional portions of the tax
asset will be realized in the future, the valuation allowance can be adjusted.
The Company believes that during the time period in which the deferred tax asset
can be utilized it will generate sufficient income to realize the net deferred
tax asset. It is difficult to assess the ultimate timing of the realization of
the deferred tax asset.
The tax effects of temporary differences and net operating loss
carryforwards that give rise to the deferred tax asset and deferred tax
liability consist of the following at:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Deferred tax asset:
Net operating loss carryforward $ 6,882,000 $ 4,452,000
Write-downs of real estate 6,060,000 5,838,000
Accrued expenses 963,000 453,000
------------ ------------
Total deferred tax asset 13,905,000 10,743,000
Deferred tax liability
Expensing of interest and property taxes -- (784,000)
Valuation allowance (11,705,000) (7,759,000)
------------ ------------
Net deferred tax asset $ 2,200,000 $ 2,200,000
============ ============
</TABLE>
At December 31, 1996, the Company has net operating loss carryforwards
for federal income tax purposes of $17.1 million that are available to offset
future federal taxable income. Of these federal net operating losses, $3.7
million, $5.0 million and $8.4 million expire in the years 2009, 2010 and 2011,
respectively.
A reconciliation of the computed statutory income tax benefit at the
Federal statutory rate to the effective income tax benefit follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------
1996 1995 1994
------- -------- -------
<S> <C> <C> <C>
Percent of pre-tax loss at current
federal statutory income tax rate (34.0%) (34.0%) (34.0%)
------ ------- -------
State and local income taxes net of
federal benefit (4.7) (4.7) (4.7)
Increase in valuation allowance to absorb
benefit created 38.7 -- --
Other -- (2.0) (0.2)
------ ------- -------
Net increase (reduction) 34.0 (6.7) (4.9)
----- ------ ------
Effective tax rate 0.0% (40.7%) (38.9%)
====== ======= =======
</TABLE>
NOTE 8. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
The Company is involved in routine litigation arising in the ordinary
course of business. Such matters, if decided adversely to the Company, would
not, in the opinion of management, have a material adverse effect on the
financial condition of the Company. In addition, from time to time, the Company
could be involved in litigation in connection with claims of development or
construction defects, which matters, if decided adversely to the Company, could
have a material adverse effect on the financial condition of the Company.
F-15
<PAGE> 47
The Company generally believes its relationships with its
subcontractors has been good. However, as a result of the limited amount of
available working capital, relationships with certain subcontractors have
weakened due to the Company's inability to pay all of its subcontractors and
their suppliers on a current basis. Numerous subcontractors and suppliers have
filed liens, and some are pursuing further legal action, including the filing of
complaints. The Company has negotiated payment arrangements, as appropriate, in
an effort to settle these claims and release the liens.
In December 1996, a commercial bank filed notices of default relating
to matured loans with principal balances totaling $2.8 million secured by one of
the Company's projects. In February 1997, the Company obtained new financing
that provided approximately $2.3 million to pay the loans in full pursuant to a
Discounted Loan Payoff Agreement. In January 1997, this same bank filed separate
notices of default relating to matured loans with principal balance totaling
$3.5 million secured by an estimated 1,140 lots and 71 commercially zoned acres
of the Company's Eagle Ranch project located in the high desert. There is no
assurance that the Company will be successful in its negotiations with this
bank. The law permits the bank to proceed with a non-judicial sale of the
property as of April 9, 1997, 90 days after the notices of default were filed.
Although the Company is currently in negotiations with the bank to amend the
terms of the loans and remove the notices of default, there can be no assurances
that the Company will be successful in its negotiations with the bank or that
the bank will not commence with a non-judicial sale of the property. The final
settlement could result in writedowns in 1997 in amounts ranging from minimal to
approximately $6.0 million.
During 1996 the Company entered into common stock purchase agreements
for 90,878 shares (restated for reverse stock split) of common stock with
certain subcontractors, suppliers and other creditors, including a director and
former directors of the Company. These shares were issued in exchange for
relieving the Company of debt owed to the respective creditors in the aggregate
amount of $539,000. In March 1996, the Company filed a Registration Statement on
Form S-3 in accordance with the terms of the common stock purchase agreement
that granted registration rights to these stockholders. The Registration
Statement was declared effective by the Securities and Exchange Commission in
April 1996. None of the proceeds from the sale of the shares by the selling
stockholders under that Registration Statement will be received by the Company.
The Company agreed to bear all expenses (other than underwriting discounts and
commissions) in connection with the registration.
In December 1996, the Company entered into a Common Stock Purchase
Agreement with a third party to sell 200,000 shares (restated for reverse stock
split) of the Company's common stock in a private transaction. The stock was
issued subsequent to year end for a total purchase price of $750,000. The
Company also granted the third party the right to require the Company to
register the stock for public sale with the Securities and Exchange Commission.
At that time, in consideration of a $50,000 payment, the third party was also
given an exclusive option to purchase approximately 71 acres of commercial
property located in one of the Company's high desert projects. Additionally, in
December 1996, the Company issued a warrant to purchase 200,000 shares (restated
for reverse stock split) of common stock in a private transaction to an entity
related to this third party. The warrant was issued as compensation for all
services to be performed pursuant to a Consulting Agreement entered into in
December 1996. The Consulting Agreement is for a term of two years during which
the related entity, on a non-exclusive basis, shall seek out, investigate and
pursue residential development projects and present them to the Company for its
consideration and approval. The warrant may be exercised within eighteen months
of the date of the agreement at a price of $5.25 per share (restated for reverse
stock split). If at least half of the warrant shares are not exercised during
this period, then half of the warrant shares will expire, with the balance
exercisable over an additional eighteen month period at $9.75 per share
(restated for reverse stock split). The related entity may also convert the
warrant shares or any portion thereof into shares of common stock using a
formula based upon the fair market value of the Company's common stock on the
conversion date. One of the owners of this third party and the related entity is
a partner in FERHP, one of the Company's consolidated partnerships and is a
general partner of the owner of land in which the Company has entered into the
Development and Marketing Agreement described below.
In November 1996, the Company entered into a Development and Marketing
Agreement with a third party to develop, construct, and market 163 lots owned by
the third party in Victorville, California. All financing and bonding will be
the responsibility of the third party. The Company will receive compensation in
the form of overhead draws, development fees and sales and marketing fees
totaling approximately 8.0% of the gross sales price of the homes. The Company
will assume the home warranty costs for which it will be paid $750 per house.
F-16
<PAGE> 48
In April 1996, the Company entered into a letter of intent with an
unaffiliated privately held home builder primarily doing business in Southern
California relating to a potential combination of the Company and the home
builder and certain of the home builders' affiliates. After conducting due
diligence relating to the proposed combination, negotiations were mutually
terminated. Subsequently, at the request of the unaffiliated home builder,
informal discussions have resumed. No assurances can be given whether or when
the Company and the home builder may enter into a definitive agreement or, if
entered into, what the precise terms of the transactions will be and whether any
conditions to the consummation of such a transaction will be satisfied.
In May 1994, the owners of 11 homes sold by the Company at its 201-home
Northfork project located in Murrieta, California filed a complaint against Inco
Development Corporation, a wholly-owned subsidiary of the Company ("Inco
Development"), in the Superior Court of California in Riverside County. In June
1994, the owners of six additional homes filed a separate complaint. These two
complaints were consolidated into one action. Subsequent to the consolidation,
one of the homeowners dismissed the lawsuit due to the Company's repair of the
alleged defects. In August 1994, one additional homeowner filed a complaint. In
October 1996, an additional eighteen homeowners filed a separate complaint. This
complaint was subsequently amended to include an additional four homeowners. The
Company is attempting to have this complaint consolidated with the previously
consolidated complaints. The complaints each allege, among other things,
negligence, nuisance, strict liability, breach of warranty, negligent infliction
of emotional distress and fraud based on alleged design and construction defects
and inadequate soils conditions. The plaintiffs are seeking general, special,
and punitive damages in an unspecified amount, and attorney fees. The causes of
action for fraud were dismissed by the court in 1994 with respect to the
complaints filed in 1994, and accordingly, there are no claims for punitive
damages. The Company intends to continue to vigorously defend itself in this
action. In 1994 the Company incurred as general and administrative expenses
approximately $850,000 of post-warranty costs to potentially mitigate these
items.
Commitments and contingencies also include the usual obligations
incurred by real estate developers in the ordinary course of business, including
the securing of financing, performance bonds, entitlement and water rights.
Outstanding performance bonds at December 31, 1996 and 1995 were $8.9 and $10.7
million, respectively.
In 1993, the Company began to purchase lumber directly from suppliers
pursuant to forward purchase commitments. These commitments were initiated in an
effort to mitigate the continuing escalation in lumber pricing and ensure
supply. The agreement in place for 1994 obligated the Company to purchase lumber
to build at least 600 homes during 1994 at specified pre-established prices. The
Company purchased lumber for approximately 100 homes under the contract. In
February 1995 the Company reached an agreement with the lumber company to settle
its lumber purchase commitment for $800,000, $645,000 of which was paid during
1995, with the balance paid during 1996. The Company accrued the full settlement
as cost of homes sold in 1994.
The Company is responsible for a one-year warranty period upon the sale
of single-family homes. An estimated reserve for warranty costs is included in
accounts payable and accrued liabilities.
The Company is committed under various operating leases for office
space and equipment. Rental expense relating to operating leases of $274,000,
$520,000, and $440,000, for the years ended December 31, 1996, 1995, and 1994,
respectively, is included in general and administrative expenses. The minimum
future payments due on the lease contracts payable at December 31, 1996 are
$299,000 for 1997, $167,000 for 1998, $111,000 for 1999, $82,000 for 2000, and
$0 for 2001.
At December 31, 1996, the Company did not satisfy a certain financial
covenant pursuant to a loan to Spirit 77 related to minimum net worth levels.
The Company has received a waiver from the lender. Based on the anticipated
results for 1997, the Company may be in violation of certain financial covenants
under this loan agreement for the quarter ending March 31, 1997 and subsequent
quarters. Although the Company believes these covenants could continue to be
modified or waived, it is not certain that such modifications or waivers will be
obtained.
F-17
<PAGE> 49
The Company is currently in default on the Purchase Agreement with
Spirit 77 since the Company has not purchased all of the required minimum number
of lots from Spirit 77. The Company and Spirit 77 are currently negotiating a
modification to the Purchase Agreement. The Company is also in default on two
notes payable to Spirit 77 related to the purchase of lots in 1996. The Company
and Spirit 77 are currently negotiating extensions to the due dates of these
notes.
NOTE 9. RELATED PARTY TRANSACTIONS
For the years ended December 31, 1996, 1995, and 1994, the Company
incurred $47,000, $46,000, and $109,000, respectively, in model home design fees
and $153,000, $50,000, and $387,000, respectively, as reimbursement for the cost
of the model home furnishings to Nancy Orman Interiors. Nancy Orman Interiors is
owned by Nancy Norris, the wife of Ira C. Norris.
For the years ended December 31, 1996, 1995, and 1994, the Company paid
$107,000, $147,000, and $154,000, respectively, for the use of office space, to
Inco Plaza, Ltd. Inco Plaza, Ltd. is a limited partnership owned 80% by G&N
Investments, Ltd., its sole general partner. G&N Investments, Ltd. is a limited
partnership owned 70% by Nancy and Ira C. Norris, its sole general partners.
Included in other assets at December 31, 1995 is an unsecured
non-interest bearing advance in the amount of $293,000, from Victor Valley
Commercial Properties. Victor Valley Commercial Properties is a limited
partnership owned 50% by G&N Investments, Ltd., its sole general partner. During
1996 the Company assigned this advance to Ira C. Norris in exchange for a cash
payment of $293,000.
Thomas E. Gibbs, Jr., a director of the Company, holds a 1.295% limited
partner's interest in Palmdale Vistas. Mr. Gibbs also holds a 23% general
partner's interest and a 1.376% limited partner's interest in Palmdale Vistas
Housing Investments, which holds a 47.41% limited partner's interest in Palmdale
Vistas. Mr. Gibbs also holds a 25% and 56.25% general partner's interest in ALG
and HRIP, respectively. Additionally, the Gibbs Family Trust, of which Mr. Gibbs
is a beneficiary and trustee, is a 50% limited partner in Triumph.
One of the owners of two entities that own approximately 12.2% of the
Company's outstanding common stock and a warrant to acquire approximately an
additional 10.9%, respectively, holds a 5.55% limited partnership interest in
FERHP.
In January 1993 the Company borrowed $1.8 million under a loan
agreement with one of its limited partners and a current stockholder and
director of the Company. Ten percent of the rights and obligations under this
agreement were assigned to another stockholder of the Company. The loan accrued
interest at an annual rate of 1.0% above the prime rate. The loan, plus
interest, was paid in full in April 1993, subsequent to the IPO. In connection
with this loan the Company issued to such stockholders warrants to purchase
7,920 shares (restated for reverse stock split) and 880 shares (restated for
reverse stock split), respectively, of the Company's common stock at an exercise
price of $60.00 per share (restated for reverse stock split). The warrants
expire in April 1998. As of December 31, 1996 none of the warrants had been
exercised.
NOTE 10. EMPLOYEES' PROFIT SHARING PLAN
The Company has an employee profit-sharing plan covering substantially
all employees. Contributions are made annually on a discretionary basis. No
contributions have been made for the years ended December 31, 1996, 1995, and
1994.
NOTE 11. STOCK OPTIONS/STOCK ISSUANCE PLAN
In November 1992, the Company's Board of Directors adopted the Stock
Option/Stock Issuance Plan (the "Plan"). Under the plan, 100,000 shares
(restated for reverse stock split) of common stock were authorized for issuance.
The discretionary option grant program provides for the grant of options to
purchase shares of the Company's common stock to key employees (including
officers and directors) and consultants of the Company.
F-18
<PAGE> 50
The options issued to employees are subject to certain vesting requirements. The
options issued to directors may be exercised in full six months after the grant
date.
The Company has adopted Statement of Financial Accounting Standards No.
123 ("SFAS No. 123") "Accounting for Stock-Based Compensation." In accordance
with the provisions of SFAS No. 123, the Company applies APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its plan and does not recognize compensation expense for its
stock-based compensation plan. If the Company had elected to recognize
compensation expense based upon the fair value at the grant date for awards
given in 1996 and 1995 under this plan consistent with the methodology
prescribed by SFAS No. 123, the Company's net loss and net loss per share for
the years ended December 31, 1996 and 1995 would not change materially from what
is presented.
During 1996, 19,142 options (restated for reverse stock split) were
granted at prices ranging from $3.750 to $4.875 per share (restated for reverse
stock split). As of October 2, 1995 the Compensation Committee of the Board of
Directors offered all employees of the Company the right to exchange 26,167
existing options (restated for reverse stock split) at prices ranging from
$14.25 to $56.25 (restated for reverse stock split) with replacement options.
The replacement options were set at $6.75, the current fair market value at the
time (restated for reverse stock split), and reset the required holding period.
All employees elected to exchange their existing options for replacement
options. As of December 31, 1996, 45,741 options (restated for reverse stock
split) were outstanding at prices ranging from $3.75 to $56.25 per share
(restated for reverse stock split), none of which have been exercised.
NOTE 12. SUBSEQUENT EVENTS
On January 16, 1997, a stockholder approved amendment to the Company's
Restated Certificate of Incorporation effecting a one-for-six reverse stock
split became effective.
In December 1996, a commercial bank filed notices of default relating
to matured loans with principal balances totaling $2.8 million secured by one of
the Company's projects. In February 1997, the Company obtained new financing
that provided approximately $2.3 million to pay the loans in full pursuant to a
Discounted Loan Payoff Agreement. In January 1997, this same bank filed separate
notices of default relating to matured loans with principal balance totaling
$3.5 million secured by an estimated 1,140 lots and 71 commercially zoned acres
of the Company's Eagle Ranch project located in the high desert. The law permits
the bank to proceed with a non-judicial sale of the property as of April 9,
1997, 90 days after the notices of default were filed. Although the Company is
currently in negotiations with the bank to amend the terms of the loans and
remove the notices of default, there can be no assurances that the Company will
be successful in its negotiations with the bank or that the bank will not
commence with a non-judicial sale of the property.
In December 1996, the Company entered into a Common Stock Purchase
Agreement with a third party to sell 200,000 shares (restated for reverse stock
split) of the Company's common stock in a private transaction. The stock was
issued subsequent to year end for a total purchase price of $750,000.
F-19
<PAGE> 51
NOTE 13. QUARTERLY RESULTS (UNAUDITED)
The Company has experienced, and expects to continue to
experience, significant variability in its operating results. The following
table reflects the quarterly operating results of the Company for 1996 and 1995
(in thousands, except for earnings per share, number of homes sales closed, and
average sales price).
<TABLE>
<CAPTION>
For the Three Months Ended (unaudited)
------------------------------------------------------------
Dec. 31, Sept. 30, June 30, March 31,
1996 1996 1996 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total revenue $ 7,269 $ 5,704 $ 2,972 $ 3,646
Gross profit 268 615 145 303
Operating loss (1,228) (670) (900) (976)
Pretax loss (1,798) (667) (859) (946)
Net loss (1,798) (667) (857) (946)
Net loss per common share (restated for reverse
stock split) $ (1.25) $ (0.46) $ (0.60) $ (0.69)
Number of homes closed 53 41 22 28
Average sales price $ 137,100 $ 139,100 $ 135,100 $ 130,200
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended (unaudited)
---------------------------------------------------------
Dec. 31, Sept. 30, June 30, March 31,
1995 1995 1995 1995
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Total revenue $ 12,281 $ 17,194 $ 21,209 $ 20,633
Gross profit 434 2,346 3,325 3,376
Operating income (loss) (2,094) (402) 38 80
Pretax income (loss) (12,989) (466) 23 40
Net income (loss) (15,435) (279) 14 24
Net income (loss) per common share (restated for
reverse stock split) $ (11.47) $ (0.21) $ 0.01 $ 0.02
Number of homes closed 117 149 171 158
Average sales price $ 105,000 $ 115,400 $124,000 $130,600
</TABLE>
Quarterly and year-to-date computations of per share amounts are made
independently. Therefore, the sum of per share amounts for the quarters may not
agree with per share amounts for the year.
F-20
<PAGE> 52
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
The Company's Proxy Statement for its 1997 Annual Meeting of
Stockholders, which, when filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934, will be incorporated by reference in this Annual Report on
Form 10-K pursuant to General Instruction G(3) of Form 10-K and provides the
information required under Part III (Items 10, 11, 12 and 13), except for the
information with respect to the registrant's executive officers who are not
directors, which is included in "Item 1. Business -- Executive Officers of the
Registrant."
32
<PAGE> 53
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
(A) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES. Page
----
<S> <C>
1. The financial statements are included in Item 8. F1 - F20
</TABLE>
2. The following financial statement schedules are included in this
Report:
None
Information required by other schedules has either been incorporated in the
financial statements and accompanying notes, or is not applicable to the
Company.
(B) REPORTS ON FORM 8-K.
The Company filed a current report on Form 8-K dated September 17, 1996
regarding a change of its independent accountant to Price Waterhouse LLP from
Ernst & Young LLP. The Company filed Amendments No. 1 and No. 2 to this Form 8-K
dated September 25, 1996 and October 1, 1996, respectively, to file the
requisite letters received from Ernst & Young LLP. No financial statements were
filed as part of these reports.
(C) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ------ --------------------
<S> <C>
3.1 Restated Certificate of Incorporation of the Registrant. (Incorporated
by reference to the Company's Form 8-K dated January 15, 1997.)
3.2 Restated Bylaws of the Registrant. (Incorporated by reference to
Exhibit 3.2 of the Company's Annual Report on Form 10-K dated December
31, 1995.)
*4.1 Specimen of Common Stock Certificate.
10.1 Form of Indemnification Agreement between the Registrant and its
directors and certain officers. (Incorporated by reference to Exhibit
10.1 of the Company's registration statement under the Securities Act
on Form S-1, Registration Statement No. 33-58050.)
+10.2 Form Stock Option Agreement. (Incorporated by reference to Exhibit 10.3
of the Company's registration statement under the Securities Act on
Form S-1, Registration Statement No. 33-58050.)
+10.3 Form Stock Option Agreement (with Stock Appreciation Right.)
(Incorporated by reference to Exhibit 10.4 of the Company's
registration statement under the Securities Act on Form S-1,
Registration Statement No. 33-58050.)
+10.4 Form of Non-employee Director Option Agreement. (Incorporated by
reference to Exhibit 10.5 of the Company's registration statement under
the Securities Act on Form S-1, Registration Statement No. 33-58050.)
</TABLE>
33
<PAGE> 54
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ------ --------------------
<S> <C>
+10.5 Form of Stock Issuance Agreement. (Incorporated by reference to Exhibit
10.6 of the Company's registration statement under the Securities Act
on Form S-1, Registration Statement No. 33-58050.)
+10.6 Profit Sharing Plan. (Incorporated by reference to Exhibit 10.7 of the
Company's registration statement under the Securities Act on Form S-1,
Registration Statement No. 33-58050.)
+10.7 Cash or Deferred Profit Sharing Plan. (Incorporated by reference to
Exhibit 10.8 of the Company's registration statement under the
Securities Act on Form S-1, Registration Statement No. 33-58050.)
10.8 Building Loan Agreement between Mesa Verde Land Developments and Union
Bank dated June 15, 1989. (Incorporated by reference to Exhibit 10.12
of the Company's registration statement under the Securities Act on
Form S-1, Registration Statement No. 33-58050.)
10.9 Amendment to Building Loan Agreement between Mesa Verde Land
Developments and Union Bank dated January 10, 1990. (Incorporated by
reference to Exhibit 10.13 of the Company's registration statement
under the Securities Act on Form S-1, Registration Statement No.
33-58050.)
10.10 Amendment to Building Loan Agreement between Mesa Verde Land
Developments and Union Bank dated June 25, 1992. (Incorporated by
reference to Exhibit 10.14 of the Company's registration statement
under the Securities Act on Form S-1, Registration Statement No.
33-58050.)
10.11 Amendment to Building Loan Agreement between Mesa Verde Land
Developments and Union Bank dated August 14, 1992. (Incorporated by
reference to Exhibit 10.15 of the Company's registration statement
under the Securities Act on Form S-1, Registration Statement No.
33-58050.)
10.12 Note between Mesa Verde Land Developments and Union Bank dated June 15,
1989. (Incorporated by reference to Exhibit 10.16 of the Company's
registration statement under the Securities Act on Form S-1,
Registration Statement No. 33-58050.)
10.13 Construction Deed of Trust and Assignment of Rents between Mesa Verde
Land Developments and Union Bank dated June 15, 1989. (Incorporated by
reference to Exhibit 10.17 of the Company's registration statement
under the Securities Act on Form S-1, Registration Statement No.
33-58050.)
10.14 Guaranty between Ira C. Norris and Union Bank dated June 15, 1989.
(Incorporated by reference to Exhibit 10.18 of the Company's
registration statement under the Securities Act on Form S-1,
Registration Statement No. 33-58050.)
10.15 Guaranty between Inco Holding and Union Bank dated June 15, 1989.
(Incorporated by reference to Exhibit 10.19 of the Company's
registration statement under the Securities Act on Form S-1,
Registration Statement No. 33-58050.)
+10.16 Employees' Incentive Compensation Plan. (Incorporated by reference to
Exhibit 10.49 of the Company's registration statement under the
Securities Act on Form S-1, Registration Statement No. 33-58050.)
10.17 Business Loan Agreement between Inco Homes Corporation and Riverside
National Bank, dated October 12, 1993. (Incorporated by reference to
Exhibit 10.76 of the Company's Annual Report on Form 10-K dated
December 31, 1993.)
</TABLE>
34
<PAGE> 55
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ------ --------------------
<S> <C>
10.18 Corporate Resolution to Borrow between Inco Homes Corporation and
Riverside National Bank, dated October 12, 1993. (Incorporated by
reference to Exhibit 10.77 of the Company's Annual Report on Form 10-K
dated December 31, 1993.)
10.19 Disbursement Request and Authorization between Inco Homes Corporation
and Riverside National Bank, dated October 12, 1993. (Incorporated by
reference to Exhibit 10.78 of the Company's Annual Report on Form 10-K
dated December 31, 1993.)
10.20 Promissory Note between Inco Homes Corporation and Riverside National
Bank, dated October 12, 1993. (Incorporated by reference to Exhibit
10.79 of the Company's Annual Report on Form 10-K dated December 31,
1993.)
10.21 Note Secured by Deed of Trust between Inco Homes Corporation and Union
Bank, dated August 30, 1993. (Incorporated by reference to Exhibit
10.80 of the Company's Annual Report on Form 10-K dated December 31,
1993.)
10.22 Revised Letter of Intent to Purchase Certain Unimproved Real Property
Located in City of Corona, County of Riverside, State of California,
dated December 2, 1993. (Incorporated by reference to Exhibit 10.95 of
the Company's Annual Report on Form 10-K dated December 31, 1993.)
+10.23 1992 Stock Option/Stock Issuance Plan. (Incorporated by reference to
Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q dated
March 31, 1994.)
10.24 Settlement Statement and Revised Letter of Intent to Purchase Certain
Unimproved Real Property Located in the City of Corona, County of
Riverside, State of California. (Incorporated by reference to Exhibit
10.3 of the Company's Quarterly Report on Form 10-Q dated March 31,
1994.)
10.25 Standard Office Lease - Gross between Princeland Development Company
and Inco Homes Corporation, dated March 3, 1994. (Incorporated by
reference to Exhibit 10.13 of the Company's Quarterly Report on Form
10-Q dated June 30, 1994.)
10.26 Standard Form Shopping Center Lease between Commercial Center
Management, Inc., Receiver for Ranch Center Limited and Inco Homes
Corporation, dated June 30, 1994. (Incorporated by reference to
Exhibit 10.16 of the Company's Quarterly Report on Form 10-Q dated
June 30, 1994.)
10.27 Supplement to Deed of Trust between Union Bank and Inco Homes
Corporation, dated October 7, 1994. (Incorporated by reference to
Exhibit 10.11 of the Company's Quarterly Report on Form 10-Q dated
September 30, 1994.)
10.28 Addendum to Deed of Trust, Assignment of Rents, Security Agreement and
Fixture Filing between Union Bank and Inco Homes Corporation, dated
August 23, 1994. (Incorporated by reference to Exhibit 10.12 of the
Company's Quarterly Report on Form 10-Q dated September 30, 1994.)
10.29 Addendum to Commercial Promissory Note Secured by Deed of Trust
between Union Bank and Inco Homes Corporation, dated August 23, 1994.
(Incorporated by reference to Exhibit 10.13 of the Company's Quarterly
Report on Form 10-Q dated September 30, 1994.)
10.30 Amendment Agreement Promissory Note and Deed of Trust between Union
Bank and Inco Homes Corporation, dated October 7, 1994. (Incorporated
by reference to Exhibit 10.14 of the Company's Quarterly Report on
Form 10-Q dated September 30, 1994.)
</TABLE>
35
<PAGE> 56
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ------ --------------------
<S> <C>
10.31 Amendment Agreement between Union Bank and Inco Homes Corporation,
dated October 7, 1994; Loan No. 3779915092 0021-00-0-001. (Incorporated
by reference to Exhibit 10.15 of the Company's Quarterly Report on Form
10-Q dated September 30, 1994.)
10.32 Office lease between Princeland Properties (International), Inc. and
Inco Homes Corporation, dated October 5, 1994. (Incorporated by
reference to Exhibit 10.106 of the Company's Annual Report on Form 10-K
dated December 31, 1994.)
10.33 Promissory Note, Loan No. 01373927-70, dated October 24, 1994, between
Riverside National Bank and Inco Homes Corporation. (Incorporated by
reference to Exhibit 10.107 of the Company's Annual Report on Form 10-K
dated December 31, 1994.)
10.34 Construction Deed of Trust, Assignment of Rents, Security Agreement
and Fixture Filing, dated October 7, 1994, between Union Bank and Inco
Homes Corporation. (Incorporated by reference to Exhibit 10.108 of the
Company's Annual Report on Form 10-K dated December 31, 1994.)
10.35 Building Loan Agreement/Disbursement Schedule dated October 7, 1994,
between Union Bank and Inco Homes Corporation. (Incorporated by
reference to Exhibit 10.109 of the Company's Annual Report on Form
10-K dated December 31, 1994.)
10.36 Commercial Promissory Note dated October 7, 1994, between Union Bank
and Inco Homes Corporation. (Incorporated by reference to Exhibit
10.110 of the Company's Annual Report on Form 10-K dated December 31,
1994.)
10.37 Lease of premises located at 1282 West Arrow Highway, Upland,
California, dated as of October 1, 1995, between Inco Homes
Corporation and G & N Investments. (Incorporated by reference to
Exhibit 10.70 of the Company's Annual Report on Form 10-K dated
December 31, 1995.)
10.38 Construction Deed of Trust, Modification of Deed of Trust Agreement
(two Agreements), Construction Loan Modification Agreement and Amended
and Restated Promissory Note, dated October 1, 1995, between Inco
Homes Corporation and Riverside National Bank. (Incorporated by
reference to Exhibit 10.71 of the Company's Annual Report on Form 10-K
dated December 31, 1995.)
10.39 Tax Indemnification Agreement between the Registrant and Ira C. Norris
dated March 15, 1993. (Incorporated by reference to Exhibit 10.44 of
the Company's registration statement under the Securities Act on Form
S-1, Registration Statement No. 33-58050.)
10.40 Limited Partnership Agreement of Spirit Corona 77, L.P. by and between
ORA A&D Associates, L.P., a California Limited Partnership and Inco
Homes Corporation, a Delaware corporation, dated January 11, 1996.
(Incorporated by reference to Exhibit 10.1 of the Company's Quarterly
Report on Form 10-Q dated June 30, 1996.)
10.41 Limited Partnership Agreement of Freedom -- Eagle Ranch Housing
Partners by and between Julia Construction Inc., a California
corporation, Fred E. Liao and Bob C. Chang, and Inco Homes
Corporation, a Delaware corporation, dated May 1, 1996. (Incorporated
by reference to Exhibit 10.2 of the Company's Quarterly Report on Form
10-Q dated June 30, 1996.)
</TABLE>
36
<PAGE> 57
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ------ --------------------
<S> <C>
10.42 Secured Participation Note by and between ALG-1996-1, a California
Limited Partnership and Inco Homes Corporation, a Delaware
corporation, dated June 26, 1996. (Incorporated by reference to
Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q dated June
30, 1996.)
10.43 Limited Partnership Agreement of Triumph -- Lancaster Housing Partners
by and between the Gibbs Family Trust and Inco Homes Corporation,
dated August 5, 1996. (Incorporated by reference to Exhibit 10.1 of
the Company's Quarterly Report on Form 10-Q dated September 30, 1996.)
*10.44 Common Stock Purchase Agreement by and between Inco Homes Corporation,
a Delaware corporation and Overland Opportunity Fund, LLC, a
California limited liability company, dated December 23, 1996.
*10.45 Option Agreement by and between Inco Homes Corporation, a Delaware
corporation and Overland Opportunity Fund, LLC, a California limited
liability company, dated December 26, 1996.
*10.46 Consulting Agreement by and between Inco Homes Corporation, a Delaware
corporation and Overland Opportunity Fund, LLC, a California limited
liability company, dated December 26, 1996.
*10.47 Warrant to Purchase 1,200,000 Shares of Inco Homes Corporation Common
Stock issued to Overland Company, Inc., dated December 26, 1996.
*10.48 Development and Marketing Agreement by and between Victorville 163
Partners, L.P., a California limited partnership and Inco Homes
Corporation, a Delaware corporation, dated November 15, 1996.
*10.49 Secured Participation Note by and between Hunter's Ridge Investment
Partners, a California partnership and Inco Homes Corporation, a
Delaware corporation, dated October 1996.
*10.50 Registration Rights Agreement by and between Inco Homes Corporation, a
Delaware corporation and Overland Opportunity Fund, LLC, a California
limited liability company, dated December 23, 1996.
*21.1 Subsidiaries of the Registrant.
*23.1 Consent of Independent Auditors (Ernst & Young LLP).
*23.2 Consent of Certified Public Accountants (Price Waterhouse LLP).
*27.1 Financial Data Schedule
</TABLE>
- ----------------
* Filed herewith
+ Management contract, compensatory plan or arrangement
37
<PAGE> 58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INCO HOMES CORPORATION
By /s/ Ira C. Norris
--------------------------------
Ira C. Norris
Chairman of the Board, President and
Chief Executive Officer
Dated: April 14, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Ira C. Norris Chairman of the Board, President and Chief April 14, 1997
- -------------------------------- Executive Officer (principal executive
Ira C. Norris officer)
/s/ Norman B. Gold Vice President and Chief Financial Officer April 14, 1997
- -------------------------------- (principal financial officer)
Norman B. Gold
/s/ Robert H. Daskal Director April 14, 1997
- --------------------------------
Robert H. Daskal
/s/ Thomas E. Gibbs, Jr. Director April 14, 1997
- --------------------------------
Thomas E. Gibbs, Jr.
/s/ Ronald L. Neeley Director April 14, 1997
- --------------------------------
Ronald L. Neeley
/s/ John Seymour Director April 14, 1997
- --------------------------------
John F. Seymour, Jr.
</TABLE>
38
<PAGE> 59
INCO HOMES CORPORATION
FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1996
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DOCUMENT DESCRIPTION NUMBERED PAGE
- ------ -------------------- -------------
<S> <C> <C>
3.1 Restated Certificate of Incorporation of the Registrant. (Incorporated
by reference to the Company's Form 8-K dated January 15, 1997.)
3.2 Restated Bylaws of the Registrant. (Incorporated by reference to
Exhibit 3.2 of the Company's Annual Report on Form 10-K dated December
31, 1995.)
*4.1 Specimen of Common Stock Certificate
10.1 Form of Indemnification Agreement between the Registrant and its
directors and certain officers. (Incorporated by reference to Exhibit
10.1 of the Company's registration statement under the Securities Act
on Form S-1, Registration Statement No. 33-58050.)
+10.2 Form Stock Option Agreement. (Incorporated by reference to Exhibit 10.3
of the Company's registration statement under the Securities Act on
Form S-1, Registration Statement No. 33-58050.)
+10.3 Form Stock Option Agreement (with Stock Appreciation Right.)
(Incorporated by reference to Exhibit 10.4 of the Company's
registration statement under the Securities Act on Form S-1,
Registration Statement No. 33-58050.)
+10.4 Form of Non-employee Director Option Agreement. (Incorporated by
reference to Exhibit 10.5 of the Company's registration statement under
the Securities Act on Form S-1, Registration Statement No. 33-58050.)
+10.5 Form of Stock Issuance Agreement. (Incorporated by reference to Exhibit
10.6 of the Company's registration statement under the Securities Act
on Form S-1, Registration Statement No. 33-58050.)
+10.6 Profit Sharing Plan. (Incorporated by reference to Exhibit 10.7 of the
Company's registration statement under the Securities Act on Form S-1,
Registration Statement No. 33-58050.)
+10.7 Cash or Deferred Profit Sharing Plan. (Incorporated by reference to
Exhibit 10.8 of the Company's registration statement under the
Securities Act on Form S-1, Registration Statement No. 33-58050.)
10.8 Building Loan Agreement between Mesa Verde Land Developments and Union
Bank dated June 15, 1989. (Incorporated by reference to Exhibit 10.12
of the Company's registration statement under the Securities Act on
Form S-1, Registration Statement No. 33-58050.)
</TABLE>
1
<PAGE> 60
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DOCUMENT DESCRIPTION NUMBERED PAGE
- ------ -------------------- -------------
<S> <C> <C>
10.9 Amendment to Building Loan Agreement between Mesa Verde Land
Developments and Union Bank dated January 10, 1990. (Incorporated by
reference to Exhibit 10.13 of the Company's registration statement
under the Securities Act on Form S-1, Registration Statement No.
33-58050.)
10.10 Amendment to Building Loan Agreement between Mesa Verde Land
Developments and Union Bank dated June 25, 1992. (Incorporated by
reference to Exhibit 10.14 of the Company's registration statement
under the Securities Act on Form S-1, Registration Statement No.
33-58050.)
10.11 Amendment to Building Loan Agreement between Mesa Verde Land
Developments and Union Bank dated August 14, 1992. (Incorporated by
reference to Exhibit 10.15 of the Company's registration statement
under the Securities Act on Form S-1, Registration Statement No.
33-58050.)
10.12 Note between Mesa Verde Land Developments and Union Bank dated June 15,
1989. (Incorporated by reference to Exhibit 10.16 of the Company's
registration statement under the Securities Act on Form S-1,
Registration Statement No. 33-58050.)
10.13 Construction Deed of Trust and Assignment of Rents between Mesa Verde
Land Developments and Union Bank dated June 15, 1989. (Incorporated by
reference to Exhibit 10.17 of the Company's registration statement
under the Securities Act on Form S-1, Registration Statement No.
33-58050.)
10.14 Guaranty between Ira C. Norris and Union Bank dated June 15, 1989.
(Incorporated by reference to Exhibit 10.18 of the Company's
registration statement under the Securities Act on Form S-1,
Registration Statement No. 33-58050.)
10.15 Guaranty between Inco Holding and Union Bank dated June 15, 1989.
(Incorporated by reference to Exhibit 10.19 of the Company's
registration statement under the Securities Act on Form S-1,
Registration Statement No. 33-58050.)
+10.16 Employees' Incentive Compensation Plan. (Incorporated by reference to
Exhibit 10.49 of the Company's registration statement under the
Securities Act on Form S-1, Registration Statement No. 33-58050.)
10.17 Business Loan Agreement between Inco Homes Corporation and Riverside
National Bank, dated October 12, 1993. (Incorporated by reference to
Exhibit 10.76 of the Company's Annual Report on Form 10-K dated
December 31, 1993.)
10.18 Corporate Resolution to Borrow between Inco Homes Corporation and
Riverside National Bank, dated October 12, 1993. (Incorporated by
reference to Exhibit 10.77 of the Company's Annual Report on Form 10-K
dated December 31, 1993.)
10.19 Disbursement Request and Authorization between Inco Homes Corporation
and Riverside National Bank, dated October 12, 1993. (Incorporated by
reference to Exhibit 10.78 of the Company's Annual Report on Form 10-K
dated December 31, 1993.)
</TABLE>
2
<PAGE> 61
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DOCUMENT DESCRIPTION NUMBERED PAGE
- ------ -------------------- -------------
<S> <C> <C>
10.20 Promissory Note between Inco Homes Corporation and Riverside National
Bank, dated October 12, 1993. (Incorporated by reference to Exhibit
10.79 of the Company's Annual Report on Form 10-K dated December 31,
1993.)
10.21 Note Secured by Deed of Trust between Inco Homes Corporation and Union
Bank, dated August 30, 1993. (Incorporated by reference to Exhibit
10.80 of the Company's Annual Report on Form 10-K dated December 31,
1993.)
10.22 Revised Letter of Intent to Purchase Certain Unimproved Real Property
Located in City of Corona, County of Riverside, State of California,
dated December 2, 1993. (Incorporated by reference to Exhibit 10.95 of
the Company's Annual Report on Form 10-K dated December 31, 1993.)
+10.23 1992 Stock Option/Stock Issuance Plan. (Incorporated by reference to
Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q dated March
31, 1994.)
10.24 Settlement Statement and Revised Letter of Intent to Purchase Certain
Unimproved Real Property Located in the City of Corona, County of
Riverside, State of California. (Incorporated by reference to Exhibit
10.3 of the Company's Quarterly Report on Form 10-Q dated March 31,
1994.)
10.25 Standard Office Lease - Gross between Princeland Development Company
and Inco Homes Corporation, dated March 3, 1994. (Incorporated by
reference to Exhibit 10.13 of the Company's Quarterly Report on Form
10-Q dated June 30, 1994.)
10.26 Standard Form Shopping Center Lease between Commercial Center
Management, Inc., Receiver for Ranch Center Limited and Inco Homes
Corporation, dated June 30, 1994. (Incorporated by reference to Exhibit
10.16 of the Company's Quarterly Report on Form 10-Q dated June 30,
1994.)
10.27 Supplement to Deed of Trust between Union Bank and Inco Homes
Corporation, dated October 7, 1994. (Incorporated by reference to
Exhibit 10.11 of the Company's Quarterly Report on Form 10-Q dated
September 30, 1994.)
10.28 Addendum to Deed of Trust, Assignment of Rents, Security Agreement and
Fixture Filing between Union Bank and Inco Homes Corporation, dated
August 23, 1994. (Incorporated by reference to Exhibit 10.12 of the
Company's Quarterly Report on Form 10-Q dated September 30, 1994.)
10.29 Addendum to Commercial Promissory Note Secured by Deed of Trust between
Union Bank and Inco Homes Corporation, dated August 23, 1994.
(Incorporated by reference to Exhibit 10.13 of the Company's Quarterly
Report on Form 10-Q dated September 30, 1994.)
10.30 Amendment Agreement Promissory Note and Deed of Trust between Union
Bank and Inco Homes Corporation, dated October 7, 1994. (Incorporated
by reference to Exhibit 10.14 of the Company's Quarterly Report on Form
10-Q dated September 30, 1994.)
</TABLE>
3
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<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DOCUMENT DESCRIPTION NUMBERED PAGE
- ------ -------------------- -------------
<S> <C> <C>
10.31 Amendment Agreement between Union Bank and Inco Homes Corporation,
dated October 7, 1994; Loan No. 3779915092 0021-00-0-001. (Incorporated
by reference to Exhibit 10.15 of the Company's Quarterly Report on Form
10-Q dated September 30, 1994.)
10.32 Office lease between Princeland Properties (International), Inc. and
Inco Homes Corporation, dated October 5, 1994. (Incorporated by
reference to Exhibit 10.106 of the Company's Annual Report on Form 10-K
dated December 31, 1994.)
10.33 Promissory Note, Loan No. 01373927-70, dated October 24, 1994, between
Riverside National Bank and Inco Homes Corporation. (Incorporated by
reference to Exhibit 10.107 of the Company's Annual Report on Form 10-K
dated December 31, 1994.)
10.34 Construction Deed of Trust, Assignment of Rents, Security Agreement and
Fixture Filing, dated October 7, 1994, between Union Bank and Inco
Homes Corporation. (Incorporated by reference to Exhibit 10.108 of the
Company's Annual Report on Form 10-K dated December 31, 1994.)
10.35 Building Loan Agreement/Disbursement Schedule dated October 7, 1994,
between Union Bank and Inco Homes Corporation. (Incorporated by
reference to Exhibit 10.109 of the Company's Annual Report on Form 10-K
dated December 31, 1994.)
10.36 Commercial Promissory Note dated October 7, 1994, between Union Bank
and Inco Homes Corporation. (Incorporated by reference to Exhibit
10.110 of the Company's Annual Report on Form 10-K dated December 31,
1994.)
10.37 Lease of premises located at 1282 West Arrow Highway, Upland,
California, dated as of October 1, 1995, between Inco Homes Corporation
and G & N Investments. (Incorporated by reference to Exhibit 10.70 of
the Company's Annual Report on Form 10-K dated December 31, 1995.)
10.38 Construction Deed of Trust, Modification of Deed of Trust Agreement
(two Agreements), Construction Loan Modification Agreement and Amended
and Restated Promissory Note, dated October 1, 1995, between Inco Homes
Corporation and Riverside National Bank. (Incorporated by reference to
Exhibit 10.71 of the Company's Annual Report on Form 10-K dated
December 31, 1995.)
10.39 Tax Indemnification Agreement between the Registrant and Ira C. Norris
dated March 15, 1993. (Incorporated by reference to Exhibit 10.44 of
the Company's registration statement under the Securities Act on Form
S-1, Registration Statement No. 33-58050.)
10.40 Limited Partnership Agreement of Spirit Corona 77, L.P. by and between
ORA A&D Associates, L.P., a California Limited Partnership and Inco
Homes Corporation, a Delaware corporation, dated January 11, 1996.
(Incorporated by reference to Exhibit 10.1 of the Company's Quarterly
Report on Form 10-Q dated June 30, 1996.)
</TABLE>
4
<PAGE> 63
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DOCUMENT DESCRIPTION NUMBERED PAGE
- ------ -------------------- -------------
<S> <C> <C>
10.41 Limited Partnership Agreement of Freedom -- Eagle Ranch Housing
Partners by and between Julia Construction Inc., a California
corporation, Fred E. Liao and Bob C. Chang, and Inco Homes Corporation,
a Delaware corporation, dated May 1, 1996. (Incorporated by reference
to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q dated
June 30, 1996.)
10.42 Secured Participation Note by and between ALG-1996-1, a California
Limited Partnership and Inco Homes Corporation, a Delaware corporation,
dated June 26, 1996. (Incorporated by reference to Exhibit 10.3 of the
Company's Quarterly Report on Form 10-Q dated June 30, 1996.)
10.43 Limited Partnership Agreement of Triumph -- Lancaster Housing Partners
by and between the Gibbs Family Trust and Inco Homes Corporation, dated
August 5, 1996. (Incorporated by reference to Exhibit 10.1 of the
Company's Quarterly Report on Form 10-Q dated September 30, 1996.)
*10.44 Common Stock Purchase Agreement by and between Inco Homes Corporation,
a Delaware corporation and Overland Opportunity Fund, LLC, a California
limited liability company, dated December 23, 1996.
*10.45 Option Agreement by and between Inco Homes Corporation, a Delaware
corporation and 58 Overland Opportunity Fund, LLC, a California limited
liability company, dated December 26, 1996.
*10.46 Consulting Agreement by and between Inco Homes Corporation, a Delaware
corporation and 61 Overland Opportunity Fund, LLC, a California limited
liability company, dated December 26, 1996.
*10.47 Warrant to Purchase 1,200,000 Shares of Inco Homes Corporation Common
Stock issued to Overland Company, Inc., dated December 26, 1996.
*10.48 Development and Marketing Agreement by and between Victorville 163
Partners, L.P., a California limited partnership and Inco Homes
Corporation, a Delaware corporation, dated November 15, 1996.
*10.49 Secured Participation Note by and between Hunter's Ridge Investment
Partners, a California partnership and Inco Homes Corporation, a
Delaware corporation, dated October 1996.
*10.50 Registration Rights Agreement by and between Inco Homes Corporation, a
Delaware corporation and Overland Opportunity Fund, LLC, a California
limited liability company, dated December 23, 1996.
*21.1 Subsidiaries of the Registrant.
*23.1 Consent of Independent Auditors (Ernst & Young LLP).
*23.2 Consent of Certified Public Accountants (Price Waterhouse LLP).
</TABLE>
5
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<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DOCUMENT DESCRIPTION NUMBERED PAGE
- ------ -------------------- -------------
<S> <C> <C>
*27.1 Financial Data Schedule.
</TABLE>
- ----------------
* Filed herewith
+ Management contract, compensatory plan or arrangement
6
<PAGE> 1
EXHIBIT 4.1
COMMON STOCK COMMON STOCK
NUMBER SHARES
IH INCO
HOMES
INCORPORATED UNDER THE LAWS OF SEE REVERSE FOR
THE STATE OF DELAWARE CERTAIN DEFINITIONS
CUSIP 453257 20 6
THIS CERTIFIES THAT
SPECIMEN
IS THE RECORD HOLDER OF
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, $.01 PAR VALUE, OF
INCO HOMES CORPORATION
transferable on the books of the Corporation in person or by duly authorized
attorney upon surrender of this Certificate properly endorsed. This Certificate
is not valid unless countersigned and registered by the Transfer Agent and
Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
INCO HOMES CORPORATION
[SEAL]
[SIG] [SIG]
------------------------- ------------------------
SECRETARY PRESIDENT
COUNTERSIGNED AND REGISTERED:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
(Jersey City, NJ)
TRANSFER AGENT
AND REGISTRAR
BY
------------------------------------------
AUTHORIZED OFFICER
<PAGE> 2
The Corporation will furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and
relative, participating, optional or other special rights of each class of
stock of the Corporation or series thereof and the qualifications, limitations
or restrictions of such preferences and/or rights. Such requests shall be made
to the Corporation's Secretary at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship
and not as tenants in common
UNIF GIFT MIN ACT - .........................Custodian.........................
(Cust) (Minor)
under Uniform Gifts to Minors Act..........................
(State)
UNIF TRF MIN ACT - ..........................Custodian (Until age ...........)
(Cust)
................................under Uniform Transfers to
(Minor)
to Minors Act..............................................
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ___________________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ---------------------------------------
- ---------------------------------------
- -------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
_________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated _____________________
X ______________________________________
X ______________________________________
THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS
NOTICE: WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By___________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS,
SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS
WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE> 1
EXHIBIT 10.44
INCO HOMES CORPORATION
COMMON STOCK PURCHASE AGREEMENT
This Common Stock Purchase Agreement (the "AGREEMENT") is made as of
December 23, 1996, by and among INCO HOMES CORPORATION, a Delaware corporation
(the "COMPANY"), with its principal office located at 1282 W. Arrow Highway,
Suite 200, P. O. Box 970, Upland, California 91786, and OVERLAND OPPORTUNITY
FUND, LLC, a California limited liability company, with its principal office
located at 147 East Olive Avenue, Monrovia, California 91016 (the "PURCHASER").
1
Authorization and Sale of Common Stock
--------------------------------------
1.1 Authorization. The Company has authorized the sale and
issuance of up to 1,200,000 shares (the "SHARES") of its Common Stock, par
value $.01 per share (the "COMMON STOCK") pursuant to this Agreement.
1.2 Purchase and Sale of Common Stock. Subject to the terms and
conditions of this Agreement, the Company agrees to issue and sell to the
Purchaser and the Purchaser agrees to purchase from the Company an aggregate of
1,200,000 Shares in three installments of 400,000 Shares each, closing on the
dates and pursuant to the terms set forth in Section 2.1 below. In exchange
for the specified Shares, the Purchaser shall deliver, as set forth in Section
2, below, to the Company a check or money order in an amount (the "PURCHASE
PRICE") equal to the Share Price (defined below) times the number of Shares
purchased by the Purchaser in each such installment.
The Share Price shall be $.625 per share, which was determined in
arms' length negotiations between the Company and the Purchaser.
2
Closing Date; Escrow Holder; Deliveries
---------------------------------------
2.1 Closing Date. The closing of the issuance, purchase and sale
of each of the three installments of 400,000 Shares (the closing of each
installment referred to as a "CLOSING") shall be held at the offices of the
Company at the address set forth above, the first such closing occurring on
December 23, 1996, the second such closing occurring on January 10, 1997, and
the third such closing occurring on January 31, 1997, or at such other times
and place upon which the Company and the Purchaser shall agree. The date of
the Closing of each installment is hereinafter referred to as a "CLOSING DATE".
2.2 Deliveries.
(a) Company's Deliveries on or before Closing. On or
before each Closing Date, the Company shall deliver to the Purchaser a
certificate of good standing issued by the Secretary of State of Delaware
issued within two (2) days prior to such Closing Date and reflecting the
corporate and state tax good standing of the Company in the State of Delaware.
(b) Company's Deliveries at Closing. At each Closing,
the Company will deliver to the Purchaser a certificate (individually, a
"CERTIFICATE", and collectively, the "CERTIFICATES"), registered in the
Purchaser's name, representing the number of Shares to be purchased in the
installment to be closed on that date; provided, however, that the Certificate
to be delivered at the closing of the first installment shall be delivered at
the closing of the second installment, but Purchaser shall be deemed the holder
of 400,000 Shares as of the Closing Date of the first installment,
notwithstanding that no Certificate is delivered on that date.
(c) Purchaser's Deliveries at Closing. At each Closing,
the Purchaser shall deliver to the Company the following items:
D-1
<PAGE> 2
(i) a certificate signed by the Purchaser stating
that the Purchaser believes that it has received all of the information it
considers necessary or appropriate for deciding whether to purchase the Shares,
and further that Purchaser is aware of the Company's business affairs and
financial condition, has had an opportunity to ask questions and receive
responses to inquiries from representatives of the Company, and has had access
to and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Shares; and
(ii) a check or money order in an amount equal to
the Purchase Price for the installment of Shares to be purchased on that
Closing Date.
The deliveries required by this Section 2 shall be deemed a covenant
and agreement of the Company and the Purchaser, respectively, for the purposes
of Sections 6.2 and 7.2 hereof.
2.3 Option To Purchase Commercial Acreage. Provided that
Purchaser purchases all of the Shares as set forth above on or before January
31, 1997, the Company will grant to the Purchaser an exclusive option to
purchase approximately 71 acres of commercial real estate located in Eagle
Ranch in Victorville, California, such option to be substantially in the form
attached hereto as Exhibit A.
3
Due Diligence
-------------
3.1 Deliveries by Company.
(a) Concurrently with the execution of this Agreement,
the Company shall provide to the Purchaser each of the following items:
(i) certified true copies of the Certificate of
Incorporation (as amended) and the Bylaws (as amended) of the Company;
(ii) a resolution of the board of directors of the
Company approving this Agreement, the issuance of the Shares on the terms of
this Agreement and authorizing a person or persons to execute this Agreement on
behalf of the Company and to issue and affix the corporate seal of the Company
on the Certificates;
(iii) copies of all documents that the Company was
required to file with the Securities and Exchange Commission (the "SEC") under
Sections 13, 14(a) and 15(d) of the Securities Exchange Act of 1934, as amended
(the "EXCHANGE ACT"), during the twelve (12) months preceding the date of this
Agreement, including without limitation all 8-K filings of the Company during
such period and the 10-K filings for the year ended December 31, 1995; and
(iv) copies of all statements and/or circulars
dispatched to the shareholders or to any class of creditors of the Company
within the twelve (12) month period preceding the first Closing Date.
(b) Within three (3) days after receipt of a written
request from Purchaser for the instruments or other documents evidencing any of
the items disclosed in this Agreement, including Exhibit C hereto, the Company
shall deliver such items to the requesting party.
3.2 Due Diligence Review. In the event that the Purchaser
disapproves any of the items set forth in Section 3.1 or disclosed in Section 4
or on Exhibit C hereto, the Purchaser shall have the right, upon delivery of
written
D-2
<PAGE> 3
notice thereof to the Company, to immediately cancel this Agreement. In the
event of such cancellation and upon receipt of a written statement detailing
the fees and expenses incurred by the Company in connection with this
Agreement, the Purchaser shall pay to the Company its reasonable fees and
expenses incurred in connection with this Agreement.
4
Representations and Warranties of the Company
---------------------------------------------
The Company represents and warrants to the Purchaser as of each
Closing Date as set forth below in this Section 4 (the "COMPANY WARRANTIES").
At all times prior to the Closing, the Company shall notify the Purchaser
immediately upon its becoming aware of any event which may cause any of the
Company Warranties set forth in this Section 4 to be incorrect, incomplete,
misleading or breached in any material respect or which may have any adverse
affect on the assets or liabilities of the Company.
4.1 Organization and Standing. The Company is a corporation duly
organized and validly existing under, and by virtue of, the laws of the State
of Delaware and is in good standing as a domestic corporation under the laws of
said state.
4.2 Corporate Power; Authorization. The Company has all requisite
legal and corporate power and has taken all necessary corporate action to
execute and deliver this Agreement, to sell and issue the Shares and to carry
out and perform all of its obligations under this Agreement. This Agreement
constitutes the legal, valid and binding obligation of the Company, enforceable
in accordance with its terms, except (i) as limited by applicable bankruptcy,
insolvency, reorganization or similar laws relating to or affecting the
enforcement of creditors' rights generally and (ii) as limited by equitable
principles generally.
4.3 Non-Contravention. The execution and delivery of this
Agreement does not, and the performance of this Agreement and the compliance
with the provisions hereof, and the issuance, sale and delivery of the Shares
by the Company to the Purchaser will not materially conflict with, or result in
a material breach or violation of the terms, conditions or provisions of, or
constitute a material default under, or result in the creation or imposition of
any material lien pursuant to the terms of, the Certificate of Incorporation or
Bylaws of the Company or any statute, law, rule or regulation or any state or
federal order, judgment or decree or any indenture, mortgage, lease or other
material agreement or instrument to which the Company or any of its properties
is subject. There is not any agreement or arrangement between the Company and
any third party which will, by virtue of the transactions envisioned by this
Agreement or other performance of the terms of this Agreement, result in any
such third party being relieved of any obligation or becoming entitled to
exercise any right of termination or any right of preemption or other option
thereunder.
4.4 Issuance and Delivery of the Shares. The Shares, when issued
in compliance with the provisions of this Agreement, will be validly issued,
fully paid and nonassessable. The issuance and delivery of the Shares are not
subject to preemptive or any other similar rights of the stockholders of the
Company or any liens or encumbrances.
4.5 SEC Documents: Financial Statements. Each report or proxy
statement delivered to the Purchaser is a true and complete copy of such
document as filed by the Company with the SEC. The Company has filed in a
timely manner all documents that the Company is required to file with the SEC
under Sections 13, 14(a) and 15(d) of the Exchange Act, during the twelve (12)
months preceding the date of this Agreement. Except as disclosed on Exhibit C
attached hereto, as of their respective filing dates, all documents filed by
the Company with the SEC (the "SEC DOCUMENTS") complied in all material
respects with the requirements of the Exchange Act or the Securities Act of
1933, as amended (the "SECURITIES ACT"), as applicable. None of the SEC
Documents as of their respective dates contained any untrue statement of
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements made therein, in light of the circumstances
under which they were made, not
D-3
<PAGE> 4
misleading. The financial statements of the Company included in the SEC
Documents (the "SEC FINANCIAL STATEMENTS") comply as to form in all material
respects with applicable accounting requirements of the Exchange Act and the
Securities Act and with the published rules and regulations of the SEC with
respect thereto. The SEC Financial Statements have been prepared in accordance
with generally accepted accounting principles consistently applied and fairly
present the consolidated financial position of the Company and any subsidiaries
at the dates thereof and the consolidated results of their operations and
consolidated cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal, recurring adjustments).
4.6 Governmental Consents. All necessary consents, authorizations
and approvals of, and all necessary registrations and filings with, any
governmental or regulatory agency or body required in connection with the
issuance, sale and delivery of the Shares by the Company to the Purchaser have
been obtained or made or will be obtained or made prior to each Closing or
within such time period following each Closing as is required by such
governmental or regulatory agency or body. The issue of the Shares will not
infringe and will not be contrary to any applicable laws or regulations
(including but not limited to any and all applicable securities laws and
regulations) of any governmental or regulatory agency or body. Without
limiting the foregoing, compliance with the securities and blue sky laws in the
states in which the Shares are offered and/or sold will be effected in
accordance with such laws, and the filing of the Nasdaq National Market
Notification Form with the Nasdaq National Market and Form 10-C with the SEC,
if required, will be effected in accordance with federal laws and regulations.
4.7 No Litigation, Arbitration or Administrative Proceedings. The
Company is not involved in, nor is aware of any facts which might give rise to,
litigation, arbitration or administrative proceedings relating to claims or
amounts which are material in the context of the issue of the Shares or
material to the nature of the business of the Company. There are no
unfulfilled or unsatisfied judgments or court orders against the Company, and
the Company has not committed any criminal act or breach of contract or
statutory duty or any tortious or other unlawful, ultra vires or unauthorized
act the effect of which would or may materially adversely affect the nature of
the business of the Company or the issuance of the Shares.
4.8 Articles of Incorporation and Bylaws. There have been no
amendments to the Certificate of Incorporation of the Company or the Bylaws of
the Company except as reflected in such documents delivered to the Purchaser
pursuant to Section 3.1(a)(i) hereof, and such documents fully set out all
rights and restrictions attaching to each class of the share capital of the
Company. The stock transfer register of the Company and other statutory books
of the Company have been properly kept and contain a true, accurate and
complete record of the matters which are required by Delaware law to be dealt
with therein, and no notice or allegation that any of the same is incorrect or
should be rectified has been received.
4.9 Authorized Capital Stock. The authorized capital stock of the
Company consists of (i) 20,000,000 shares of Common Stock, par value $.01 per
share, of which, as of the date of this Agreement, 8,622,573 shares were
outstanding and (ii) 1,000,000 shares of Preferred Stock, per value $.01 per
share, of which as of the date of this Agreement, no shares were outstanding.
4.10 No Material Change in Financial Condition. Since September
30, 1996, to the date of this Agreement:
(a) the Company has not entered into any contracts or
commitments binding upon it outside the ordinary course of business;
(b) there has not been any acquisition or disposal by
the Company of material fixed or capital assets or any agreement to effect
the same;
D-4
<PAGE> 5
(c) there has not been any creation of liabilities by
the Company (other than expenses incurred in connection with this Agreement or
as set forth in the SEC Financial Statements or liabilities incurred in the
ordinary course of business);
(d) there has not been any capitalization of reserves or
creation or issue of any equity shares or loan capital by the Company;
(e) no resolution of the Company's board of directors or
shareholders has been passed, except as set forth in the corporate minute book;
(f) the Company has not created any mortgage or charge
on the whole or any part of its assets except in the ordinary course of
business;
(g) the Company has not declared, made or paid any
dividends or made any other distribution of capital, and no loans or loans or
loan capital has been repaid in whole or in part except in the ordinary course
of business;
(h) the Company has not borrowed or increased any secured
liability except in the ordinary course of business;
(i) no business material to the Company has been carried
on by the Company, except with respect to the development, construction,
marketing and sale of residential homes;
(j) no event has occurred which gives rise to a tax
liability to the Company on deemed (as opposed to actual) income or profits
or which results in the Company becoming liable to pay or bear a tax liability
directly or primarily chargeable against or attributable to another person,
firm or company;
(k) there have not been any changes in the assets,
liabilities, financial condition, business prospects or operations of the
Company from that reflected in the SEC Financial Statements or in any SEC
Document except changes in the ordinary course of business which have not been,
either individually or in the aggregate, materially adverse; and
(l) the Company does not have any material assets or
liabilities other than as set forth on the SEC Financial Statements as of the
dates thereof.
4.11 No Defaults. The Company is not in default in any material
respect under any material agreement to which it is a party or by which it is
bound, and to the Company's actual knowledge, (i) no party with whom the
Company has entered into any agreement or arrangement is in default in any
material respect thereunder and (ii) there are no circumstances likely to give
rise to such a default.
4.12 No Unusual Commitments. Except as set forth in the SEC
Financial Statements or on Exhibit C hereto, the Company is not a party to, nor
has any liability (present or future) under, any long-term, unusual,
non-routine, onerous or material contract or commitment involving obligations
or expenditures of an unusual or exceptional nature or magnitude or any
contract which cannot readily be fulfilled or performed by it on time and
without undue or unusual expenditure of money or effort, nor is the Company
party to, nor does it have any liability (present or future) under, any loan
agreement, debenture, guarantee, indemnity or letter of credit or leasing,
hiring, hire purchase, credit sale or conditional sale agreement, nor has it
entered into any contract or commitment involving, or likely to involve,
obligations or expenditure of an unusual or exceptional nature or magnitude.
4.13 No Options, Pledges, Liens. Except for rights granted under
or to be granted under the Company's 1992 Stock Option/Stock Issuance Plan,
there is no option, right to acquire, mortgage, charge, pledge, lien or other
D-5
<PAGE> 6
form of security or encumbrance on, over or affecting any of the Shares or any
part of the unissued share capital of the Company and there is no agreement or
commitment to give or create any of the foregoing, no claim has been made by
any person to be entitled to any of the foregoing which has not been waived in
its entirety or satisfied in full, and there is no agreement or commitment
outstanding which calls for the allotment or issue of or accords to any person
the right to call for the allotment or issue of any equity shares or debentures
in the Company.
4.14 Governmental Compliance with Respect to Business. The Company
and the directors and officers of the Company (in their capacity as such) have
complied with all legal requirements in relation to any transactions to which
the Company has been a party, and have obtained all licenses, permissions,
authorizations, consents and exceptions required for the carrying on of its
business, and such licenses, permissions, authorizations, consents and
exceptions are in full force and effect in each case, except as would not have a
material adverse effect on the Company and its subsidiaries taken as a whole.
There are no circumstances which indicate that any of such licenses,
permissions, authorizations, consents or exceptions may be revoked or not
renewed, in whole or in part except as would not have a material adverse effect
on the Company and its subsidiaries taken as a whole.
4.15 Corporate Affairs. The Company has conducted its corporate
affairs in all respects in accordance with its Certificate of Incorporation and
Bylaws from time to time in force, with the applicable Delaware corporate
statutes and, to the Company's actual knowledge, with all other applicable laws
and regulations of any jurisdiction, and to the Company's actual knowledge,
there is no violation of, or default with respect to, any ordinance, statute,
regulation, order, decree or judgment of any court or any governmental agency of
Delaware or any other jurisdiction which could reasonably have a material
adverse effect upon the assets or business of the Company.
4.16 No Capital Commitment. The Company has no capital commitment
and is not engaged in, nor contemplating the engagement in, any activity outside
of the ordinary course of business requiring the expenditure of capital.
4.17 No Factoring of Debts. The Company has not factored any of its
debts or engaged in financing outside of the ordinary course of business.
4.18 Insurance. The Company maintains those policies of insurance
in the amounts listed on Exhibit D hereto.
4.19 Taxation. The Company has complied with all other relevant
legal requirements relating to registration, notification, the filing of returns
and payment in connection with any form of taxation, charge, duty, levy, impost,
withholding, deduction or liability imposed to collect public or local revenue
by any local, state, federal and other governmental entity ("TAXATION"). The
Company has not incurred any Taxation other than in the ordinary course of
business. None of the returns which ought to have been made by or in respect of
the Company for any Taxation purposes are the subject of any dispute with any
Taxation or other relevant authority and there are no present circumstances
which are likely to give rise to any such dispute and provision has been made in
the SEC Financial Statements for all amounts which were or would have been shown
by any such return to be payable by the Company.
4.20 No Compensation for Loss of Office. The Company has not since
its incorporation paid compensation for loss of office or made or agreed to make
any payment to any of its present or former directors, officers or employees
other than payments in consideration for actual services provided by such
persons to the Company, other than payments made to Betty J. Simpson pursuant to
a Settlement Agreement dated March 9, 1995 between the Company and Ms. Simpson.
4.21 Employment, Service and Consulting Agreements. Except with
respect to indemnity agreements entered into with the directors and certain
officers of the Company (past and present) and except with respect to
indemnification and limitations on liability under the Company's Certificate of
Incorporation or Bylaws or under Delaware law, there is not now outstanding any
contract of employment or service or consulting agreement between the
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<PAGE> 7
Company and any of its respective directors, officers, employees, agents,
advisers or consultants or any material liability on the part of the Company to
any person who is or has been a director, officer, employee, agent, adviser or
consultant of or to the Company and no former director, officer, employee or
agent of the Company has any claim or has asserted any claim against the
Company for compensation for loss of office or arising out of the termination
of his office or employment.
4.22 No Profit Sharing Plan or Share Option Plan. Other than the
Company's 1992 Stock Option/Stock Issuance Plan, the Company is not a party to
any profit sharing plan, share option plan, share incentive plan, or any other
plan under which any director, officer, employee or agent of the Company is
entitled to participate in the profits of the Company or has any rights in
respect of any shares or stock of the Company. The Company is not a party to
any pension or retirement plan, or any other plan under which any director,
officer, employee or agent of the Company is entitled to receive retirement or
pension benefits of any nature whatsoever. There are no beneficial loans or
other benefits in kind enjoyed by any director, officer, employee or agent of
the Company.
4.23 Receivers; Insolvency. No receiver has been appointed of the
whole or any part of the assets or undertaking of the Company, no petition has
been presented, no order has been made, and no resolution has been passed for
the winding-up or dissolution of the Company.
4.24 No Powers of Attorney. The Company has not given any power of
attorney or any other authority (express, implied or ostensible) which is still
outstanding or effective to any person to enter into any contract or commitment
or do anything on its behalf other than any authority of officers or employees
to enter into contracts and/or security documents in the normal course of
business.
4.25 Agreements Affecting Assets. There is no sale or purchase
option or similar agreement or arrangement affecting any assets owned or used by
the Company or by which the Company is bound except in the normal course of
business, there is no joint venture, consortium, partnership or profit sharing
agreement or arrangement of which the Company is a party other than such
arrangements entered into by the Company in the ordinary course of the Company's
business of developing, constructing, marketing and selling residential homes,
and there is no agreement (whether by way of guarantee, indemnity, warranty,
representation or otherwise) under which the Company is under any actual or
contingent liability in respect of (a) any disposal by the Company of its assets
(other than in the normal course of business) or disposal by the Company of its
business or any part thereof or (b) the obligations of any other person. Other
than loan documents, there is no contract which restricts the freedom of the
Company to carry on its business in the normal course of conduct.
5
Representations, Warranties and Covenants of the Purchaser
----------------------------------------------------------
Purchaser hereby represents and warrants to the Company (the
"PURCHASER WARRANTIES"), effective as of each Closing Date, as follows:
5.1 Authorization. Purchaser represents and warrants to the
Company that: (i) Purchaser has all requisite legal and corporate or other
power and capacity and has taken all requisite corporate or other action to
execute and deliver this Agreement, to purchase the Shares to be purchased by it
and to carry out and perform all of its obligations under this Agreement; and
(ii) this Agreement constitutes the legal, valid and binding obligation of
Purchaser, enforceable in accordance with its terms, except (a) as limited by
applicable bankruptcy, insolvency, reorganization, or similar laws relating to
or affecting the enforcement of creditors' rights generally and (b) as limited
by equitable principles generally.
5.2 Investment Experience. Purchaser is an "accredited investor"
as defined in Rule 501(a) under the Securities Act. Purchaser has such business
and financial experience as is required to give it the capacity to protect its
D-7
<PAGE> 8
own interests in connection with the purchase of the Shares. Purchaser has
previously invested in securities and acknowledges that it is able to fend for
itself, can bear the economic risk of its investment, and has such knowledge and
experience in financial or business matters that Purchaser is capable of
evaluating the merits and risks of the investment in the Common Stock. Purchaser
represents that it is an entity in which all of the equity owners are accredited
investors and which has not been organized for the purpose of acquiring the
Shares. Purchaser also represents that Purchaser has relied on Purchaser's own
independent judgment as to whether to enter into this Agreement or purchase the
Shares and has not relied upon the advice or the use of a broker, dealer or
finder in connection therewith.
5.3 Disclosure of Information. Purchaser understands that the
future price of the Shares after each Closing will be based on market conditions
and other factors. Neither the Company, nor officers or directors of the
Company, have made any representations to Purchaser regarding the price at which
shares of Common Stock of the Company will trade in the future or whether there
will continue to be a market for the Common Stock.
5.4 Investment Intent. Purchaser is purchasing the Shares for its
own account as principal, for investment purposes only, and not with a present
view to, or for, resale, distribution or fractionalization thereof, in whole or
in part, within the meaning of the Securities Act until such time as the Shares,
as the case may be, shall have been registered under the Securities Act and
applicable state securities law. Purchaser understands that its acquisition of
the Shares has not been registered under the Securities Act or registered or
qualified under any state securities law in reliance on specific exemptions
therefrom, which exemptions may depend upon, among other things, the bona fide
nature of Purchaser's investment intent as expressed herein. Purchaser has, in
connection with its decision to purchase the Shares, relied solely upon the SEC
Documents, the Company Warranties, and such other documents as are provided by
the Company to Purchaser pursuant to this Agreement. Purchaser will not,
directly or indirectly, offer, sell, pledge, transfer or otherwise dispose of
(or solicit any offers to buy, purchase or otherwise acquire or take a pledge
of) any of the Shares, except in compliance with the Securities Act and the
rules and regulations promulgated thereunder.
5.5 Registration or Exemption Requirements. Purchaser understands
that the Shares are characterized as "restricted securities" under the federal
securities laws inasmuch as they were initially acquired from the Company in a
transaction not involving a public offering and that under such laws and
applicable regulations, such securities may be resold without registration under
the Securities Act only in certain limited circumstances. In this connection,
Purchaser represents that it is familiar with SEC Rule 144 as presently in
effect, and Purchaser understands the resale limitations imposed thereby and by
the Securities Act. Purchaser further acknowledges and understands that the
Shares may not be resold or otherwise transferred except in a transaction
registered under the Securities Act or unless an exemption from such
registration is available.
5.6 No Legal, Tax or Investment Advice. Purchaser understands
that nothing in this Agreement or any other materials presented to Purchaser in
connection with the purchase and sale of the Shares constitutes legal, tax or
investment advice. Purchaser has consulted such legal, tax and investment
advisors as it, in its sole discretion, has deemed necessary or appropriate in
connection with its purchase of the Shares.
5.7 Legends. It is understood that the certificates evidencing
the Shares, when issued in the name of Purchaser, may bear the following legend,
or a legend substantially similar to such legend:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION
STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH
ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT
SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO
RULE 144 OF SUCH ACT."
D-8
<PAGE> 9
6
Conditions to the Obligation of the Purchaser
---------------------------------------------
The Purchaser's obligation to purchase the Shares is, at the option of
Purchaser, subject to the fulfillment or waiver of the following conditions:
6.1 Representations and Warranties. The Company Warranties shall
be true and correct in all material respects when made, and shall be true and
correct in all material respects on each Closing Date with the same force and
effect as if they had been made on and as of such date.
6.2 Covenants. All covenants, agreements and conditions contained
in this Agreement to be performed by the Company on or prior to each Closing
Date shall have been performed or complied with in all material respects.
6.3 Exemption from Federal and State Securities Laws. The offer
and sale of the Shares shall be exempt from qualification or registration under
all state and federal securities laws.
6.4 Approval of Due Diligence Items. All of the documents and
evidence referred to in Sections 2.2(a), 3.1(a), 3.1(b) and 6.5 shall be in form
and substance reasonably satisfactory to the Purchaser.
6.5 Registration Rights Agreement. Concurrently with the
execution of this Agreement, the Company shall execute and deliver to the
Purchaser a registration rights agreement, which registration rights agreement
shall be substantially in the form attached hereto as Exhibit B.
7
Conditions to the Obligations of Company
----------------------------------------
The Company's obligation to sell and issue the Shares is, at the
option of the Company, subject to the fulfillment or waiver of the following
conditions:
7.1 Representations and Warranties. The Purchaser Warranties
shall be true and correct in all material respects when made, and shall be true
and correct in all material respects on each Closing Date with the same force
and effect as if they had been made on and as of such date.
7.2 Covenants. All covenants, agreements and conditions contained
in this Agreement to be performed by the Purchaser on or prior to each Closing
Date shall have been performed or complied with in all material respects.
7.3 Exemption from Federal and State Securities Laws. The offer
and sale of the Shares shall be exempt from qualification or registration under
all state and federal securities laws.
D-9
<PAGE> 10
8
Restrictions on Transferability of Shares:
Compliance with Securities Act
------------------------------
8.1 No Transfer in Absence of Registration or Exemption. The Shares
shall not be transferable in the absence of a registration under the Securities
Act or an exemption therefrom or in the absence of compliance with any term of
this Agreement. The Purchaser hereby covenants with the Company not to make any
sale of the Shares except either (i) in accordance with the filing of a
registration statement under the Securities Act, in which case Purchaser
covenants to comply with the requirement of delivering a current prospectus, or
(ii) in accordance with SEC Rule 144, in which case Purchaser covenants to
comply with SEC Rule 144. The Company shall be entitled to give stop transfer
instructions to its transfer agent with respect to the Shares in order to
enforce the foregoing restrictions.
9
Miscellaneous
-------------
9.1 Independent Counsel. Each of the parties to this Agreement
admits, acknowledges and represents to each of the other parties to this
Agreement that he or she has had the opportunity to consult with and be
represented by independent counsel of such party's choice in connection with the
negotiation, execution and amendment of this agreement. Each of such parties
further admits, acknowledges and represents to each of the other parties to this
Agreement that, except for the Warranties set forth in this agreement, none of
them rely or have relied on any representation or statement made by any other
party or by any of the attorneys or representatives of any other party with
regard to the subject matter, basis or effect of this Agreement.
9.2 Waivers and Amendments. The terms of this Agreement may be
waived or amended with the written consent of the Company and the Purchaser.
9.3 Broker's Fee. Each of the parties hereto hereby represents
that, on the basis of any actions and agreements by it, there are no brokers,
dealers or finders entitled to compensation in connection with the sale of the
Shares to the Purchaser.
9.4 Governing Law. This Agreement shall be governed in all
respects by and construed in accordance with the laws of the State of Delaware
without any regard to conflicts of laws principles.
9.5 Survival. The representations, warranties, covenants and
agreements made in this Agreement shall survive any investigation made by the
Company or the Purchaser and the Closing.
9.6 Successors and Assigns. The provisions hereof shall inure to
the benefit of, and be binding upon, the successors, assigns, heirs, executors
and administrators of the parties to this Agreement. Notwithstanding the
foregoing, the Purchaser shall not assign this Agreement or any rights
hereunder without the prior written consent of the Company, which consent shall
not be unreasonably withheld.
9.7 Entire Agreement. This Agreement, together with (i) the
Confidentiality Agreement dated as of February 5, 1996, by and between the
Company and the Purchaser, and (ii) the Registration Rights Agreement of even
date herewith, by and between the Company and the Purchaser, constitute the
full and entire understanding and agreement between the parties with regard to
the subjects thereof. This Agreement, together with such Confidentiality
Agreement and Registration Rights Agreement, shall supersede all prior
agreements, contracts, letters of intent, and any other undertakings entered
into by and between the Purchaser and/or the Company relating to the subject
matter hereof.
D-10
<PAGE> 11
9.8 Notices, etc. All notices and other communications required
or permitted under this Agreement shall be in writing and may be delivered in
person, by telecopy, overnight delivery service or registered or certified
United States mail, addressed to the Company (Attention: President) or the
Purchaser, at their respective addresses set forth at the beginning of this
Agreement or at such other address as the Company or the Purchaser shall have
furnished to the other party in writing. All notices and other communications
shall be effective upon the earlier of actual receipt thereof by the person to
whom notice is directed or (i) in the case of notices and communications sent
by personal delivery or telecopy, one business day after such notice or
communication arrives at the applicable address or was successfully sent to the
applicable telecopy number, (ii) in the case of notices and communications sent
by overnight delivery service, at noon (local time) on the second business day
following the day such notice or communication was sent, and (iii) in the case
of notices and communications sent by United States mail, seven days after such
notice or communication shall have been deposited in the United State mail.
9.9 Severability of this Agreement. If any provision of this
Agreement shall be judicially determined to be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
9.10 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
9.11 Further Assurances. Each party to this Agreement shall do and
perform or cause to be done and performed all such further acts and things and
shall execute and deliver all such other agreements, certificates, instruments
and documents as the other party hereto may reasonably request in order to
carry out the intent and accomplish the purposes of this Agreement and the
consummation of the transactions contemplated hereby.
9.12 Expenses. Except as otherwise provided in Section 3.3, above,
the Company and the Purchaser shall bear its own expenses incurred on its
behalf with respect to this Agreement and the transactions contemplated hereby,
including fees of legal counsel.
9.13 Currency. All references to "dollars" or "$" in this
Agreement shall be deemed to refer to United States dollars.
The foregoing agreement is hereby executed as of the date first above
written.
"COMPANY"
INCO HOMES CORPORATION,
a Delaware corporation
By:
---------------------------
Title:
---------------------------
Name:
---------------------------
"PURCHASER"
OVERLAND OPPORTUNITY FUND, LLC,
a California limited liability company
By:
---------------------------
Title:
---------------------------
Name:
---------------------------
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<PAGE> 1
EXHIBIT 10.45
OPTION AGREEMENT
----------------
THIS OPTION AGREEMENT (the Agreement") is entered into as of December
26, 1996, by and between INCO HOMES CORPORATION, a Delaware corporation
("Owner"), and OVERLAND OPPORTUNITY FUND, LLC, a California limited liability
company ("Optionee").
Grant of Option. Provided that Optionee acquires all of the
"Shares" (as defined in that certain Common Stock Purchase Agreement of even
date herewith ("Stock Purchase Agreement") between Owner and Optionee) in
accordance with the terms thereof, Owner grants to Optionee an exclusive option
to purchase any one or all of the four parcels constituting the real property
(the "Property") specifically described in the Agreement of Purchase and Sale
attached to this Agreement as Exhibit A (the "Purchase Agreement"), on the
terms and conditions set forth in this Agreement and in the Purchase Agreement.
Option Consideration. On or before January 31, 1997, Optionee
shall pay to Owner the sum of Fifty Thousand Dollars ($50,000) as consideration
for the option, which sum shall not be applied to or credited against the
purchase price of the Property in the event the option is exercised.
The purchase price for the Property ("Purchase Price") shall
be determined as follows:
If the Closing (as defined in the Purchase Agreement) occurs
on or before the date which is 24 months after the date of the Purchase
Agreement (such date being referred to herein as the "First Closing Date"), the
Purchase Price shall be $8,000 per acre; and if the Closing occurs after the
First Closing Date but on or before the date which is 48 months after the date
of the Purchase Agreement (such date being referred to herein as the "Second
Closing Date"), the Purchase Price shall be $10,000 per acre; and if the
Closing occurs after the Second Closing Date, the Purchase Price shall be
$12,000 per acre. Once the Purchase Price is determined, the parties shall
(and hereby agree to) insert the Purchase Price where provided in Section 1.2
of the Purchase Agreement. If the Optionee is prepared to close but the
Closing is delayed due to no fault of the Optionee, the Purchase Price shall be
the per acre amount that would have been paid had the Closing occurred without
the delay.
Term of Option. The term of this option shall commence on
February 1, 1997 and shall expire at 5:00 p.m. (PST) on January 31, 2003.
Manner of Exercising Option. The option may be exercised by
Optionee's delivering to Owner, by personal delivery, before the expiration of
the option term set forth in Paragraph 3 above, written notice of such exercise
(the "Notice"), which Notice shall state that the option is exercised without
condition or qualification. The Notice shall be accompanied by three (3)
copies of the Purchase Agreement identical to the form attached as Exhibit A,
executed by Optionee, with the blank in the introductory paragraph of the
Purchase Agreement for the Contract Date being completed with the date of the
Notice.
Completion of Sale. On actual receipt by Owner before the
expiration of the option term of the Notice and three (3) copies of the
Purchase Agreement executed by Optionee, Owner shall, within two (2) business
days, execute the Purchase Agreement and deliver an executed copy to Optionee
and to the Title Company (as defined in the Purchase Agreement). The Purchase
Agreement shall thereafter be immediately effective and binding on both Owner
and Optionee without further execution by the parties. The terms and
conditions of the sale of the Property shall be those set forth in the Purchase
Agreement.
Optionee's Review of the Property. During the option term,
Optionee shall have the right to review such soils tests and reports and other
tests and inspections of the Property as Optionee shall deem necessary in order
to determine whether the Property is suitable for Optionee's intended use.
Additionally, during the option term, Optionee shall have the right to market
the Property to third parties or co-investors. Owner hereby grants to
Optionee, its agents and employees, the right and license to go on to the
Property and to inspect Owner's records relating to the Property for such
purposes; provided, however, that Optionee shall indemnify Owner from any loss
or liability caused by Optionee in exercising such right.
<PAGE> 2
Operation of the Property. Until the Closing, Owner shall
maintain the Property in good condition. Until the Closing, unless Optionee's
prior written consent is first obtained, Owner shall not enter into any
contract or agreement with respect to the Property which is not cancelable on
thirty days' notice without cost or expense to Optionee. Owner shall promptly
deliver to Optionee copies of all offers and proposals to purchase the Property
or any portion thereof which are received or made by Owner prior to the
Closing.
Memorandum of Option; Recording Quitclaim Deed on Termination
of Option. Optionee may cause a memorandum of this Agreement to be recorded
against the Property. If this option is terminated, Optionee agrees, if
requested by Owner, to execute, acknowledge, and deliver a quitclaim deed to
Owner within two (2) days of such request and to execute, acknowledge, and
deliver any other documents required by any title company to remove any cloud,
title exception or title problem from the Property resulting from or arising
out of this Agreement or the option granted herein.
Notices. Except as otherwise provided in this Agreement, any
notice, demand or request which may be permitted, required or desired to be
given in connection herewith shall be given in writing and directed to Owner
and Optionee as follows:
If to Owner: Inco Homes Corporation
1282 West Arrow Highway
Post Office Box 970
Upland, California 91785
Attention: Mr. Ira Norris
Telecopier No. (909) 982-9784
If to Optionee: Overland Opportunity Fund, LLC
147 East Olive Avenue
Monrovia, California 91016
Attention: Mr. Fred Liao
Telecopier No. (818) 358-0338
With copies to: Cox, Castle & Nicholson, LLP
2049 Century Park East
Suite 2800
Los Angeles, California 90067
Attention: Gregory J. Karns, Esq.
Telecopier No. (310) 277-7889
Except as otherwise provided in this Agreement, notices shall be either (i)
personally delivered (including delivery by Federal Express or other courier
service) to the offices set forth above, in which case they shall be deemed
delivered on the date of delivery to said offices; (ii) sent by telecopy, in
which case they shall be deemed delivered on the date sent; provided, however,
that any notices sent by telecopy shall also be sent by overnight courier on
the same day; or (iii) sent by certified mail, return receipt requested, in
which case they shall be deemed delivered on the date shown on the receipt
unless delivery is refused or delayed by the addressee, in which event they
shall be deemed delivered on the date of deposit in the U.S. Mail.
Miscellaneous.
Entire Agreement.
This Agreement (including all exhibits and
schedules attached, each of which is incorporated into this Agreement by this
reference), constitutes the entire understanding between the parties with
respect to the option contemplated herein, and all prior or contemporaneous
oral agreements, understandings,
-2-
<PAGE> 3
representations and statements, and all prior written agreements,
understandings, representations and statements are merged into this Agreement.
This Agreement may only be amended by a written instrument executed by the
parties.
The parties are not bound by any agreements,
understandings, provisions, conditions, representations or warranties
(including but not limited to any so-called letters of intent, drafts of this
Agreement or correspondence antedating this Agreement) other than as are
expressly set forth and stipulated in this Agreement.
Performance of Acts. If any date herein set forth
for the performance of any obligations by the parties or for the delivery of
any instrument or notice as herein provided should be on a Saturday, Sunday or
legal holiday, the compliance with such obligations or delivery shall be deemed
acceptable on the next business day following such Saturday, Sunday or legal
holiday. As used herein, the term "legal holiday" means any state or federal
holiday for which financial institutions and post offices are generally closed
in the State of California for observance thereof. For purposes of this
Agreement, all references to "days" means calendar days unless otherwise
specified.
Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of the State of California.
Severability. If any one or more of the provisions
contained in this Agreement is for any reason held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Agreement, and this Agreement
shall be construed as if such invalid, illegal or unenforceable provisions had
never been contained herein; provided, however, that in no event shall this
Agreement be construed to allow Optionee to purchase less than all of the
Property or to exercise the option after expiration of the option term.
Waiver. Either party may specifically and expressly
waive in writing any condition or breach of this Agreement by the other party,
but no such waiver shall constitute a further or continuing wavier of any
preceding or succeeding breach of the same or any other provision. Consent by
one party to any act by the other for which such consent is required shall not
be deemed to imply consent or waiver of the necessity of obtaining such consent
for the same or similar acts in the future.
Counterparts. This Agreement may be executed in one
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Option
Agreement on the date first above written.
OPTIONEE: OVERLAND OPPORTUNITY FUND, LLC,
a California limited liability company
By:
--------------------------------
Its:
--------------------------------
OWNER: INCO HOMES CORPORATION, a Delaware
corporation
By:
---------------------------------
Its:
---------------------------------
-3-
<PAGE> 1
EXHIBIT 10.46
CONSULTING AGREEMENT
--------------------
THIS CONSULTING AGREEMENT is entered into as of December 26, 1996, by
and between INCO HOMES CORPORATION, a Delaware corporation ("Company"), and
OVERLAND COMPANY, INC., a California corporation ("Consultant").
A. Company is a publicly traded corporation engaged in the
acquisition, development, construction, marketing and sale of residential
projects.
B. Consultant is experienced and qualified in identifying,
evaluating, assessing and rendering advice relating to land acquisition and
development and to markets and marketing strategies for residential projects
(collectively the "Services").
C. Company desires to retain Consultant to perform the Services
and Consultant desires to perform the Services, in each case as set forth
below.
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereby agree as follows:
1. Retention of Consultant. Company hereby retains Consultant,
on a non-exclusive basis, to perform the Services, and Consultant hereby
accepts such arrangement and agrees to perform the Services on the terms set
forth herein. Consultant hereby acknowledges that Company desires Consultant
to perform the Services so that Company can take advantage of acquisition and
development opportunities, markets and market strategies in Southern California
which are now available or may become available in the future. Without
limiting the generality of the foregoing, Consultant shall seek out,
investigate and pursue residential development projects and present them to the
Company for its consideration and approval. Although the Company may seek
advice from Consultant in Company matters not related to the Services, the
parties acknowledge and agrees that Consultant has only been retained hereunder
to perform the Services, and not to act in any other capacity.
2. Independent Contractor. It is understood and agreed that in
performing the Services hereunder, Consultant is an independent contractor, and
not the employee, joint venturer, partner, agent, representative or broker of
or for the Company for any purpose whatsoever.
3. Nonexclusive Services. During the term of this Agreement,
Consultant will perform the Services in a commercially reasonable manner, and
utilize such means as Consultant deems reasonably necessary. Consultant shall
not be required to perform the Services on a full-time basis, and Company
acknowledges that its retention of Consultant hereunder is on a non-exclusive
basis. Notwithstanding the foregoing and any other provision to the contrary
herein, Company acknowledges that Consultant is itself in the land acquisition
and development business, and nothing herein shall restrict Consultant from
seeking out, investigating and otherwise pursuing projects and opportunities
for its own account. Nothing contained in this Agreement or in law shall be
construed to limit or restrict in any way the freedom of Consultant or its
respective partners, shareholders, affiliates or principals, to carry on their
own respective business activities. In this regard, and provided it does not
materially interfere with its performance under this Agreement, Consultant may,
during the term of this Agreement, render or other services to or for any other
person or entity.
4. Compensation. In full payment for all Services to be
performed by Consultant under this Agreement Consultant shall be entitled to
receive from Company, and Company shall issue to Consultant a warrant in the
form of Exhibit "A" attached hereto and incorporated herein by this reference
(the "Warrant"), to purchase up to two million (2,000,000) shares of common
stock in the Company, par value $.01 per share (the "Warrant Shares"), for the
price and on such terms as are set forth in the Warrant. Concurrently with the
execution of this Agreement, the Company shall provide to Consultant each of
the following items:
(a) The authorized and issued Warrant, representing the
Warrant Shares;
A-1
<PAGE> 2
(b) The resolution of each of the Board of Directors and
Shareholders of the Company (to the extent required) approving this Agreement
and the issuance of the Warrant and Warrant Shares on the terms set forth
herein and therein and authorizing the due execution of this Agreement on
behalf of the Company.
5. Director's Section. During the term of this Agreement,
Consultant shall be entitled to sit as a Director on the Company's Board of
Directors.
6. Term and Termination of Agreement. The term of this Agreement
shall be for two (2) years. This Agreement may be terminated after the
expiration of 180 days from the date hereof (the "Vesting Date") (a) if a party
has materially breached this Agreement and continues to do so after written
notice and the passage of a reasonable opportunity to cure; (b) without cause
on 30 days' prior written notice to the other party. Prior to the Vesting
Date, this Agreement may only be terminated if a party has materially breached
this Agreement and has been given sixty (60) days' prior written notice.
Notwithstanding the foregoing, the Warrant shall fully vest in Consultant on
the date of its issuance, and Consultant shall be entitled to exercise all of
its rights with respect to the Warrant Shares notwithstanding any termination
of this Agreement, subject to any conditions or limitations set forth in the
Warrant itself.
7. Representations and Warranties.
(a) By the Company. The Company represents and warrants
to the Consultant as follows:
(i) Organization and Standing. The Consultant is
a corporation duly organized and validly existing under, and by virtue of, the
laws of the State of Delaware and is in good standing under the laws of said
state.
(ii) Corporate Power; Authorization. The
Consultant has all requisite legal and corporate power and has taken all
necessary corporate action to execute and deliver this Agreement, and to carry
out and perform all of its obligations under this Agreement. This Agreement
constitutes the legal, valid and binding obligation of the Company, enforceable
in accordance with its terms.
(iii) Non-Contravention. The execution and
delivery of this Agreement does not, and the performance of this Agreement by
the Company (including the issuance and delivery of the Warrant Shares) will
not materially conflict with, or result in a material breach or violation of
the terms, conditions or provisions of, or constitute a material default under,
or result in the creation or imposition of any material lien pursuant to the
terms of, the Certificate of Incorporation or Bylaws of the Company or any
statute, law, rule or regulation or any state or federal order, judgment or
decree or any indenture, mortgage, lease or other material agreement or
instrument to which the Company or any of its properties is subject.
(iv) Issuance and Delivery of the Warrant Shares.
The Warrant Shares, when issued in compliance with the provisions of this
Agreement, will be validly issued, fully paid and nonassessable. The issuance
and delivery of the Warrant Shares are not and will not be subject to
preemptive or any other similar rights of the stockholders of the Company or
any liens or encumbrances.
(v) Consent. All necessary consents,
authorizations and approvals of, and all necessary registrations and filings
with, any governmental or regulatory agency or body required in connection with
the issuance and delivery of the Warrant and the Warrant Shares by the Company
to the Consultant have been obtained or made.
(b) By the Consultant. The Consultant represents and
warrants to the Consultant as follows:
(i) Organization and Standing. The Consultant is
a corporation duly organized and validly existing under, and by virtue of, the
laws of the State of California and is in good standing as a domestic
corporation under the laws of said state.
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<PAGE> 3
(ii) Corporate Power; Authorization. The
Consultant has all requisite legal and corporate power and has taken all
necessary corporate action to execute and deliver this Agreement, and to carry
out and perform all of its obligations under this Agreement. This Agreement
constitutes the legal, valid and binding obligation of the Consultant,
enforceable in accordance with its terms.
(iii) Non-Contravention. The execution and
delivery of this Agreement does not, and the performance of this Agreement by
the Consultant (including the issuance and delivery of the Warrant Shares) will
not materially conflict with, or result in a material breach or violation of
the terms, conditions or provisions of, or constitute a material default under,
or result in the creation or imposition of any material lien pursuant to the
terms of, the Certificate of Incorporation or Bylaws of the Consultant or any
statute, law, rule or regulation or any state or federal order, judgment or
decree or any indenture, mortgage, lease or other material agreement or
instrument to which the Consultant or any of its properties is subject.
8. Meetings; Records. Consultant shall meet with and report to
the Company as often as is reasonably necessary in connection with the
performance of the Services (but not less often than once per month), and shall
maintain complete and accurate records relating to the Services, which records
shall at all times be the property of Company.
9. Expenses. Consultant shall be responsible for all of
Consultant's expenses related to the performance of the Services, including but
not limited to all compensation attributable to any agents or employees engaged
by Consultant to assist in the performance of the Services hereunder. Company
acknowledges that it is Consultant's intention to compensate such agents and
employees with Warrant Shares, and Company agrees to cooperate with Consultant
in this regard.
10. Hold Harmless. Consultant acknowledges and agrees that it
shall be solely liable for all claims, liabilities, damages and debts of any
type whatsoever that may arise on account of Consultant's activities, or those
of Consultant's agents or employees, in the performance of the Services.
Company shall exonerate, indemnify, defend and hold harmless Consultant and any
agent of Consultant against any claim, expense, loss, damage or liability
resulting from Consultant's good faith performance of the Services or otherwise
from the acts or omissions of Consultant, except where Consultant's gross
negligence or willful misconduct is the cause of such damage.
11. Confidentiality. In connection with the performance of the
Services, the Company will furnish to Consultant certain information regarding
the Company and its business and activities, most of which may be of a
confidential nature. Consultant hereby acknowledges and agrees with respect to
its treatment of such confidential information of the Company, as follows: for
the purposes of this Agreement, "CONFIDENTIAL INFORMATION" means any and all
information with respect to the business operations, finances and plans of the
Company which Consultant has received from the Company or which will be
received on or after the date of this Agreement from the Company in connection
with the performance of the Services hereunder.
Consultant hereby agrees to maintain the confidentiality of the
Confidential Information and not to disclose it to anyone without the consent
of the Company, except for (a) disclosures to Consultant's partners, officers,
employees and advisors that Consultant believes have a need to know such
information in connection with the performance of the Services hereunder (it
being understood that Consultant will advise such officers, partners, employees
and advisors of the confidential nature of such information and shall instruct
them to treat such information confidentially), and (b) disclosures which may
be required by law. Upon the expiration or earlier termination of this
Agreement, Consultant shall upon request return to the Company or destroy all
written Confidential Information of the Company in its possession or in the
possession of advisors and any other written material in its possession which
embodies any Confidential Information of the Company, and shall not retain any
copies, extracts or other reproductions in whole or in part of such written
material.
The Company acknowledges that Consultant operates a residential land
acquisition and development company whose business is similar to or competitive
with the business of the Company. Subject to the Consultant's observance of
the confidentiality obligation set forth above, nothing in this Agreement shall
prevent the Consultant
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and Consultant's company (on its own, independent of the Company) from
pursuing, investing or evaluating a possible investment in, or entering into a
transaction for the acquisition, development and/or sale of residential land
and/or similar products.
For purposes of this Agreement, the term "Confidential Information"
does not include information which (1) is generally known to the public or in
the trade, or becomes so known other than as a result of breach of Consultant's
obligations under this Agreement, or (ii) is disclosed to the Consultant on a
nonconfidential basis by a person other than Company employees, agents or
advisors, provided that such person is not known by the Consultant to be in
violation of a confidentiality agreement with the Company in making such
disclosure.
Similarly, Consultant expects that the Company will maintain the
confidentiality of all Consultant Confidential Information (as defined below),
and the Company agrees to maintain the confidentiality of the Consultant
Confidential Information. "CONSULTANT CONFIDENTIAL INFORMATION" means any
information with respect to the business operations, finances, investment
objectives and plans of the Consultant. The Company's use and disclosure of
the Consultant Confidential Information shall be governed by the same
restrictions as are applicable to the Confidential Information under the
provisions of this Agreement.
12. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
13. Severability. If any provision of this Agreement is held by a
court of competent jurisdiction to be invalid, void, or unenforceable, the
remaining provisions shall nevertheless continue in full force and effect
without being impaired or invalidated in any way.
14. Integration. This Agreement contains the entire Agreement
among the parties and supersedes all prior and contemporaneous oral and written
agreements, understandings, and representations among the parties. No
amendments to this Agreement shall be binding unless executed in writing by all
of the parties.
15. Waiver. No waiver of any of the provisions of this Agreement
shall be deemed, or shall constitute a waiver of any other provisions, nor
shall any waiver constitute a continuing waiver. No waiver shall be binding
unless executed in writing by the party making the waiver.
16. Notices. Any notice required by this Agreement shall be
effective only if sent by certified or registered mail, return receipt
requested, postage prepaid, or by federal express or other recognized courier,
or by telecopy, as follows:
If to the Company: INCO Homes Corporation
1282 West Arrow Highway
Post Office Box 970
Upland, California 91785
ATTENTION: Ira C. Norris
Telecopy No: (909) 982-9784
With a copy to:
If to Consultant: Overland Company, Inc.
147 East Olive Avenue
Monrovia, California 91016
ATTENTION: Fred E. Liao
Telecopy No: (818) 358-0338
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<PAGE> 5
With a copy to: Cox, Castle & Nicholson, LLP
2049 Century Park East
Suite 2800
Los Angeles, California 90067
ATTENTION: Gregory J. Karns, Esq.
Telecopy No: (310) 277-7889
A notice shall be deemed given when received. Either party may, at any time,
change its address designated above by giving to the other party written notice
of the new address to be used for the purposes of this Section.
17. Assignability. Neither this Agreement nor any duties or
obligations hereunder shall be assignable by any party hereto without the prior
written consent of the other party. If Company shall at any time be merged or
consolidated into or with any other corporation, or if substantially all of the
assets of Company are transferred to another corporation or other entity, this
Agreement shall be binding upon any such successor.
IN WITNESS WHEREOF, the parties have duly executed this Agreement on
the date first above written.
COMPANY: INCO HOMES CORPORATION, a Delaware
corporation
By:
-----------------------------------
Its:
-----------------------------------
CONSULTANT: OVERLAND COMPANY, INC., a California
corporation
By:
-----------------------------------
Its:
-----------------------------------
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<PAGE> 1
EXHIBIT 10.47
WARRANT TO PURCHASE
1,200,000 SHARES OF COMMON STOCK
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.
THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES
UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT.
INCO HOMES CORPORATION
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES THAT, for value received, OVERLAND COMPANY, INC., a
California corporation (the "Investor"), is entitled to purchase, on the terms
hereof, One Million Two Hundred Thousand (1,200,000) shares of common stock
("Common Stock") of INCO HOMES CORPORATION, a Delaware corporation (the
"Company"), at a purchase price as set forth herein.
I. EXERCISE OF WARRANT. The terms and conditions upon which this
Warrant may be exercised, and the Common Stock covered hereby (the "Warrant
Shares") may be purchased, are as follows:
A. Exercise. This Warrant, with respect to One Million
Two Hundred Thousand (1,200,000) of the Warrant Shares, may be exercised in
whole or in part any time from the date hereof and ending on the date which is
eighteen (18) months following the date hereof (the "Initial Exercise Period").
If, at the end of the Initial Exercise Period, Investor has not exercised this
Warrant to purchase at least 600,000 of the Warrant Shares, this Warrant will
expire with respect to such Warrant Shares in excess of 600,000 shares. With
respect to the Warrant Shares for which this Warrant has not expired pursuant
to the immediately preceding sentence and as to which this Warrant has not been
exercised, this Warrant may be exercised in whole or in part any time from the
first day after the Initial Exercise Period and ending on the date which is
three (3) years from the date of this Warrant (the "Final Exercise Period"),
after which time this Warrant shall terminate and shall be void and of no
further force or effect.
B. Purchase Price. Subject to adjustment as set forth
in this Warrant, the purchase price for the Warrant Shares to be issued upon
exercise of this Warrant during the Initial Exercise Period shall be $0.875 per
share, and the purchase price for the Warrant Shares to be issued upon exercise
of this Warrant during the Final Exercise Period shall be $1.625 per share.
C. Method of Exercise. The exercise of the purchase
rights evidenced by this Warrant shall be affected by (a) the surrender of the
Warrant, together with a duly executed copy of the form of subscription
attached hereto (with the representations and warranties made therein), to the
Company at its principal offices and (b) the delivery of the purchase price by
<PAGE> 2
check or bank draft payable to the Company's order for the number of shares for
which the purchase rights hereunder are being exercised or any other form of
consideration approved by the Company's Board of Directors.
D. Issuance of Shares. In the event the purchase rights
evidenced by this Warrant are exercised in whole or in part, a certificate or
certificates for the purchased shares shall be issued to the Investor as soon
as practicable. In the event the purchase rights evidenced by this Warrant are
exercised in part, the Company will also issue to the Investor a new warrant
representing the unexercised purchase rights.
II. NET ISSUANCE.
A. Right to Convert. In addition to and without
limiting the rights of the Investor under the terms of the Warrant, the
Investor shall have the right to convert the Warrant or any portion thereof
(the "Conversion Right") into shares of Common Stock as provided in this
Section II.A at any time or from time to time during the term of the Warrant.
Upon exercise of the Conversion Right with respect to a particular number of
shares subject to the Warrant (the "Converted Warrant Shares"), the Company
shall deliver to the Investor (without payment by the Investor of any exercise
price or any cash or other consideration) that number of shares of fully paid
and nonassessable Common Stock computed using the following formula:
X = Y(A-B)
------
A
Where X = the number of shares of Common Stock
to be issued to the Investor.
Y = the number of Converted Warrant Shares.
A = the fair market value of one share of
the Company's Common Stock on the
Conversion Date (as defined below).
B = the per share exercise price of the
Warrant (as adjusted to the
Conversion Date).
The Conversion Right may only be exercised with respect to a whole number of
shares subject to the Warrant. No fractional shares shall be issuable upon
exercise of the Conversion Right, and if the number of shares to be issued
determined in accordance with the foregoing formula is other than a whole
number, the Company shall pay to the Investor an amount in cash equal to the
fair market value of the resulting fractional share on the Conversion Date.
Shares issued pursuant to the Conversion Right shall be treated as if they were
issued upon the exercise of the Warrant.
B. Method of Exercise. The Conversion Right may be
exercised by the Investor by the surrender of the Warrant at the principal
office of the Company together with a written statement specifying that the
Investor thereby intends to exercise the Conversion Right and indicating the
number of shares subject to the Warrant which are being surrendered (referred
to in Subsection
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<PAGE> 3
II.A hereof as the Converted Warrant Shares) in exercise of the Conversion
Right. Such conversion shall be effective upon receipt by the Company of the
Warrant together with the aforesaid written statement, or on such later date as
is specified therein (the "Conversion Date"). Certificates for the shares
issuable upon exercise of the Conversion Right and, if applicable, a new
warrant evidencing the balance of the shares remaining subject to the Warrant,
shall be issued as of the Conversion Date and shall be delivered to the
Investor promptly following the Conversion Date.
C. Determination of Fair Market Value. For purposes of
this Section II, fair market value of a share of Common Stock on the Conversion
Date shall mean:
1. If traded on a stock exchange, the fair
market value of the Common Stock shall be deemed to be the average of the
closing selling prices of the Common Stock on the stock exchange determined by
the Company's Board of Directors to be the primary market for the Common Stock
over the ten (10) trading day period ending on the date prior to the Conversion
Date, as such prices are officially quoted in the composite tape of
transactions on such exchange;
2. If traded over-the-counter, the fair market
value of the Common Stock shall be deemed to be the average of the closing bid
prices (or, if such information is available, the closing selling prices) of
the Common Stock over the ten (10) trading day period ending on the date prior
to the Conversion Date, as such prices are reported by the National Association
of Securities Dealers through its NASDAQ system or any successor system; and
3. If there is no public market for the Common
Stock, then the fair market value shall be determined by mutual agreement of
the Investor and the Company, and if the Investor and the Company are unable to
so agree, by an investment banker of national reputation selected by the
Company and reasonably acceptable to the Investor.
III. CERTAIN ADJUSTMENTS.
A. Common Stock Dividends; Split or Subdivision of
Shares. If at any time while this Warrant remains outstanding and unexpired,
the Company should effect a split or subdivision of the outstanding shares of
Common Stock or pay a dividend with respect to Common Stock payable in shares
of Common Stock, or make any other distribution with respect to Common Stock,
then the purchase price shall be correspondingly decreased and the number of
shares of Common Stock issuable upon exercise of the Warrant shall be increased
to the product obtained by multiplying the number of Warrant Shares purchasable
immediately prior to such purchase price adjustment by a fraction (A) the
numerator of which shall be the purchase price immediately prior to such
adjustment, and (B) the denominator of which shall be the purchase price
immediately after such adjustment.
B. Mergers, Consolidations or Sale of Assets. If at any
time there shall be a capital reorganization of the Common Stock (other than a
combination, reclassification, exchange or subdivision of Warrant Shares
otherwise provided for herein), or a merger or consolidation of the Company
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<PAGE> 4
with or into another corporation in which the Company is not the surviving
corporation, or the sale of the Company's properties and assets as, or
substantially as, an entirety to any other person, then, as a part of such
reorganization, merger, consolidation or sale, lawful provision shall be made
so that the Investor shall thereafter be entitled to receive upon exercise of
this Warrant, during the period specified in this Warrant and upon payment of
the purchase price then in effect, the number of shares of stock or other
securities or property of the successor corporation resulting from such
reorganization, merger, consolidation or sale, to which a holder of the Warrant
Shares deliverable upon exercise of this Warrant would have been entitled under
the provisions of the agreement in such reorganization, merger, consolidation
or sale if this Warrant had been exercised immediately before that
reorganization, merger, consolidation or sale. In any such case, appropriate
adjustment (as determined in good faith by the Company's Board of Directors)
shall be made in the application of the provisions of this Warrant with respect
to the rights and interests of the Investor after the reorganization, merger,
consolidation or sale to the end that the provisions of this Warrant (including
adjustment of the purchase price then in effect and the number of shares of
Warrant Shares) shall be applicable after that event, as near as reasonably may
be, in relation to any shares or other property deliverable after that event
upon exercise of this Warrant.
C. Reclassification. If the Company at any time shall,
by subdivision, combination or reclassification of securities or otherwise,
change any of the Warrant Shares into the same or a different number of
securities of any other class or classes, this Warrant shall thereafter
represent the right to acquire such number and kind of securities as would have
been issuable as a result of such change with respect to the Warrant Shares
immediately prior to such subdivision, combination, reclassification or other
change.
D. Combination of Shares. If at any time while this
Warrant remains outstanding and unexpired, the number of shares of Common Stock
outstanding is decreased by a combination of the outstanding shares of Common
Stock, then the purchase price shall be correspondingly increased and the
number of shares of Common Stock issuable upon exercise of the Warrant shall be
decreased to the product obtained by multiplying the number of Warrant Shares
purchasable immediately prior to such purchase price adjustment by a fraction
(A) the numerator of which shall be the purchase price immediately prior to
such adjustment, and (B) the denominator of which shall be the purchase price
immediately after such adjustment.
E. Certificate as to Adjustments. In the case of each
adjustment or readjustment of the purchase price pursuant to this Section III,
the Company will promptly compute such adjustment or readjustment in accordance
with the terms hereof and cause a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based to be delivered to the holder of this Warrant. The
Company will, upon the written request at any time of the holder of this
Warrant, furnish or cause to be furnished to such holder a certificate setting
forth:
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<PAGE> 5
1. Such adjustments or readjustments;
2. The purchase price at the time in effect; and
3. The number of Warrant Shares and the amount, if any,
of other property at the time receivable upon the
exercise of the Warrant.
IV. FRACTIONAL SHARES. No fractional shares shall be issued in
connection with any exercise of this Warrant. In lieu of the issuance of such
fractional share, the Company shall make a cash payment equal to the then fair
market value of such fractional share as determined by the Company's Board of
Directors.
V. RESERVATION OF COMMON STOCK. The Company shall at all times
reserve and keep available out of its authorized but unissued shares of Common
Stock, solely for the purpose of effecting the exercise of this Warrant; and if
at any time the number of authorized but unissued shares of Common Stock shall
not be sufficient to effect the exercise of the entire Warrant, in addition to
such other remedies as shall be available to the holder of this Warrant, the
Company will use its reasonable best efforts to take such corporate action as
may, in the opinion of its counsel, be necessary to increase its authorized by
unissued shares of Common Stock to such number of shares as shall be sufficient
for such purposes.
VI. PRIVILEGE OF STOCK OWNERSHIP. Prior to the exercise of this
Warrant, the Investor shall not be entitled, by virtue of holding this Warrant,
to any rights of a stockholder of the Company, including (without limitation)
the right to vote, receive dividends or other distributions, exercise
preemptive rights or be notified of stockholder meetings, and such holder shall
not be entitled to any notice or other communication concerning the business or
affairs of the Company, except as required by law.
VII. LIMITATION OF LIABILITY. No provision hereof, in the absence
of affirmative action by the holder hereof to purchase the Warrant Shares, and
no mere enumeration herein of the rights or privileges of the holder hereof,
shall give rise to any liability of such holder for the purchase price or as a
stockholder of the Company, whether such liability is asserted by the Company
or by creditors of the Company.
VIII. PAYMENT OF TAXES. The Company shall pay all expenses in
connection with, and all taxes and other governmental charges (other than any
thereof on, based on or measured by, the net income of the holder thereof) that
may be imposed in respect of, the issue or delivery of the Warrant Shares. The
Company shall not be required, however, to pay any tax or other charge imposed
in connection with any transfer involved in the issue of any certificate for
the Warrant Shares in any name other than that of the Investor, and in such
case, the Company shall not be required to issue or deliver any stock
certificate until such tax or other charge has been paid or it has been
established to the Company's satisfaction that no such tax or other charge is
due.
IX. SUCCESSORS AND ASSIGNS. The terms and provisions of this
Warrant shall be binding upon the Company and the Investor and their respective
successors and assigns.
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<PAGE> 6
X. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT. Upon
receipt by the Company of evidence reasonably satisfactory to it of the loss,
theft, destruction or mutilation of this Warrant, and in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to the Company,
and upon reimbursement to the Company of all reasonably expenses incidental
thereto, and upon surrender and cancellation of this Warrant, if mutilated, the
Company will make and deliver a new warrant of like tenor and dated as of such
cancellation, in lieu of this Warrant.
XI. RESTRICTED SECURITIES. The holder understands that this
Warrant and the Warrant Shares purchasable hereunder constitute "restricted
securities" under the federal securities laws inasmuch as they are, or will be,
acquired from the Company in transactions not involving a public offering and
accordingly may not, under such laws and applicable regulations, be resold or
transferred without registration under the Securities Act of 1933, as amended,
or an applicable exemption from registration. In this connection, the holder
acknowledges that Rule 144 of the Securities and Exchange Commission is not
now, and may not in the future be, available for resales of this Warrant and
the Warrant Shares purchased hereunder.
XII. SATURDAYS, SUNDAYS AND HOLIDAYS. If the last or appointed day
for the taking of any action or the expiration of any right required or granted
herein shall be a Saturday or Sunday or shall be a legal holiday, then such
action may be taken or such right may be exercised, except as to the purchase
price, on the next succeeding day not a legal holiday.
XIII. GOVERNING LAW. This Warrant shall be governed and construed
in accordance with the laws of the State of Delaware.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
by its duly authorized officer and issued on the 26th day of December, 1996.
INCO HOMES CORPORATION
By:
---------------------------
Ira C. Norris
President
6
<PAGE> 1
EXHIBIT 10.48
DEVELOPMENT AND MARKETING AGREEMENT
This DEVELOPMENT AND MARKETING AGREEMENT is made and entered into as
of this 15th day of November 1996 by and between VICTORVILLE 163 PARTNERS,
L.P., a California limited partnership ("Owner" herein) and INCO HOMES
CORPORATION, a Delaware corporation ("Builder" herein) with reference to the
following facts:
A. Owner has unencumbered fee title to that certain
_________________ acre parcel of undeveloped real property located in
Victorville, California, the legal description of which is set forth on Exhibit
A (the "Property" herein). The Property has been subdivided into One Hundred
and Sixty-Three (163) lots (the "Lots" herein) which Owner desires to be
developed with single family, detached homes (the "Homes" herein). The
development and construction of One Hundred and Sixty-Three (163) single
family, detached Homes on the Lots together with all of the required on-site
and off-site infrastructure required therewith is collectively referred to as
the "Project" herein.
B. Builder is a licensed building contractor in the State of
California whose primary expertise is the construction and sale of single
family, detached homes. Since 1987, Builder has developed and sold over 5,500
single family, detached homes in the Victor Valley which includes the City of
Victorville.
C. Owner desires to engage the services of Builder to develop and
construct the Project and market the completed Homes. Such services shall
include coordinating existing and future entitlements, constructing all on-site
and off-site infrastructure improvements, constructing the Homes, marketing the
Homes, and providing warranty and customer service work for the completed and
sold Homes, all pursuant to the terms and conditions set forth in this
Agreement.
D. Provided that Owner delivers fully entitled Lots to Builder
together with all of the financing and bonding in amounts and at the time
required to develop the Project and to pay all of the costs (none of which
shall be the responsibility of Builder) to develop the Project and market the
Homes, Builder is willing to perform such development and marketing services
for Owner pursuant to the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in reliance on the facts set forth in the above
recitals and in consideration of the mutual covenants and agreements set forth
herein, the parties hereto agree as follows:
1. Engagement.
Owner hereby engages the services of Builder to develop and
construct the Project and market the Homes, and Builder hereby agrees to accept
such engagement and provide said services to Owner for the consideration and
upon the terms and conditions hereinafter set forth.
2. Development of the Project and Marketing of the Homes.
Builder agrees to diligently develop and construct the Project
and market the completed Homes, as more specifically provided herein. Such
development responsibilities of Builder shall generally include coordinating
both the existing and future entitlements that benefit the Property,
constructing the on-site and off-site infrastructure for the Project,
constructing the Homes and providing all warranty and customer service
construction and repairs for the completed and sold Homes. Such marketing
responsibilities of Builder shall generally include designing the Homes,
constructing, landscaping, and decorating the model complex, holding a Grand
Opening for the Project, setting the sale prices of the Homes, signage,
advertising, developing and printing marketing brochures, sales contracts, and
materials, hiring and overview of sales personnel and managing all other
pre-closing and post-closing relationships with the Home buyers. Builder
agrees to use its reasonable best efforts under the circumstances that exist
from time to time during the term hereof to perform its services hereunder in a
manner that, subject to the rights of Owner to direct Builder and subject to
the performance of Owner of its obligations (particularly funding) hereunder,
shall be intended to maximize the sales revenue from the completed Homes.
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3. Term.
The term of this Agreement shall commence on the date hereof
and, unless earlier terminated by either Owner or Builder as provided herein,
shall continue until the close of the sale escrow of the last Home in the
Project.
4. Title - Full Cooperation By Owner.
Title to the Property shall remain in the name of Owner.
Owner shall fully cooperate with Builder as requested by Builder to perform its
services hereunder and Owner also agrees to promptly sign all maps,
governmental forms, utility agreements, deeds of trust, sales agreements,
escrow instructions, deeds, and all other documents required by Builder to
develop the Project and market the Homes.
5. Phase Budget.
(a) Approval of Phase Budget. Prior to the commencement
of any construction hereunder, Builder shall submit to Owner, for Owner's
review and reasonable approval, the proposed cost breakdown schedule for the
development of the first "Phase" of Homes (as defined in Paragraph 8 hereof)
and related improvements (the "Phase Budget" herein). Within Five (5) business
days following receipt by Owner of the proposed Phase Budget, Owner shall
notify Builder of Owner's approval or disapproval of the same, which approval
Owner shall not unreasonably withhold. Failure of Owner to timely notify
Builder in writing of the disapproval of any item in the Phase Budget, the
Phase Budget as submitted by Builder shall be deemed to be approved. If all or
any portion of the proposed Phase Budget is disapproved, the parties shall meet
as soon as reasonably practicable thereafter to endeavor in good faith to reach
agreement on the Phase Budget. Builder shall not make any commitment or
contract which is materially (more than 10%) more in cost for a line item than
as set forth for said line item in the Phase Budget as it may be amended from
time to time without the prior written consent of Owner which consent Owner
shall not unreasonably withhold. Builder shall submit to Owner a new Phase
Budget for each Phase of the Project which new Phase Budget shall be reviewed
and reasonably approved by Owner and followed by Builder as provided herein.
(b) Conformity with Phase Budget. Builder shall use its
best efforts to cause each Phase to be completed in all reasonable respects in
conformity with the Phase Budget. Builder shall hold monthly job cost meetings
with representatives of the Owner and shall prepare monthly updates of the
Phase Budget with variance explanations and Project cost reports showing actual
expenditures made during such month and from the beginning of the Phase to
date, by category of expenditure, and a comparison thereof to budgeted expenses
and estimated cost of completion of the improvements.
6. Phase Schedule.
(a) Approved Phase Schedule. Concurrently with the
delivery of the proposed Phase Budget, Builder shall submit to Owner, for
Owner's review and reasonable approval, the proposed schedule for the design
and construction of the Phase, and the proposed schedule for the marketing and
sales for the Homes in the Phase (the "Phase Schedule"). The proposed Phase
Schedule shall be subject to Owner's prior reasonable approval, which approval
Owner shall not unreasonably withhold, and the Phase Schedule shall be approved
and updated for each Phase in the same manner as the Phase Budget.
(b) Conformity with Phase Schedule. Builder shall use
its reasonable best efforts to cause each Phase to be completed in all respects
in conformity with the Phase Schedule. Builder shall prepare and deliver to
Owner monthly progress reports setting forth the actual construction progress
achieved during such month and from the beginning of the Phase to date, and
comparison thereof to scheduled construction progress for the same period and
sales reports setting forth the actual sales consummated and escrows closed
during such month and from the beginning of the Phase to date.
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7. Design of Homes.
Builder has provided Owner with the design of the Homes it
intends to develop on the Property. Owner has reviewed the design of the Homes
(the Homes will be substantially similar to the homes currently being developed
and sold by Builder known as "Pride at Wildrose") and has agreed that Builder
will construct and market the Homes pursuant to the design therefor furnished
by Builder to Owner.
8. Phasing of Development.
Owner and Builder hereby agree that to minimize the financial
risk to Owner, Builder shall develop the Project in phases, with a phase
typically (but not limited to) approximately ten (10) to twenty (20) Homes (a
"Phase" herein). Accordingly, Builder shall submit all budgets and schedules
required pursuant to this Agreement on a Phase-by-Phase basis. Budgets and
schedules shall set forth Builder's estimates of the proper allocation to
particular phases of those items which impact more than one phase of the
Project.
9. Builder's Development and Construction Duties.
Subject to government restrictions and approvals
(entitlements), the physical condition of the Property, the availability from
the Owner of adequate funds/financing, the posting by the Owner of all required
bonds, deposits, and other required forms of security, and the market for new
single family houses of the type and in the price range of the Homes, Builder
shall use its reasonable best efforts to continuously and diligently to do all
things necessary to cause the Homes and other improvements in the Project to be
built, and the constructed Homes to be offered for sale and sold in accordance
with the Phase Schedule and the Phase Budget. Without limiting the generality
of the foregoing, Builder's duties are described more particularly below:
(a) Development. Builder, at the sole cost and expense
of Owner, shall work with the Owner to obtain all appropriate governmental
authorities having jurisdiction over the Project to obtain, maintain and
process all necessary zoning, permits, approvals, licenses, entitlements and
consents required to develop the Project including without limitation, any
necessary building permits, grading permits, and development agreements
regarding the construction of or funding of the Homes with the appropriate
governmental entities. In obtaining such zoning, permits, approvals, licenses,
entitlements and consents, Builder shall, at the sole cost and expense of
Owner, work with the Owner to prepare and process as necessary all
environmental impact reports, bonds, utility agreements, maps, studies,
drawings, applications, and other necessary or appropriate items of every
description. Applications for approval of licenses, permits, subdivision maps,
bond and utility agreements shall be in the name of and approved by Owner.
Owner and Builder shall fully cooperate with each other to obtain all such
items required to develop the Project and Owner shall promptly execute all
documents and agreements required by Builder in connection therewith.
(b) Construction. Builder shall act as the general
contractor for the construction of the Project and, as such, shall be
responsible for the following:
(i) Builder shall furnish or arrange for all
consultants, skills, labor, materials, supplies,
equipment, services, machinery, tools and other items
of every description reasonably required for the
prompt and efficient construction of the Homes and
other improvements in the Project in a good and
workmanlike manner and substantially in accordance
with the current Phase Budget;
(ii) Builder shall enter into contracts with such
subcontractors and material suppliers as are necessary
to cause the Homes to be constructed substantially in
accordance with this Agreement. All such contracts
shall be entered into by Builder and shall
specifically provide that (x) Owner is a third-party
beneficiary thereunder (y) at any time Owner may
request any information it deems necessary from the
subcontractors and such information will be provided
within Five (5) business days and (z) in the event
Builder's involvement in the Project terminates, the
subcontractor will, upon Owner's request, recognize
Owner as the
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successor-in-interest to Builder under the
subcontract. Builder shall require all
subcontractors to obtain and maintain at all times
during performance of work on the Project an
occurrence form commercial general liability policy
on a primary and non-contributing basis on which the
Owner and Builder are named as additional insureds.
In addition, Builder shall require all subcontractors
to carry workers compensation coverage on a basis
consistent with Builder's customary practices as may
change from time to time; and
(iii) Builder shall cause the Project to be
constructed, substantially in accordance with all
governmental requirements and existing plans and
specifications as are approved by Owner.
(c) Bonds and Deposits. Builder shall prepare all
necessary documents and instruments required for the posting of any bonds,
letters of credit, deposits or other forms of security required by any
governmental entity or utility in connection with the Project. Builder shall
prepare any and all deposit agreements in Owner's name and shall use its
reasonable best efforts to secure reimbursement of the deposits in a timely
fashion. Owner shall furnish, at its sole cost and expense, all bonds, letters
of credit, deposits or other forms of security, required of any governmental
entity or utility with respect to the Project. Builder shall request, track
and cause any bonds, letters of credits, deposits or other forms of security
that have been posted by Owner in favor of any governmental entity or utility
in connection with the Project to be exonerated when all obligations thereunder
are satisfied. Builder shall maintain a schedule of such security and assess
the timing for such exoneration and shall prepare all necessary documents and
instruments required for the timely exoneration of same.
(d) Warranties and Customer Service. In consideration
for the warranty fee paid to Builder pursuant to Paragraph 27(d) hereof,
Builder shall provide and administer the warranty and customer service programs
with respect to the Project and for the Homes constructed and sold hereunder.
In connection therewith, Builder shall use all reasonable efforts to enforce
the warranty provisions of any subcontractors so that the subcontractors
thereunder are required to perform warranty work in accordance with the terms
of their respective contracts. To the extent not performed by a subcontractor
at its cost pursuant to a subcontract, Builder shall, at the sole cost and
expense of Builder, (either directly or through the engagement of
subcontractors) provide and administer all required warranty and customer
service work. The performance of such warranty work shall be conducted in
accordance with the Builder's customer service program, as such program may be
established and modified by the Builder during the term of this Agreement.
10. Builder's Sales Duties.
(a) Development and Implementation of Sales Program.
Promptly following the execution of this Agreement, Builder shall develop a
program for selling the Homes and shall arrange for the construction,
preparation, and availability of such models and other marketing sales tools
and materials as shall be necessary to such program. Builder shall deliver a
schedule of proposed pricing and plotting mixes for the Homes to Owner for its
prior reasonable approval. Based on the recommendation of Builder, Owner shall
approve a range of sales prices for the Homes and Builder is authorized to sell
such Homes for a price within such range. A Home may not be sold below the
established sales price without the prior reasonable consent of Owner. Builder
shall, at the sole cost and expense of Owner, construct and maintain both the
interior and exterior of the model Homes, including all decorating and
landscaping, hold a Grand Opening for the Project, establish the sales program,
advertise the Project in such media as the Builder may determine, provide
appropriate signage for the Project, and prepare all sales tools, including
promotional/advertising material, and disclaimer and disclosure programs.
Builder allowances and other public relations activities shall be subject to
Owner's prior review and reasonable approval. In connection with Builder's
sales program obligations, Builder has proposed and Owner has approved of the
engagement by Builder of the ______________ ("Sales Agent" herein). The Sales
Agent shall assist Builder in marketing and selling the Homes. Every cost and
expense of marketing the Homes (except sales commissions) shall be paid solely
by Owner including, the construction, landscaping, and decoration of the model
complex, holding a Grand Opening for the Project, signage, advertising,
developing and printing marketing brochures, sales contracts and materials, and
constructing and maintaining an on-site sales office. Only the cost of all
brokerage fees and sales commissions to sell the Homes due to
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the sales personnel of Builder and Sales Agent shall be paid solely by Builder,
but all commissions due to third parties shall be paid by Owner. The Sales
Agent's services shall include:
(i) Providing at its sole cost all on-site sales
staffing as required, provided, however, that Owner
will permit the Sales Agent to employ members of
Owner's and/or Builder's existing sales staff;
(ii) Preparing at its sole cost and submitting to
Owner monthly competitor reports and other outside
market studies to review pricing, incentives,
absorption rates, demographics and the like;
(iii) Assigning a sales manager employed by Sales
Agent to the Project who will act as a liaison
between Sales Agent and the on-site sales personnel.
All training and motivation will be conducted by the
Sales Agent at the sole expense of the Sales Agent;
(iv) Sales Agent will strategically advertise the
Project. Sales Agent will conduct periodic
advertising meetings and coordinate, supervise, and
furnish the advertising agency with advertising
direction and focus. Actual advertising costs and
expenses will be subject to Owner's prior reasonable
approval and will be Owner's sole cost and
responsibility. Ad placement will be handled by
Builder's or Sales Agent's account manager through
the advertising agency. A reputable and professional
advertising firm shall be retained by Builder and/or
Sales Agent in to assist with marketing and
advertising the Project;
(v) A weekly sales report will be furnished
showing daily traffic, media origin, and sources of
the sales consistent with Builder's form for such
report as it may change from time to time;
(vi) Sales Agent personnel will be assigned to
organize and handle the staffing, selection, and
purchase of all standard design center option
equipment and promote the design center sales
(Builder will coordinate and provide for the
installation of all such design center equipment in
the Homes); and
(vii) During the term of this Agreement, Sales
Agent, acting under the direction and control of
Builder, shall act as the sales agent for the Homes.
Builder shall cause Sales Agent to comply with all
requirements under the California Real Estate Law.
(b) Escrow Coordination Program. Promptly following the
execution of this Agreement, Builder shall establish an escrow program for
processing and closing Home sale escrows in coordination with Builder's
customer/homeowner warranty service department. The escrow coordination
program shall also coordinate and/or provide sources of end loan financing for
the Home buyers.
(c) Builder's Role in Sales Activity. In addition to any
duties relating to the sale of Homes set forth elsewhere in this Agreement,
Builder shall perform each of the following:
(i) Supervision of Sales Activity. Builder shall
use its reasonable best efforts to ensure that all
sales activities, including all activities of the
Sales Agent and its personnel, are supervised and
conducted in a manner that complies with this
Agreement and all applicable laws and regulations;
(ii) Review and Execution of Sales Agreements.
Salespersons shall be authorized only to obtain offers
from prospective buyers of the Homes and shall have no
authority to accept such offers or enter into binding
agreements for the sale of the Homes. A senior
executive officer of Builder shall be responsible for
reviewing and approving each and every sales
agreement, and each sale shall be effected using only
those forms of sales
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agreements and other documents previously approved by
both Builder and Owner. If a sales agreement for a
Home that is reviewed by Builder is in a form and
contains only those terms that have been approved by
Owner, and if Builder believes in good faith that the
sale transaction proposed by such sales agreement
should be entered into by Owner, then one of the
above-described senior executive officers of Builder
acting as an agent of Owner, shall execute such sales
agreement on behalf of Owner; and
(iii) Escrow Instructions. The persons who are
authorized to execute sales agreements on behalf of
Owner shall also be authorized to execute escrow
instructions on behalf of Owner to effectuate the
closing of sales of the Homes to buyers. The general
form of escrow instructions to be used shall be
approved by both Builder and Owner prior to its use.
Builder shall designate the escrow holder for all Home
sales. While Builder may recommend a title insurance
company to the Home buyer, all title insurance
policies to be issued in conjunction with the sale of
Homes shall be issued by a title company selected by
the Home buyer.
(d) Commissions Payable to Builder/Sales Agent. Except
for Builder's compensation set forth in Paragraph 27(c) hereof, neither Builder
nor Sales Agent shall be entitled to commissions or other compensation in
connection with their activities performed pursuant to this Agreement with
respect to sales.
(e) Sales Representations. Builder, Sales Agent, and any
sales persons shall be authorized only to make representations concerning the
Project or sale of the Homes that are approved by Owner. Builder shall be
responsible for closely monitoring the activities and performance of all
salespersons.
11. Coordination with Owner's Bank.
Builder acknowledges that Owner intends to obtain various
loans from various financial institutions (collectively "Bank" herein) in
connection with the development of the Project and Builder shall assist Owner
to obtain all such required financing but shall have no direct financial
obligation with respect thereto. Builder shall review and become familiar with
the terms and obligations of these loans and shall develop the Project in a
manner which complies with all loan covenants in order to minimize Owner's
exposure under such loans (i.e., start restrictions, accelerated payoffs,
standing inventory, etc.) At the request of Owner or Bank, Builder shall, at
the sole cost of Owner, prepare proforma and actual cost, income, cash flow and
other financial projections and reports for the Project, including product line
profitability analysis and projections of return on cost. These projections
shall be supplemented and/or updated throughout the course of development to
reflect any major changes or deviations. Builder shall obtain the approval of
Owner and Bank prior to commencing the construction of any Homes. At Owner's
request, Builder shall prepare bank loan submissions and draw requests.
12. Operation and Quarterly Review Meetings.
In addition to all other meetings to be held by Builder and
Sales Agent pursuant to this Agreement, Builder shall hold monthly operations
meetings with representatives of Owner. All meetings required hereunder
between Owner and Builder shall, unless otherwise approved by both parties, be
held at the principal executive office of Builder. Builder agrees to hold such
other meetings concerning the Project at such time as reasonably requested by
Owner.
13. Compliance with Laws.
Builder, its employees, agents, and subcontractors shall use
its reasonable best efforts to comply with all laws, ordinances and
regulations, permits, licenses and approvals obtained from any governmental
entity in connection with the Project.
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14. Inspections.
Owner shall, at its sole cost and expense, have the right, but
not the obligation, to inspect the progress and quality of all work performed
by, or under subcontract to, Builder in connection with the Project, to require
the replacement of any defective or improper work, and to refuse payment of any
funds until such matters have been remedied. Inspections by Owner shall not in
any manner constitute Owner's approval or acceptance of the progress or quality
of the work. The failure of Owner to inspect shall not relieve Builder of its
duties under this Agreement.
15. Approvals by Owner.
Owner shall have the right to generally review and reasonably
approve all aspects of the Project including, but not limited to, all
contracts, plans, specifications, designs and schedules and all amendments
thereto and deviations therefrom. In addition, all requests or applications,
together with all supporting documentation for governmental approvals or
permits of any kind, shall be submitted to, and approved by, Owner prior to
filing with the governmental agency, and Owner may request copies of all
written communications between Builder and the governmental agencies processing
such requests or applications. Builder shall immediately notify Owner in
writing of any changes to requirements, conditions, or entitlements being
sought by any governmental entity whether the change has been requested by the
entity either orally or in writing. Builder shall furnish all such items from
time to time to Owner and, if Owner fails to notify Builder in writing within
Five (5) business days of receipt of such item, the item in question shall be
deemed to be approved by Owner.
16. Land Maintenance and Protection.
During the term of this Agreement, Builder shall, at the sole
cost of Owner, maintain the Property free of weeds, debris, pests and toxic or
hazardous substances with the exception of what is legal, reasonable,
sufficient, and prudent to operate equipment to construct the contemplated
improvements thereon. In addition, Builder shall, at the sole cost and expense
of Owner, at all times take such actions as are reasonably necessary to protect
the Project and all improvements thereon, whether or not completed, from being
damaged by the work of Builder or any subcontractor or other persons or cause
including, but not limited to, vandals and the elements.
17. Liens.
Provided that Owner has provided Builder with sufficient funds
to develop the Project, Builder shall not suffer or permit to be enforced
against the Property or any part thereof, any mechanics', laborers',
materialmen's, contractors', subcontractors', or any other liens, except to the
extent caused solely by a default of Owner, arising from or any claim for
damages growing out of any work or construction or improvement in connection
with the Project or except for a bona fide dispute between Builder and
subcontractor which Builder may, but is not obligated to, bond against.
18. Ownership of Plans and Materials.
As between Owner and Builder, all plans and specifications and
all marketing and sales materials, including advertising, signs, and
promotional materials prepared for and/or used in connection with the Project
by or for Builder shall, at all times, be solely the property of Builder.
Builder shall, however, deliver to Owner all advertising, sales materials, and
the like which relate only to the Project and which Builder cannot use on its
other projects. All consultants contracts shall provide that Owner is entitled
to receive from the consultant upon demand all work-product for the Project
generated by the consultant which is not otherwise the property of Builder.
Upon the expiration or earlier termination of this Agreement, Builder shall
deliver immediately to Owner all copies in Builder's possession of all such
documents not owned by Builder for Owner's use as it deems appropriate.
19. Builder As Agent for Limited Purposes.
Builder and Owner acknowledge and expressly agree, and Builder
shall not make any representations to the contrary, that (as provided in
Paragraph 20 hereof) Builder is an independent contractor, and nothing
contained in
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this Agreement, unless expressly to the contrary, shall be construed as making
Builder or any other person the agent or employee of Owner, whether actual,
implied or apparent, or as authorizing Builder or any other person to bind or
obligate Owner, or as making Owner responsible or liable for any of Builder's
acts or obligations under this Agreement. Notwithstanding the provisions of
the foregoing sentence, Builder is hereby designated as the limited agent of
Owner during the term of this Agreement, specifically and only to: (i) carry
out its obligations in connection with the development of the Project and the
sale of the Homes, (ii) execute notices of completion pertaining to the work to
be completed by Builder pursuant to this Agreement, (iii) execute agreements
in connection with the marketing and sale of the Homes, provided that the terms
and conditions of all such agreements are approved in advance in writing by
Owner, and (iv) obtain any bond exonerations and utility refunds or other
deposits.
20. Builder As Independent Contractor - No Interest in Property.
Builder is entering into this Agreement not as a partner or
agent (except to the limited extent provided herein) of Owner, but as an
independent contractor to provide the services set forth in this Agreement. By
entering into this Agreement, Builder acknowledges that Builder is acquiring no
rights whatsoever in the Property and under no circumstances whatsoever will
acquire any interest in the Property except as may result under California
Civil Code Sections 3109 through 3154 or other laws relating to the enforcement
of rights by mechanics, materialmen, contractors, and the like. In
acknowledging that Builder is acquiring no rights whatsoever in the Property,
and will, under no circumstances acquire any interest in the Property other
than under mechanics' lien laws to the extent they are applicable, Builder
shall not assert, in any legal action or otherwise, any right or interest in
the Property and will not record any lis pendens or any similar notice or lien
against the Property other than as expressly allowed under the mechanics' lien
laws. By entering into this Agreement, Builder acknowledges that it is
acquiring no rights whatsoever in the total revenues from the Project (except
to the extent to receive funds due to Builder hereunder from the sale escrow
upon the close thereof) and that Owner has no obligation to keep and maintain
such revenues in a separate account, account for the Project revenues to
Builder, deposit or invest the Project revenues to earn interest thereon, or
otherwise take any other action with respect to the Project revenues whether or
not such actions would benefit the Builder.
21. Non-Discrimination.
Builder shall comply with all laws that require Builder to be
an equal opportunity, non-discriminatory employer and shall comply with the
federal and state laws with respect to non-discrimination with respect to the
sale of the Homes. The Builder agrees that there shall be no discrimination
against or segregation of any person or group of persons on account of race,
color, religion, age, politics, physical handicap, place of residence, creed,
sex, sexual preference, marital status or national origin in connection with
respect to the construction of the Project and the sale of the Homes.
22. Competition.
Until the sale escrow for the last of the Homes is closed or
until this Agreement is terminated if such termination occurs before the sale
escrow for the last of the Homes is closed, Builder and its affiliates shall
not, without the prior written approval of Owner, have any interest nor may it
engage in any other activities of any type, including, without limitation, (i)
being a general or limited partner in any partnership or a shareholder, officer
or director of any corporation, (ii) rendering advice or services to other
investors, and (iii) investing its own capital or revenues with the capital or
revenues of others in any fashion, in any competing single family housing
project which is situated within a one (1) mile radius from the center point of
the Project. Such competitive activity shall include, without limitation,
activities in connection with the ownership, development, operation,
management, leasing, sale, and syndication of single family detached
residential houses within the radius.
23. Owner's Responsibility for Funding.
Owner shall pay all of the costs, fees, expenses, taxes, debt
service, bond premiums, deposits, insurance premiums, brokerage commissions to
unrelated third parties, and the like which are in any way directly or
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indirectly related to the ownership of the Property, the development and
construction of the Project, and the sale of the Homes (except for the overhead
of Builder and the fee of Sales Agent), including, but not limited to:
(a) All costs for architectural, legal (including the
cost due to Builder's counsel to draft this Agreement), accounting,
engineering and other consultant services.
(b) All costs for soils, geological, and toxic and
hazardous waste studies incurred by consultants and under contracts designated
or approved by Owner.
(c) All construction costs, including labor and material
costs and equipment rental and repair, and the costs to maintain the Project
free of weeds,debris, pests, toxic or hazardous waste.
(d) All costs for on-tract construction superintendents
during the course of construction (including reasonable payroll taxes and
transportation costs, if any).
(e) All costs of establishing, maintaining, and operating
an on-tract construction field office.
(f) All governmental licenses and fees relating to the
Project.
(g) All marketing and advertising costs and costs of
sale, including but not limited to: the construction, landscaping, and
decoration of the model Home complex, holding a Grand Opening for the Project,
signage, advertising, sales brochures, constructing and operating an on-site
sales office (exclusive of the cost of sales personnel), escrow and title
charges, and other closing costs, brokerage commissions to unrelated third
parties, but excluding any brokerage commissions to the personnel of Builder
and/or Sales Agent, and the cost of on-site salespersons (the cost of which
shall be paid by Builder or by Sales Agent).
(h) All premiums on any insurance required by Owner to be
carried by Builder (but excluding insurance relating to the general operation
of Builder's business, other insurance which is specified in this Agreement as
a cost to be paid by Builder, and worker's' compensation insurance to cover
Builder's employees, except to the extent it covers on-tract employees), the
specific arrangements for which have been approved by Owner.
(i) All real property taxes and assessments which are due
and payable against the Property.
(j) All payments of principal, interest, loan fees,
discounts, costs and fees related to any financing obtained by Owner to fund
the construction of the Project and the sale of the Homes.
(k) All bond premiums, deposits, security, and all other
similar costs or security required by any governmental entity, utility, or any
other entity which requires any such item with respect to the Project.
24. Disbursement of Funds.
Disbursement of funds by Owner pursuant to this Agreement
shall be according to the system provided below.
(a) Application for Payment. On the first and fifteenth
of each month during the term of this Agreement, Builder shall submit to
Owner's designated superintendent for the Project an itemized application for
payment ("Application for Payment"). Each Application for Payment submitted to
the superintendent shall include a detailed statement of all costs and expenses
incurred in connection therewith, and copies of appropriate bills and invoices
evidencing the total amount expended, incurred or due to a subcontractor,
materialmen or laborer for work done pursuant to this Agreement or materials
furnished or incorporated in such work. The Application for Payment shall
reflect bills incurred in accordance with the construction payment schedule.
The presentation to the superintendent of such an Application for Payment shall
constitute a representation on the part of Builder that the costs specified
therein have been incurred properly in the development of the Project and in
accordance with this Agreement,
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and Owner shall be entitled to rely thereon. Along with the Application for
Payment, Builder shall furnish such additional items as required by Bank.
(b) Operating Account. Owner shall deposit funds equal
to the amount of the Application for Payment in an account (the "Operating
Account") within ten (10) days after Owner's superintendent's receipt and
approval of such Application for Payment. Builder shall prepare and deliver to
Owner monthly reconciliations for the Operating Account.
(c) Payment from Operating Account. Owner shall fund the
Operating Account with at least Fifty Thousand Dollars ($50,000.00) and shall
maintain that amount in said Account. Builder shall be permitted to draw
checks without restriction from the Operating Account for payment of approved
outstanding bills. Builder may, without the prior approval of Owner, pay bills
for the Project provided, however, that no single bill paid by Builder from
said Account may be more than Ten Thousand Dollars ($10,000.00). Payment of
bills in excess of that amount shall require the prior approval of Owner.
25. Payment of Costs by Builder.
Except as otherwise provided herein, the following items of
cost shall be borne solely by Builder and shall not be deemed a Project cost,
and Builder shall hold Owner free and harmless therefrom:
(a) All overhead expenses of Builder including, without
limitation, salaries and other payments or benefits to principals,
shareholders, officers, employees, and agents and the cost of maintaining
off-site offices and operating Builder's business.
(b) All cost of accounting and accounting personnel
employed by Builder and used to maintain the books and records of all work
performed pursuant to this Agreement.
(c) Business licenses and fees of Builder, except as
required specifically for the Project by governmental entities having
jurisdiction thereof.
(d) Builder's workers compensation and employer liability
insurance (except to the extent it covers on-tract employees which shall be a
cost of Owner) and other costs for insurance not specifically required by Owner
to be carried in connection with the Project.
(e) All brokerage commissions or sale fees paid to
Builder's employees or Sales Agent.
26. Real Property Taxes.
During the period of this Agreement, Owner shall pay all real
property taxes imposed against the Property so long as, and to the extent, the
Property is owned by Owner. Builder shall be required to request and, if
possible, obtain from the County Tax Assessor a builder inventory exclusion to
preclude the obligation to pay a supplementary tax bill during construction of
the Project.
27. Builder's Compensation.
Owner shall pay, or cause to be paid, to Builder the following
compensation which shall be the only compensation or consideration paid to
Builder for its services hereunder:
(a) Overhead Draw. To reimburse the Builder for all of
the overhead administrative expenses it incurs in administering the development
of the Project and the marketing of the Homes, Owner shall pay Builder an
overhead draw (the "Overhead Draw" herein) in the amount of Three Percent
(3.0%) of the gross sales price of the Homes. Said Overhead Draw may initially
be payable in advance in equal monthly payments over Thirty (30) months
commencing on ___________ 1, 199__, computed on the projected gross sales price
of the Homes. Such Overhead Draw shall initially be paid from cash available
from the construction loan or other Project financing with the balance
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of said Overhead Draw, if any, payable by Owner as the Homes are sold. The
monthly payment of the Overhead Draw shall be adjusted from time to time as
necessary to reflect the actual gross sale prices of the Homes.
(b) Development Fee. As compensation for Builder
developing and constructing the Project, Owner shall pay Builder a development
fee (the "Development Fee" herein) in the amount of Three Percent (3.0%) of the
gross sales price of the Homes. The Development Fee shall be paid by Owner to
Builder on a Home by Home basis at the close of escrow for the sale of each
Home. The Development Fee shall be paid to Builder from the net sales proceeds
of each Home otherwise payable to Owner from the sale escrow or, if there are
not sufficient proceeds available through the escrow to pay the Development Fee
to Builder, Owner shall concurrently with the close of the sale escrow for each
Home, pay Builder the balance of the Development Fee due to Builder as a result
of the sale of said Home.
(c) Sales/Marketing Fee. As compensation for Builder
selling and marketing the Homes, Owner shall pay Builder a sales/marketing fee
(the "Sales/Marketing Fee" herein) in the amount of Two Percent (2.0%) of the
gross sales price of the Homes. The Sales/Marketing Fee shall be paid by Owner
to Builder on a Home by Home basis at the close of escrow for the sale of each
Home. The Sales/Marketing Fee shall be paid to Builder from the net sales
proceeds of each Home otherwise payable to Owner from the sale escrow or, if
there are not sufficient proceeds available through the escrow to pay the
Sales/Marketing Fee to Builder, Owner shall concurrently with the close of the
sale escrow for each Home, pay Builder the balance of the Sales/Marketing Fee
due to Builder as a result of the sale of said Home. Builder shall pay the fee
of the Sales Agent and all other brokerage fees due to Builder's employees or
to the Sales Agent or its employees from the Sales/Marketing Fee and shall,
except for the costs to be paid by Owner as set forth herein, indemnify and
hold Owner free and harmless therefrom.
(d) Warranty Fee. To compensate Builder to assume the
Home warranty and risk, Owner shall pay Builder a warranty fee in the amount of
Seven Hundred and Fifty Dollars ($750.00) for each Home payable to Builder at
the close of the sale escrow of each Home.
(e) Builder Design Center Fee. Builder will provide the
services of its design center to the buyers of the Homes who may use such
services to purchase flooring upgrades and other options to their respective
Home that are not available on the standard production Home. The services of
the Builder Design Center are anticipated to earn a net profit. Builder shall
calculate on a Home by Home basis, after deducting all direct and indirect
costs incurred by the Builder Design Center and its personnel to provide the
requested upgrades and options, the net profit, if any, earned by the Builder
Design Center for each Home (the "Builder Design Center Profit" herein). Owner
and Builder hereby agree that at the close of the sale escrow for each Home,
they shall equally share (50% - 50%) the Builder Design Center Profit for that
Home. The payment of the Builder Design Center Profit shall be shared by Owner
and Builder by adjusting the net amount of the Development Fee and
Sales/Marketing Fee paid to Builder at the close of the sale escrow for each
Home.
28. Termination for Cause by Owner.
In the event Builder is in default of any of its covenants,
duties or obligations hereunder and Builder fails to correct such default
within a reasonable time given the nature of the covenant, duty or obligation
in question (but not less than Thirty (30) days following written notice from
Owner specifying in reasonable detail such default), Owner shall have the
right, at its option, to terminate this Agreement for "cause" upon written
notice to Builder. In the event Owner terminates this Agreement for "cause"
pursuant to this Paragraph, the following provisions shall apply:
(a) Builder's Compensation. In the event this Agreement
is terminated by Owner for "cause" pursuant to this Paragraph 28, Builder shall
have no right to receive any portion of the fees set forth in Paragraph 27 that
have not been paid to it as of the date of termination. Builder shall have no
right after such termination to enter upon the Property, except for the sole
purpose of collecting property of Builder and the personal effects of Builder's
employees.
(b) Right of Entry. In addition to Owner's rights
pursuant to Paragraph 33, Owner may take possession of and use, in completing
the Project or any portion thereof, such materials, machinery, tools,
equipment,
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appliances, and other items of personal property as may be located on the
Property upon such termination for "cause" which have been paid for by Owner or
which are not timely removed by Builder, free of charge and without liability
to Builder for any use or damage.
29. Termination Without Cause by Owner.
Notwithstanding any other provision of this Agreement, Owner
shall have the right to terminate this Agreement without cause in Owner's sole
discretion, upon Ninety (90) days written notice to Builder. In the event
Owner terminates this Agreement pursuant to this Paragraph 29, Owner shall
remain obligated to Builder for all fees which would be earned by Builder
hereunder which fees shall be paid upon the closing of the sale escrow for each
and all of the One Hundred and Sixty-Three (163) Homes. Owner shall pay such
fees to Builder in accordance with the terms of this Agreement, provided,
however, all unpaid fees shall be due and payable in full, irrespective if the
Homes have been constructed or sold, One (1) year from the date of termination
by Owner without cause under this Paragraph 29. Owner shall provide Builder
with reasonable access to the Property and all portions of the Project for the
purposes of removing its movable personal property as described in Paragraph 33
In the event Builder does not remove an item of its movable personal property
with Thirty (30) days following such termination, in addition to Owner's rights
pursuant to Paragraph 33, Owner shall have the right to use such property in
completing the Project or any portion thereof, free of charge and without
liability to Builder for the use thereof or damage thereto.
30. Termination for Cause by Builder.
In the event Owner defaults and fails to cure the default
under this Agreement within a reasonable time after written notice from Builder
specifying in reasonable detail such default (but in no event more than Five
(5) business days for the payment of money and no more than Thirty (30) days
for all other duties of Owner), if Builder is not also in default, Builder
shall have the right, at its option, to terminate this Agreement for "cause"
upon written notice to Owner. In the event Builder terminates this Agreement
for "cause" pursuant to this Paragraph 30, the rights of Owner and Builder
shall be as set forth in Paragraph 29.
31. Termination Due to Lack of Performance.
(a) Owner and Builder acknowledge that it is in the best
interest of both parties that this Agreement remain in force provided that
Builder is able to develop and successfully market an acceptable number of
Homes over a given period of time. Accordingly, if, due to no fault of either
Owner or Builder, Builder is not able to successfully develop and close the
sale escrow on at least _______________ (_____) Homes during any six calendar
month period commencing with the first full calendar month after the close of
the sale escrow for the first Home sold hereunder, then upon the written notice
from one party to the other, either party may terminate this Agreement due to
lack of performance.
(b) In the event that either party cancels this Agreement
for lack of performance pursuant to Paragraph 31(a) above, Builder agrees to
complete the construction of any Homes then under construction and to market
all such Homes. Owner and Builder agree that all of the terms and conditions
hereunder, including the payment of all fees due to Builder, shall continue in
full force and effect until the close of the sale escrow for the last of such
Homes. At that time, this Agreement shall terminate and neither party shall
have any further obligation to the other hereunder.
32. Owner's Unfettered Right to Deal With the Property Upon Any
Termination.
Builder acknowledges that, upon any termination of this
Agreement whether with or without cause, Owner shall have the right to deal
with the Property in any way it desires including, but not limited to, selling
all or a portion of the Project or any of the Homes whether or not
completed or Property completely changing any existing plan for the
development of the Property, or postponing or terminating any development of
the Property. Builder acknowledges that it shall have no right whatsoever to
dictate or provide any input regarding the development of the Property after
any termination of this Agreement.
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33. Removal by Builder.
Upon termination of this Agreement, Builder shall cease and
quit all activities and entry upon the Property. Upon such termination,
Builder shall, without expense to Owner, remove or cause to be removed from the
Property all movable signs, furnishings, equipment, trade fixtures, merchandise
and other movable personal property owned by Builder and installed or placed
thereon. Builder shall repair all damage to the Property and remove debris and
rubbish resulting from such removal. If Builder fails to remove any of such
signs, furnishings, equipment, trade fixtures, merchandise or other personal
property within Thirty (30) days after such expiration or termination of this
Agreement, then Owner may, at its sole option: (i) deem any or all of such
items abandoned as the sole property of Owner, or (ii) remove any or all of
such items and dispose of same in any manner, or store same for Builder, in
which event the expense of such disposition or storage shall be borne by
Builder and shall be immediately due and payable and Owner may, at its option,
deduct such expenses from any amount due and payable to Builder.
34. Other Rights Upon Termination.
In the event of any termination of this Agreement whether with
or without cause, Owner shall be free to make any changes and arrangements as
Owner deems appropriate in order to obtain completion of the duties which are
the obligation of Builder under this Agreement. Upon any termination of this
Agreement, Owner and Builder shall be relieved of further performance under
this Agreement except as expressly set forth and except that a termination
shall in no way affect Builder's indemnity obligations or other legal liability
to Owner or invalidate, reduce or restrict the rights of Builder or Owner to
pursue remedies for any breach of performance or wrongful act, error or
omission occurring prior to the termination, regardless of whether the
nonperformance, act, error or omission was known by the aggrieved party at the
time of termination. In addition, Builder shall perform all obligations under
this Agreement relating to the cessation and quitting of activities; entry upon
the Property; and turnover of all documents and other materials relating to the
Project or the sale of the Homes, regardless of whether Builder believes the
termination is proper or justified.
35. Insurance.
(a) Owner at its sole cost and expense shall at all times
hereunder cause to be issued the insurance coverage hereinafter set forth from
companies reasonably acceptable to both Owner and Builder. If at any time such
required insurance coverage is not timely provided by Owner or such required
coverage lapses, Builder, at the sole cost and expense of Owner, may cause such
required insurance to be issued. All policies of insurance shall be in such
amounts as reasonably required by Builder, and shall include Builder as an
additional insured, certificates of the required insurance coverage shall be
delivered by the insurance carrier to Builder promptly following the issuance
of an insurance policy and all such policies shall provide that the coverage
thereunder cannot be cancelled or diminished upon not less than Thirty (30)
days prior written notice thereof delivered to Builder by certified mail.
(b) Owner shall provide all insurance coverage as may
from time to time be reasonably requested by Builder or by Bank to protect the
interests of Owner, Builder, and/or Bank, or any other lender which makes a
loan to the Project, and any other person or entity who may from time to time
have an insurable interest in the Project. Such required insurance shall
include, but not be limited to:
(i) All risks insurance including, without
limitation, fire, earthquake (as may be required by an
third party lender), theft, and the like covering the
full insurable value of the constructed improvements
to the Project;
(ii) General liability insurance with coverage for
any one person or entity from one insured event of not
less than Two Million Dollars ($2,000,000) and a total
policy limit for all claims from all insured events of
not less than Five Million Dollars ($5,000,000);
(iii) Workman's compensation insurance; and
(iv) Non-owned automobile insurance.
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(c) All insurance proceeds from any claim under an
insurance policy maintained hereunder shall be delivered to Builder which shall
distribute or use such proceeds to cover, pay, or reimburse the person or
entity which suffered the loss. Notwithstanding the foregoing, insurance
proceeds from all risks insurance shall be distributed and utilized as required
by any construction lender or other lender who has an insurable interest in the
Project.
36. Builder's Representations and Warranties to Owner.
In addition to any other representations and warranties of
Builder contained in this Agreement, Builder warrants and represents that the
following facts are true and correct as of the date of this Agreement, and
Builder's making of each request for disbursement of funds by Owner pursuant to
Paragraph 24 shall constitute a new representation and warranty that the
following facts remain true and correct as of the date of the request, unless
previously disclosed in writing by Builder to Owner. These representations and
warranties, and any liability of Builder arising therefrom, shall survive any
termination of this Agreement.
(a) Authority. Builder has the full right and authority
to enter into this Agreement and to perform all of Builder's obligations
hereunder, and each of the persons signing this Agreement on behalf of Builder
is authorized to do so, and the signature or consent of no other person or
entity is required.
(b) Licenses Held by Builder. To the extent required by
law in order to fully perform its obligations pursuant to this Agreement,
Builder is licensed and in good standing as a building contractor under the
laws of the State of California and Builder holds all other licenses and is in
compliance with all other laws and regulations which may affect Builder's
ability to perform pursuant to this Agreement.
(c) Licenses Held by Sales Agent. To the extent required
by law in order to fully perform its obligations pursuant to this Agreement,
Sales Agent is licensed and in good standing as a real estate broker under the
laws of the State of California.
(d) Insolvency. Builder has not: (i) made a general
assignment for the benefit of creditors; (ii) filed any voluntary petition in
bankruptcy or suffered the filing of an involuntary petition by Builder's
creditors; (iii) suffered the appointment of a receiver to take possession of
all or substantially all of Builder's assets; or (iv) suffered the attachment
or other judicial seizure of all, or substantially all, of Builder's assets.
(e) No Defaults by Builder. There have been no acts or
omissions of Builder which would constitute a default under this Agreement.
37. Owner's Limited Liability.
Owner shall not be liable to Builder for any loss, damage,
injury, or claim of any kind or character to any person or property, except to
the extent caused by the willful misconduct of Owner or its officers,
directors, affiliates, or employees, arising from or caused in connection with
the development of the Property or the construction or sale or other conveyance
of Homes.
38. Builder's Liability Indemnity.
Builder hereby indemnifies and shall defend and hold harmless
Owner, and its officers, directors, affiliates, partners, agents, employees,
licensees, invitees, and contractors against all loss, expense (including, but
not limited to, attorneys fees and court costs), damage, injury, liability,
cause of action or claim of any kind or character to any person or property due
in any part to the gross negligence, willful misconduct, or material breach of
any agreement by Builder with respect to the obligations of Builder to develop
the Project and market the Homes as provided herein. The indemnity and
agreement to defend and hold harmless by Builder are intended to apply with
respect to loss, expense, damage, injury, or claim arising during the terms of
this Agreement, or following any expiration or other termination of this
Agreement and shall survive the expiration or other termination of this
Agreement.
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39. Confidentiality and Restrictions on Disclosure.
Builder and Owner shall not, unless it has obtained the prior
written consent of the other party, release, publish or otherwise distribute,
and shall not authorize or permit any person or entity to release, publish or
distribute, any information regarding the financial arrangements between Owner
and Builder pursuant to this Agreement, any marketing studies for the Project,
and financial information regarding the construction of the Project or the sale
of the Homes, and any of the documentation between Owner and Builder,
including, but not limited to, this Agreement, except as shall be required to
perform the disclosing party's obligations hereunder or as may be required by
law. Owner acknowledges that Builder may have to file this Agreement with the
Securities and Exchange Commission.
40. Assignment.
Builder may not encumber, assign, or otherwise transfer this
Agreement or any right or interest hereunder without the prior written consent
of Owner. Builder acknowledges that in entering into this Agreement, Owner has
bargained for the services specifically of Builder, and therefore, Builder
agrees that Owner may for any reason in Owner's sole discretion, withhold its
consent to any assignment or other transfer of any rights of Builder hereunder,
except the right to receive the monies set forth in Paragraph 27 hereof which
Builder may assign without restriction.
41. Notices.
All notices, requests, demands, and other communications
required to or permitted to be given under this Agreement shall be in writing
and shall be conclusively deemed to have been duly given (i) when hand
delivered to the other party; or (ii) when received when sent by facsimile to
the facsimile number set forth below (provided, however, that notices given by
facsimile shall not be effective unless either (x) a duplicate copy of such
facsimile notice is promptly given by depositing same in a United States post
office with first-class postage prepaid and addressed to each other party
hereto as set forth below, or (y) the receiving party delivers a written
confirmation of receipt for such notice either by facsimile or any other method
permitted hereunder; additionally, any notice given by facsimile shall be
deemed received on the next business day if such notice is received after 5:00
p.m. (recipient's time) or on a nonbusiness day); or (iii) three (3) business
days after the same have been deposited in a United States post office with
first-class or certified mail return receipt requested with postage prepaid and
addressed to each other party hereto as set forth below; or (iv) the next
business day after same have been deposited with a national overnight delivery
service delivery charges prepaid, addressed to each other party as set forth
below with next-business-day delivery guaranteed. Each party shall make an
ordinary, good faith effort to ensure that any person to be given notice
actually receives such notice. A party may change or supplement the addresses
and facsimile numbers given below, or designate additional addresses
and facsimile numbers, by giving each other party hereto written notice of the
new address and/or facsimile number in the manner set forth below. All such
communications shall be addressed as follows:
To Builder: Inco Homes Corporation
P.O. Box 970
Upland, CA 91785
Attn: Ira C. Norris, Chairman
Telephone: (909) 981-8989
Facsimile: (909) 982-9784
With a copy to: Thomas E. Gibbs, Jr., Esq.
Suite 400
879 West 190th Street
Gardena, CA 90248
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To Owner: Victorville 163 Partners, L.P.
c/o Overland Company
147 E. Olive Avenue
Monrovia, CA 91016
Attn: Fred E. Liao, General Partner
Telephone: (818) 358-5888
Facsimile: (818) 358-0338
With a copy to:
42. Applicable Law - Consent to Jurisdiction and Venue.
This Agreement shall in all respects be governed by the laws
of the State of California which are applicable to agreements executed and to
be fully performed therein. The parties further agree that all actions or
proceedings arising in connection with this Agreement shall be litigated or
arbitrated exclusively either in the State or the Federal Courts or by an
arbitrator, as appropriate, located in the County of San Bernardino, State of
California which courts shall have personal jurisdiction over the parties
hereto.
43. Severability.
No term, condition or provision of this Agreement shall be
interpreted or construed to require the performance of any act, duty or
obligation that is contrary to law. If any term, condition or provision of
this Agreement is determined to be illegal, unenforceable or invalid in whole
or part for any reason, such provision shall be stricken from this Agreement to
the limited extent necessary to bring this Agreement within the requirements of
the law and this Agreement to the fullest extent practical shall otherwise be
deemed legal and valid and shall continue in full force and effect.
44. Further Assurances.
Each of the parties hereto shall execute and deliver any and
all additional papers, documents, and other assurances, and shall do any and
all acts and things reasonably necessary in connection with the performance of
their respective obligations hereunder and to carry out the intent of the
parties hereto.
45. Successors and Assigns.
All of the terms and provisions contained herein shall inure
to the benefit of and shall be binding upon the parties hereto and their
respective heirs, personal representatives, successors and assigns.
46. Entire Agreement
This Agreement constitutes the entire understanding and
agreement of the parties and any and all prior agreements, understandings, or
representations and/or warranties of any kind are hereby terminated and
canceled in their entirety and are of no further force or effect. No
amendment, change or modification of this Agreement shall be valid unless such
document is in writing and signed by all of the parties hereto.
47. Attorney's Fees.
In the event any action of any type, including, but not
limited to, suit, collection, counterclaim, appeal, arbitration and/or
mediation, is instituted or brought by a party to enforce any of the terms and
provisions hereof and/or to obtain a declaratory judgment with respect to the
status of his rights hereunder (collectively an "Action" herein), the losing
party shall pay the prevailing party all costs, expenses and fees whatsoever
incurred by the prevailing party with respect to bringing and prosecuting such
Action (including any appeal) and enforcing any judgment, order, ruling, or
award granted thereunder, including reasonable attorney's fees and court costs
as the Court or the arbitrator may award.
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48. Captions.
The captions appearing at the commencement of the paragraphs
hereof are descriptive only and for convenience in reference. Should there be
any conflict between any such caption and the paragraph at the head of which it
appears, the paragraph and not such caption shall control and govern in the
construction of this Agreement.
49. Incorporation of Exhibits.
All exhibits attached hereto and referred to herein are
incorporated in this Agreement as though fully set forth in the body hereof.
50. Waiver.
No consent to any action, waiver of any provision, or waiver
of any breach of any duty or obligation hereunder shall constitute a waiver of
any other provision or consent to any other action or subsequent breach,
whether or not similar. No waiver or consent shall constitute a continuing
waiver or consent or commit a party to provide a waiver in the future except to
the extent specifically set forth in writing. Any waiver given by a party
shall be null and void if the party requesting such waiver has not provided to
the waiving party a full and complete disclosure of all material facts relevant
to the waiver requested.
51. Third Party Beneficiaries.
This Agreement and every provision herein is made exclusively
for the benefit of the parties hereto and their respective successors and
permitted assigns. Nothing in this Agreement is intended to confer any rights
or remedies under or by reason of this Agreement on any persons other than the
parties to it and their respective successors and permitted assigns; provided,
however, nothing in this Agreement is intended to relieve or discharge the
obligation or liability of any third person to any party to this Agreement.
52. Time of the Essence.
Time is of the essence with respect to the performance of all
of the duties and obligations set forth in this Agreement.
53. General Interpretation.
The terms of this Agreement have been negotiated by the
parties hereto and the language used in this Agreement shall be deemed to be
the language chosen by the parties hereto to express their mutual intent. No
rule of strict construction will be applied against any party hereto. This
Agreement shall be construed equally against all parties hereto without regard
to any presumption or rule requiring construction against the party who drafted
this Agreement or any portion thereof.
54. Representation of Authority of Signatories.
Each person signing this Agreement represents and warrants to
each other party hereto that he or she is duly authorized and has legal
capacity to execute and deliver this Agreement. Each party further represents
and warrants to each other party hereto that the execution and delivery of this
Agreement and the performance of such party's obligations hereunder have been
duly authorized and that the Agreement is a valid and legal agreement binding
on such party and enforceable in accordance with its terms.
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55. Execution of Agreement.
Each party has been represented by counsel in the negotiation
and execution of this Agreement. This Agreement was executed voluntarily
without any duress or undue influence on the part of or on behalf of the
parties hereto. The parties acknowledge that they have read and understood
this Agreement and its legal effect. Each party acknowledges that it has had a
reasonable opportunity to obtain independent legal counsel for advice and
representation in connection with this Agreement.
56. Arbitration.
The parties shall, at the request of either party, submit any
dispute concerning the interpretation of or the enforcement of rights and
duties under this Agreement to final and binding arbitration pursuant to the
rules of the American Arbitration Association. At the request of any party,
the arbitrators, attorneys, parties to the arbitration, witnesses, experts,
court reporters, or other persons present at the arbitration shall agree in
writing to maintain the strict confidentiality of the arbitration proceedings.
Arbitration shall be conducted by a single, neutral arbitrator, or, at the
election of any party, three neutral arbitrators, appointed in accordance with
the rules of the American Arbitration Association. The award of the
arbitrator(s) shall be enforceable according to the applicable provisions of
the California Code of Civil Procedure. The arbitrator(s) may award damages
and/or permanent injunctive relief, but in no event shall the arbitrator(s)
have the authority to award punitive or exemplary damages. If proper notice of
any hearing has been given, the arbitrator(s) will have full power to proceed
to take evidence or to perform any other acts necessary to arbitrate the matter
in the absence of any party who fails to appear.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Development and Marketing Agreement as of the day and year first above
written.
Inco Homes Corporation, Victorville 163 Partners, L.P.
a Delaware corporation a California limited partnership
By By
--------------------------- ------------------------------
Ira C. Norris, Fred E. Liao, General Partner
Chairman of the Board ("Owner")
("Builder")
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EXHIBIT 10.49
SECURED PARTICIPATION NOTE
$1,200,000 Gardena, California October 22, 1996
FOR VALUE RECEIVED, INCO HOMES CORPORATION, a Delaware corporation
("Maker" herein) promises to pay to HUNTER'S RIDGE INVESTMENT PARTNERS, a
California partnership (whose partners are Thomas E. Gibbs, Jr. and Richard
Segal) ("Holder" herein), or order, the principal sum of ONE MILLION TWO
HUNDRED THOUSAND DOLLARS ($1,200,000), of which amount the sum of NINE HUNDRED
THOUSAND DOLLARS ($900,000) is advanced from Holder to Maker on the date
hereof, together with accrued interest from the date hereof computed and paid
to Holder as hereinafter set forth.
1. Definitions.
Unless otherwise expressly provided herein or unless the
context otherwise requires, the terms set forth below are hereby defined as
follows:
"Additional Advances" shall mean the additional cash, if any,
advanced by Holder to Maker from time to time (see Paragraph 2).
"Available Cash" shall mean all of the cash derived from the
Development from whatever source (after payment of all costs and expenses
related thereto), including, but not limited to, that which Maker has generated
from the sale of Homes and related assets in the Development and the provision
of services to others with respect to the Development and all net proceeds or
land draws received by Maker from any A&D loans, construction loans or other
financing sources, less funds reimbursed to Maker for amounts previously
advanced by Maker to the Development and less, subject to Holder's written
approval not to be unreasonably withheld, Maker's reasonable estimate of the
amount of cash that will be required by Maker to purchase the balance of the
Real Property (41 lots) not currently owned by Maker, and to construct and sell
the next phase or phases of the Development after taking into account the
additional cash Maker expects to receive from the sale of previously
constructed Homes, and from conventional financing sources, such as A&D loans,
land loans, and construction loans.
"Base Interest" shall mean the amount of interest earned by
Holder computed by multiplying the outstanding principal balance hereunder
times an interest rate of Ten Percent (10.0%) per annum times the actual number
of days elapsed during the period.
"Deed of Trust" shall mean the deed of trust encumbering a
portion (42 Lots) of the Real Property in the amount of One Million Two Hundred
Thousand Dollars ($1,200,000) that is executed by Maker in favor of Holder and
recorded in the Office of the County Recorder of San Bernardino County on the
date hereof to secure the payment of the Loan. The Deed of Trust shall also
include the deed of trust executed by Maker in favor of Holder which encumbers
the balance of the Real Property (41 Lots) which deed of trust Maker will
deliver to Holder when Maker acquires fee title to the balance of the Real
Property. The Deed of Trust shall initially be a second lien on the Real
Property. The construction lender for the Development will receive a first
lien on the 42 lots of the Real Property.
"Development" shall mean the Eighty-Three (83) Homes to be
constructed on the Real Property, and the related assets and services, which
are sold and/or provided to buyers in the "move-up" price market in Fontana,
California.
"Event of Default" shall mean either of the following:
o The failure of Maker to pay Holder in full all sums
due hereunder within Five (5) days of the date such
payment is due, provided that, if Maker fails to
timely make a payment when due, Holder shall give
Maker written notice thereof and Maker shall have
Three (3) days after the receipt of said notice to
cure by making payment in full to Holder; or
o The occurrence of an Event of Default under the Deed
of Trust or any other agreement or document relating
to the Loan executed now or at any time during the
term of this Note.
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"Home" shall mean a single family home constructed by Maker or
one of the Lots of the Real Property.
"Inco G&A" shall mean Three Percent (3%) of the "Gross Sales
Price" of all of the Homes (total cash actually realized from the sale of a
Home less discounts and allowances). For the purpose of computing Available
Cash and Net Income, Maker may draw against the Inco G&A in equal monthly
installments over the projected term of the Development computed on the basis
of the total projected Gross Sales Price of all of the Homes in the
Development. Maker shall periodically revise the projected Gross Sales Price
expected to be realized from the sale of all of the Homes and shall adjust its
draw accordingly.
"Loan" shall mean the Nine Hundred Thousand Dollars ($900,000)
advanced from Holder to Maker on the date hereof evidenced by this Note plus
the Additional Advances, a total of One Million Two Hundred Thousand Dollars
($1,200,000), payment of which is secured by the Deed of Trust. The Loan shall
thus also include the Additional Advances.
"Lot" shall mean One (1) of the Eighty-Three (83) mapped
single family lots which comprise the Real Property.
"Net Income" shall mean the net income realized by Maker from
the construction and sale of the Homes and all related assets and services.
The computation of Net Income shall be made by Maker on the accrual basis of
accounting and, except as hereinafter provided, shall be consistent with the
method it uses to compute net income for its other single family housing
development projects, an example of which is the Proforma dated August 2, 1996,
pertaining to the project referred to as Hunter's Ridge, a copy of which is
attached hereto as Exhibit A. Net Income for the purposes of this Note shall
mean total gross revenues realized from the sale of the Homes, and all related
assets and services, less only those costs and expenses specifically related to
the construction and sale of the Homes (which costs and expenses are subject to
the reasonable review and approval of Holder), less the amount of Base Interest
paid by Maker hereunder and less the Inco G&A.
"Profit Participation" shall mean Fifty Percent (50%) of the
Net Income earned by Maker from the construction and sale of the Homes and
related assets, and the provisions of services, in the Development. The Profit
Participation may be reduced pursuant to Paragraph 2(c) hereof.
"Real Property" shall mean the land located in Fontana,
California which has been subdivided into Lots generally described as follows:
Lots 1 through 83 inclusive of Tract No. 14571, in the City of
Fontana, County of San Bernardino, State of California.
2. Additional Advances.
(a) Holder has advanced to Maker on the date hereof, the
sum of Nine Hundred Thousand Dollars ($900,000). Maker desires for Holder to
make Additional Advances under the Loan of Three Hundred Thousand Dollars
($300,000), for a total loan of One Million Two Hundred Thousand Dollars
($1,200,000), on the following dates:
Date of Advance Amount of Advance
--------------- -----------------
January 1, 1997 $100,000
March 1, 1997 100,000
June 1, 1997 100,000
--------
$300,000
========
(b) If the Development is proceeding satisfactorily to
the total satisfaction of Holder and if other conditions of the housing market
and the availability of funds are satisfactory to Holder, Holder may, but is
not obligated to, make any or all of the Additional Advances to Maker.
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<PAGE> 3
(c) The Profit Participation of Holder is based on Holder
making total advances to Maker under the Loan of One Million Two Hundred
Thousand Dollars ($1,200,000). The total cash equity required by Maker to
purchase the Real Property and construct the Development is One Million Six
Hundred Thousand Dollars ($1,600,000) which includes Four Hundred Thousand
Dollars ($400,000) borrowed from the construction lender. In the event that
Holder advances to Maker the sum of One Million Two Hundred Thousand Dollars
($1,200,000), Holder shall receive a Profit Participation of 50% of the Net
Income (see Paragraph 6 hereof). However, if Holder advances to Maker any
amount less than One Million Two Hundred Thousand Dollars ($1,200,000), the
Profit Participation of Holder shall be modified to be a function of the amount
actually advanced by Holder to Maker plus the sum of the land loan from the
construction lender, $400,000, as total of those two amounts bears to
$1,600,000 times 50%. (For example, assume that Holder advances to Maker only
the original $900,000. Then the Profit Participation of Holder would be
40.625%. That is computed as follows: $900,000 + $400,000 = $1,300,000
divided by $1,600,000 x 50%.)
3. Principal Payments.
Not later than the Twenty-Fifth (25th) day of each calendar
month during which period principal remains outstanding hereunder, Maker shall
compute the total amount of Available Cash. After deducting the amount of
accrued Base Interest currently payable to Holder, Maker shall deliver all of
such remaining Available Cash to Holder on the Twenty-Fifth (25th) day of such
calendar month as payment of principal.
4. Term.
The entire unpaid principal balance hereunder, together with
all unpaid Base Interest accrued thereon, shall be due and payable in full on
December 31, 1998. Profit Participation shall be earned on the sale of each
Home to be payable as hereinafter set forth, until all of the Homes have been
developed and sold. Provided, however, at such time as the entire unpaid
balance of principal and accrued Base Interest have been paid in full, the Deed
of Trust shall continue to encumber the Real Property which has not been sold
and reconveyed. The entire unpaid balance of Profit Participation shall be due
and payable in full on May 31, 2001 (the "Outside Date"). If, at the Outside
Date, Lots are not improved with Homes and have not been sold or Lots have been
improved with Homes but have not been sold and, therefore, Profit Participation
with respect to any such unsold Lots and Homes has not been paid, Net Income
and Profit Participation for each such unsold Lot and Home shall be calculated
based on the average Net Income for all Homes previously sold and the
calculated amount of Profit Participation shall be paid by Maker to Holder on
the Outside Date.
5. Payment of Base Interest.
Base Interest shall be computed for each calendar month during
which there is an outstanding principal balance hereunder and shall be due and
payable by Maker to Holder, in arrears, on the Fifth (5th) day of each calendar
month following the calendar month for which such Base Interest was earned.
6. Profit Participation.
Maker shall pay Holder as a Profit Participation an amount
equal to Fifty Percent (50%) of the Net Income earned by Maker from the
construction and sale of the Homes and all related assets, and the provisions
of all services, with respect to the Development. Profit Participation which
is earned with respect to Homes that are sold shall be estimated by Maker on a
month-by-month basis and the estimate thereof shall be paid by Maker to Holder
from Available Cash not later than the Twenty-Fifth (25th) of the following
month. Maker shall make a precise computation of Net Income and shall make any
additional payment of Profit Participation to Holder from Available Cash not
later than on the Fiftieth (50th) day after the end of each calendar quarter
for the first three (3) calendar quarters of each calendar year and not later
than the One Hundred and Fifth (105th) day after the end of the last calendar
quarter of each calendar year.
7. Payments to Holder.
All payments of principal, Base Interest, Profit
Participation, and all other payments due Holder from Maker hereunder shall be
payable only in the lawful money of the United States and payment thereof shall
be made to Holder without deduction or offset. All payments due and payable
under this Note shall be paid to Holder in immediately available funds
delivered to Holder as follows:
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<PAGE> 4
Hunter's Ridge Investment Partners
c/o Thomas E. Gibbs, Jr.
Suite 400
879 West 190th Street
Gardena, CA 90248
8. Deed of Trust.
(a) Payment of this Note is secured by the Deed of Trust
of even date which Deed of Trust creates a second lien on a portion (42 Lots)
of the Real Property on which the Development is to be constructed. This Note
is subject to the terms and conditions of the Deed of Trust, all of which are
incorporated herein by reference.
(b) At such time as Maker acquires fee title to the
balance of the Real Property (41 Lots) that it does not own on the date hereof,
to further secure payment of this Note, Maker shall execute and deliver to
Holder a Deed of Trust encumbering the balance of the Real Property with a
first lien (or a second lien if a first lien is required by the construction
lender) in favor of Holder and shall cause said Deed of Trust to be recorded in
the Office of the County Recorder of San Bernardino County.
(c) If and to the extent the Deed of Trust represents a
first lien on the Real Property, Holder agrees from time to time as necessary
to subordinate its lien imposed by the Deed of Trust on only that portion of
the Real Property on which Maker intends to immediately commence construction
of a portion of the Development and on which the construction lender, who has
agreed to provide construction and land acquisition financing therefor,
requires a first lien to secure its construction/land loan. As a condition to
granting such subordination, Maker shall covenant that all funds advanced by a
construction lender shall only be used and applied to construct and sell the
Development and, as applicable, purchase the Real Property. Maker agrees that
Holder shall retain a first lien under the Deed of Trust on all of the Real
Property which is not subject to a construction/land loan deed of trust and
Holder shall retain a second lien (superior to any rights of mechanics' or
materialmen) under the Deed of Trust on that portion of the Real Property that
is subject to a construction/land loan deed of trust. Provided that Maker is
not in default hereunder, including, particularly the payment of principal and
Base Interest, Holder agrees to release and reconvey its lien imposed by the
Deed of Trust on a Home by Home basis at the close of the sale escrow for the
sale of a Home in the Development to a third party buyer. At such time as all
principal and Base Interest and any other costs or expenses due hereunder have
been paid in full, Holder shall release and reconvey its lien imposed by the
Deed of Trust. Holder shall thereafter be a joint venture partner with Maker
and share in Net Income through its Profit Participation.
9. Title Insurance.
At the funding of the Loan and the recording of the Deed of
Trust, Maker shall provide Holder with a CLTA lender's policy of title
insurance with liability in the maximum amount of the Loan ($1,200,000) which
shows that Holder has a first deed of trust lien (prior to all mechanic's
liens, if any) and subject to only such exceptions and exclusions as approved
in writing by Holder. Maker shall also provide Holder with such endorsements
and updated policies of title insurance as reasonably requested by Holder when
it subordinates its lien under the Deed of Trust to a first deed of trust lien
in favor of a construction lender, or re-records following the recordation of a
construction loan. Such title policy, in connection with a subordination or
re-recording shall contain mechanics lien endorsements insuring priority of the
Deed of Trust, subordinated or re-recorded over all mechanics liens. Maker
shall also furnish Holder with a CLTA lender's liability policy of title
insurance with liability in the amount of the remaining principal due hereunder
when Maker acquires fee title to the balance of the Real Property.
10. Escrow and Costs.
The funding of the Loan shall be consummated through an escrow
at Chicago Title Company, as a companion escrow for the purchase of the Real
Property by Maker. Maker shall pay, or reimburse Holder as necessary, for all
escrow fees, recording costs, title insurance premiums (both at closing and if
title insurance is updated hereunder) and shall also reimburse Holder at the
funding of the Loan for certain legal costs and expenses incurred by Holder in
connection with this Loan in the amount of Five Thousand Dollars ($5,000).
4
<PAGE> 5
11. Reports.
Maker shall provide Holder periodic reports in the form and in
the manner reasonably requested by Holder about the construction and sale of
the Development and the amount of Net Income earned therefrom for each calendar
month in which any amounts are due and owing to Holder hereunder. Such reports
shall include, but not be limited to, a monthly report due not later than the
Twenty-Fifth (25th) day of the following calendar month on status of
construction, sales, and closings, the amount of Available Cash, and the
computation of Net Income. A final report on all such items shall be due not
later than the Fiftieth (50th) day after the end of each calendar quarter for
the first three (3) calendar quarters of the calendar year and not later than
the One Hundred and Fifth (105th) day after the end of the last calendar
quarter of the calendar year.
12. Late Payment Charge.
In the event Maker fails to make any payment due to Holder
hereunder, in addition to all other rights and remedies of Holder, to
reasonably compensate Holder for the costs and expenses it will incur due to
such delayed payment, Maker shall pay to Holder a Late Payment Charge equal to
Ten Percent (10%) of the total amount of such delinquent payment.
13. Right to Inspect Books and Records/Audit.
Maker shall keep and maintain a separate set of books and
financial records devoted solely to construction and sale of the Development.
Each monthly, quarterly, and annual computation of Net Income shall be computed
by Maker and certified by the Chief Financial Officer for Maker. Holder may,
at any time during business hours, following reasonable prior notice, inspect
the books and financial records of Maker relating to the Development and make
copies thereof and any other documents, papers and materials related thereto.
Furthermore, Holder may, at its sole cost and expense, retain its own certified
public accountant to audit the books and financial records of Maker relating to
the Development. Maker shall, however, pay Holder for the full cost of such
audit if such audit concludes that the Net Income of the Development had
previously been under reported to Holder for the period of the audit by at
least Five Percent (5%).
14. Use of Funds.
Maker hereby covenants and agrees with Holder that all
Available Cash shall exclusively be used in the following order: (i) to fund
the cost to construct and sell the Homes, (ii) to pay Holder the Base Interest
due hereunder, (iii) to pay Holder the outstanding principal of the Loan; or
(iv) to pay Holder the Profit Participation and concurrently therewith pay
Maker its proportionate share of Net Income. Maker shall pay, only from
Maker's separate funds, all other costs, fees, and expenses of Maker.
15. Status of Title.
Holder has received a Proforma CLTA Title Policy from Chicago
Title Company Policy Number 6035069P-K07 (the "PTR"), which relates to the Real
Property. Maker hereby represents, warrants, and covenants to Holder that on
the date hereof and during the term of this Note that:
(a) All taxes and assessments which are assessed against
the Real Property and which are due and payable are currently paid in full and
will continue to be paid in full when due.
(b) None of the exclusions and exceptions to title to the
Real Property as set forth in the PTR will have any material adverse affect on
the construction and sale of the Homes or in any material way increase any of
the costs and expenses relating thereto or reduce the Profit Participation
projected to be earned by Holder as set forth on Exhibit A.
(c) Maker shall not further encumber the Real Property
except as required to construct and market the Development.
(d) Maker shall not create any exceptions to title or
clouds on title which would materially reduce the Profit Participation to be
earned by Holder as set forth on Exhibit A.
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<PAGE> 6
16. Representations and Warranties and Affirmative Covenants of
Maker.
As a material condition for the Holder to make the Loan to
Maker, Maker hereby represents and warrants to, and agrees with, the Holder as
follows:
(a) Maker shall use its best efforts (using its own funds
and/or funds borrowed from third party institutional lenders) to timely
purchase the balance of the Real Property (41 Lots) not owned by Maker on the
date hereof and to effectively and profitably construct and sell the
Development. (In the event that Maker does not purchase the additional 41
Lots, payment of Base Interest, principal, and Profit Participation shall be
based on the original 42 Lots of the Real Property.)
(b) The Maker reasonably believes that it has and shall
use as necessary, all of the personnel, resources and expertise necessary to
construct and market the Development on a highly professional basis. The Maker
shall use all of its personnel and resources necessary to construct the
Development in a diligent, efficient, cost effective, and highly professional
basis and to finance and market same in a manner that the Maker believes will
earn the maximum Profit Participation reasonably obtainable for the Holder.
(c) The Maker shall use its best efforts to timely
construct, or cause to be constructed, the Development and all on-site and
off-site improvements related thereto:
(i) In a workmanlike manner using subcontractors who have
the reputation of constructing a high quality work product
consistent with Maker's standards and prior developments of
Maker similar to the Development; and
(ii) Shall use such materials that in all ways
substantially comply with plans and specifications and that
equal or, if necessary, exceed code requirements, to cause the
improvements constituting the Development to not have any
material defects as a result of the materials used to
construct same.
(d) The Maker shall use its best efforts where it deems
it necessary to obtain warranties and guarantees, and, in only those instances
where Maker deems it appropriate, to also obtain performance and/or guarantee
bonds from all suppliers, materialmen and subcontractors who supply materials
and/or labor to the Development.
17. Remedies Upon Default.
Upon the occurrence of an Event of Default, at the option of
the Holder, without demand or notice to Maker, the entire outstanding balance
of principal together with all accrued Base Interest and Profit Participation
shall immediately become due and payable. Furthermore, so long as such Event
of Default shall continue, all amounts due and payable to Holder hereof shall
bear interest at the Prime Rate plus Five Percent (5%) (the "Default Interest
Rate" herein). All interest accrued at the Default Interest Rate shall not be
deducted from the Net Income of the Development to determine the Profit
Participation payable to Holder hereunder.
18. Arbitration.
The parties shall submit any dispute concerning the
interpretation of this Note and the calculation of Available Cash, Net Income
and Profit Participation to final and binding arbitration pursuant to the rules
of the American Arbitration Association. At the request of any party, the
arbitrators, attorneys, parties to the arbitration, witnesses, experts, court
reporters, or other persons present at the arbitration shall agree in writing
to maintain the strict confidentiality of the arbitration proceedings.
Arbitration shall be conducted by a single, neutral arbitrator, or, at the
election of either party, three neutral arbitrators, appointed in accordance
with the rules of the American Arbitration Association. The award of the
arbitrator(s) shall be enforceable according to the applicable provisions of
the California Code of Civil Procedure. The arbitrator(s) may determine and
award amounts owing and payable to Holder, including, but not limited to,
principal, Base Interest and Profit Participation, based upon their calculation
of Available Cash and Net Income. If proper notice of any hearing has been
given, the arbitrator(s) will have full power to proceed to take evidence or to
perform any other acts necessary to arbitrate the matter in the absence of any
party who fails to appear.
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<PAGE> 7
19. Attorneys Fees.
If any and all amounts due and payable under this Note are not
paid when due or if any Event of Default occurs, Maker promises to pay all
costs of enforcement and collection, including, but not limited to, reasonable
attorneys' fees and court costs, whether or not any action or proceeding is
brought to enforce the provisions hereof as the arbitrator or the Court may
award.
20. Waiver by Holder.
No consent to any action, waiver of any provision, or waiver
of any breach of any duty or obligation of Maker hereunder, by Holder shall
constitute a waiver of any other provision or consent to any other action or
subsequent breach, whether or not similar. No waiver or consent by Holder
shall constitute a continuing waiver or consent or commit Holder to provide a
waiver in the future except to the extent specifically set forth in writing.
21. Waivers by Maker.
Maker hereby waives diligence, presentment, protest and
demand, notice of protest, dishonor and nonpayment of this Note, and expressly
agrees that, without in any way affecting the liability of Maker hereunder,
Holder may extend any maturity date or the time for payment of any installment
due hereunder, accept additional security, release any party liable hereunder
and release any security now or hereafter securing this Note. Maker further
waives, to the full extent permitted by law, the right to plead any and all
statutes of limitations as a defense to any demand on this Note, or on any deed
of trust, security agreement, guaranty or other agreement now or hereafter
securing this Note.
22. Subordination Agreement.
Maker and Holder have executed and delivered a Subordination
Agreement in favor of Independent Lending Corporation, a Delaware corporation
doing business as Construction Loan Corporation of America ("CLCA" herein)
pursuant to which Holder agrees that the Deed of Trust is second and
subordinate to a deed of trust executed by Maker in favor of CLCA to secure the
payment of a $6,314,000 loan from CLCA to Maker.
IN WITNESS WHEREOF, Maker has executed and delivered this Secured
Participation Note at Gardena, California on October 22, 1996.
INCO HOMES CORPORATION,
a Delaware corporation
By
----------------------------------
Ira C. Norris,
Chairman and CEO
7
<PAGE> 1
EXHIBIT 10.50
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT") is entered into
as of December 23, 1996, by and between INCO HOMES CORPORATION, a Delaware
corporation (the "COMPANY"), and OVERLAND OPPORTUNITY FUND, LLC, a California
limited liability company (the "HOLDER").
R E C I T A L S
A. The Company and Holder are parties to that certain Common
Stock Purchase Agreement (the "PURCHASE AGREEMENT") dated December 23, 1996,
pursuant to which the Company agrees to sell and issue, and Holder agrees to
purchase, an aggregate of One Million Two Hundred Thousand (1,200,000) shares
(the "COMMON SHARES") of the common stock of the Company in three installments
of 400,000 shares each, such Common Shares to be issued and sold by the Company
without registration under the Securities Act of 1933, as amended (the
"SECURITIES ACT").
B. Company and the Holder desire to enter into this Agreement to
provide to the Holder certain registration rights with respect to the Common
Shares as set forth below in this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual promises and agreements
set forth herein, and other valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto hereby agree as follows.
II. Demand Registration.
On and after execution of this Agreement and
continuing until February 1, 1999, Holder, for so long as it holds Registrable
Securities (as hereinafter defined), may request by delivery of written notice
to the Company (the "DEMAND NOTICE") that the Company file as soon as
practicable but in no event more than 60 days from the date of such Demand
Notice a registration statement (a "DEMAND REGISTRATION STATEMENT") relating to
the sale by the Holder of a minimum of 600,000 shares of Registrable Securities
(a "DEMAND REGISTRATION"). Upon receipt of a Demand Notice, if there are
holders of Registrable Securities other than the Holder ("OTHER HOLDERS"), the
Company shall promptly give written notice of such demand to all Other Holders
of Registrable Securities as shown in the Company's books and records. All
such Other Holders thereupon shall have the right, by giving written notice to
the Company (the "INCLUSION NOTICE") within ten (10) days after the Demand
Notice has been delivered to them, to have included in the Demand Registration
Statement such of their Registrable Securities as such Other Holders may
specify in the Inclusion Notice. A decision by an Other Holder not to include
his Registrable Securities in a Demand Registration Statement pursuant to the
foregoing sentence shall not prohibit such Other Holder from making a request
for a Demand Registration pursuant to this Section 1.a.
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<PAGE> 2
"REGISTRABLE SECURITIES" shall mean (i) the Common Shares and (ii) any
shares of common stock of the Company issued or issuable with respect to the
Common Shares referred to in clause (i) above by way of replacement, share
dividend, share split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization. As to any
particular Registrable Securities, such securities will cease to be Registrable
Securities when they have been sold to the public pursuant to an offering
registered under the Securities Act or sold to the public in compliance with
Rule 144 under the Securities Act (or any similar rule then in force). As to
any Registrable Securities transferred by Holder, pursuant to the immediately
preceding sentence, in a transaction which complies with an appropriate
exemption from registration under the Securities Act, such securities shall
remain Registrable Securities. In addition, whether or not any express
assignment has been made, the provisions of this Agreement which are for the
benefit of Holder are also for the benefit of, and enforceable by, any
subsequent Other Holder of Registrable Securities. If so specified in the
Demand Notice, the Demand Registration shall be an underwritten registration.
B. For so long as the Company maintains an effective
Shelf Registration (as defined in Section 4.a.i, below) and otherwise complies
with the terms of this Agreement, the Holder of Registrable Securities covered
by such Shelf Registration shall not be entitled to request an additional
Demand Registration with respect to such Registrable Securities; provided,
however, that the Holder may request, with respect to all or a part of such
Registrable Securities held by the Holder, one (1) Demand Registration (an
"ALTERNATE DEMAND REGISTRATION") which is not part of such Shelf Registration,
and the Company agrees in such case to suspend the effectiveness of such Shelf
Registration with respect to such Registrable Securities for a period beginning
fifteen (15) days before the anticipated effectiveness of such Alternate Demand
Registration and ending thirty (30) days after the effectiveness of such
Alternate Demand Registration or such later time as requested by the Holder,
but in no event more than 120 days after the effectiveness of such Alternate
Demand Registration. Separate and apart from the Demand Registration rights
granted pursuant to Section 1.a.i hereof, commencing as of the date of this
Agreement, if Other Holders of Registrable Securities exist, the Holder and
such Other Holders shall each be able to piggyback onto and Demand Registration
of the other on the terms provided below.
C. The Company agrees to use reasonable commercial
efforts to keep the Demand Registration Statement continuously effective until
the earliest of (a) February 1, 1999, (b) the date on which the Holder no
longer holds any Registrable Securities covered by such Demand Registration
Statement, or (c) the date on which the Company has caused to be delivered to
the Holder an opinion of counsel stating that the Registrable Securities may be
sold pursuant to Rule 144 promulgated under the Securities Act or any successor
thereto or replacement therefor. If despite reasonable commercial efforts of
the Company as above described, the Demand Registration Statement ceases to be
effective prior to expiration of the time period above-described, then the
Holder of the Registrable Securities which were included in such Demand
Registration Statement may again request, pursuant to another Demand Notice,
that the Company file as soon as practicable another Demand Registration
Statement relating to the sale by the Holder of such Registrable
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<PAGE> 3
Securities. Upon receipt of such Demand Notice, the Company and the Holder
shall follow the same procedures and have the same rights provided by Section
1.a of this Agreement with regard to the registration of the Registrable
Securities and the Demand Registration Statement.
D. In the case of an underwritten offering pursuant to a
Demand Registration Statement, the Holder shall have the right to select the
investment banker(s) and manager(s) to administer the offering, subject to the
Company's approval, which shall not be unreasonably withheld. If Other Holders
of Registrable Securities exist, the Holder and/or the Other Holders holding a
majority of the Registrable Securities included in such offering shall have the
right to make the selection as provided in the immediately preceding sentence.
E. If a Demand Registration Statement is an underwritten
offering and the managing underwriters advise the Company in writing that in
their opinion the number of Registrable Securities and, if permitted hereunder,
other securities requested to be included in such offering, exceeds the number
of Registrable Securities and other securities, if any, which can be sold in an
orderly manner in such offering within a price range acceptable to the Holder
(or, if Other Holders of Registrable Securities exist, the Holder and/or the
Other Holders initially requesting registration and holding a majority of the
Registrable Securities initially requested to be included in such
registration), the Company will include in such Demand Registration Statement,
prior to the inclusion of any securities which are not Registrable Securities
hereunder, the number of Registrable Securities requested to be included
hereunder which in the opinion of such underwriters can be sold in an orderly
manner within the price range of such offering. If Other Holders exist, the
number of Registrable Securities included in such Demand Registration Statement
pursuant to the immediately preceding sentence shall be determined pro rata
among the Holder or respective Other Holders thereof on the basis of the amount
of Registrable Securities owned by each such holder. In the case of
participation in such Demand Registration Statement by any other investors or
their permitted transferees who at any time have been granted piggyback
registration rights outside of this Agreement and who are seeking to include
any of their securities as part of the Demand Registration Statement (the
"OTHER INVESTORS"), the securities held by them which are requested to be
included in such Demand Registration Statement will be treated together on a
pro rata basis among the Holder (and/or the Other Holders of Registrable
Securities, if any) requesting such registration and such Other Investors on
the basis of the number of shares requested for inclusion in such Demand
Registration Statement by each such holder.
III. Piggyback Registration.
A. Right to Piggyback. On and after the date of this
Agreement and continuing until February 1, 1999, if at any time the Company
proposes to file a registration statement under the Securities Act with respect
to an offering of shares of the common stock of the Company solely for cash
(other than a Demand Registration Statement hereunder, and other than a
registration statement (i) on Form S-8 or any successor form to such form or in
connection with any employee or director welfare, benefit or compensation plan,
(ii) on Form S-4 or any successor form to such form or in connection with an
exchange
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<PAGE> 4
offer, (iii) in connection with a rights offering exclusively to existing
holders of shares of common stock of the Company, (iv) in connection with an
offering solely to employees under an employee benefit, share dividend, share
ownership or dividend reinvestment plan by the Company or its affiliates, (v)
relating to a transaction pursuant to Rule 145 of the Securities Act, or (vi) a
shelf registration pursuant to Rule 415 under the Securities Act, or any
successor rule, if the Company in its good faith discretion believes the
inclusion of Registrable Securities would adversely interfere with such
offering or otherwise adversely affect the Company), whether or not for its own
account (a "PIGGYBACK REGISTRATION STATEMENT"), the Company shall give prompt
written notice of such proposed filing to the Holder (a "PIGGYBACK NOTICE")
and, subject to the provisions of subsections 2.b and 2.c, below, the Company
will include in such registration all Registrable Securities with respect to
which the Company receives a written request for inclusion therein within
twenty (20) days after the date of delivery of the Piggyback Notice. The
Holder shall be permitted to withdraw all or part of the Holder's Registrable
Securities from a Piggyback Registration Statement at any time prior to the
effective date of such Piggyback Registration Statement.
B. Priority on Primary Registrations. If a Piggyback
Registration Statement is a registration on behalf of the Company and the
Company determines that, or in the case of an underwritten registration, the
managing underwriters advise the Company in writing that in their opinion, the
number of securities requested to be included in such registration exceeds the
number which can be sold in an orderly manner within a price range acceptable
to the Company, the Company shall include in such registration (i) first, the
securities the Company proposes to sell, and (ii) second, the Registrable
Securities requested to be included in such registration and any other
securities requested to be included in such registration, pro rata among the
holders of Registrable Securities requesting such registration and the holders
of such other securities on the basis of the number of securities requested for
inclusion in such registration by each such holder. Nothing herein shall
affect the right of the Company to withdraw any such Registration in its sole
discretion.
C. Priority on Secondary Registrations. If a Piggyback
Registration Statement is a registration on behalf of holders of the Company's
securities other than the Holder (or Other Holders, if any) of Registrable
Securities, and the Company determines, in good faith and using reasonable
discretion that, or in the case of an underwritten offering, the managing
underwriters advise the Company in writing that in their opinion, the number of
securities requested to be included in such registration exceeds the number
which can be sold in an orderly manner in such offering within a price range
acceptable to the holders initially requesting such registration, the Company
will include in such registration the securities requested to be included
therein by the holders requesting such registration and the Registrable
Securities requested to be included in such registration, pro rata among the
holders of securities requesting such registration on the basis of the number
of securities requested for inclusion in such registration by each such holder.
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<PAGE> 5
D. Selection of Underwriters. In the case of any
underwritten Piggyback Registration Statement, the Company shall have the right
to select the investment banker(s) and manager(s) to administer the offering.
IV. Holdback Agreements. The Company agrees (a) not to effect any
public sale or distribution of its equity securities, or any securities
convertible into or exchangeable or exercisable for such securities, during the
120 day period beginning on the effective date of any underwritten Demand
Registration (except pursuant to (i) registrations on Form S-8 or any successor
form, (ii) registrations on Form S-4 or any successor form, and (iii)
registrations of securities in connection with the Company's dividend
reinvestment plan on form(s) applicable to such securities) unless the
underwriters managing the registered public offering otherwise agree, and (b)
to use its reasonable best efforts to obtain agreements from each of its
officers, directors and affiliated shareholders (including, without limitation,
each holder of more than five percent (5%) in number or value of the
outstanding shares of the common stock of the Company), to agree not to effect
any public sale or distribution (including sales pursuant to Rule 144) of any
such securities during such period (except as part of such underwritten
registration, if otherwise permitted), unless the underwriters managing the
registered public offering otherwise agree.
V. Registration Procedures and Assistance.
A. Whenever the Holder requests that any Registrable
Securities be registered pursuant to this Agreement, the Company shall use its
best efforts to effect the registration and facilitate the sale and
distribution of the Registrable Securities specified in the Demand Notice (and,
if Other Holders exist, all related Inclusion Notices) in accordance with the
intended method of disposition thereof and pursuant thereto the Company shall:
1. Prepare and file with the Securities and Exchange
Commission (the "SEC") a registration statement (the "REGISTRATION STATEMENT")
with respect to such Registrable Securities and use its best efforts to cause
the Registration Statement to become effective (provided that before filing a
registration statement or prospectus or any amendments or supplements thereto,
the Company will furnish on a timely basis to the counsel selected by Holder
(or, if Other Holders of Registrable Securities exist, the Holder and/or the
Other Holders holding a majority of the Registrable Securities covered by the
Registration Statement) copies of all such documents proposed to be filed,
which documents shall be subject to the review of such counsel). If it is
eligible to do so, the Company may elect, at its option, to file such Demand
Registration as a registration pursuant to Rule 415 of Regulation C promulgated
under the Securities Act (or any successor rule) (a "SHELF REGISTRATION");
2. Notify the Holder of the effectiveness of the
Registration Statement and furnish to the Holder such number of copies of the
Registration Statement (including any amendments, supplements and exhibits) and
the prospectus contained therein (including each preliminary prospectus) as the
Holder may reasonably request in order to facilitate the Holder's sale of the
Registrable Securities in the manner described in the Registration Statement;
-5-
<PAGE> 6
3. Prepare and file with the SEC from time to
time such amendments and supplements to the Registration Statement and
prospectus used in connection therewith as may be necessary to keep the
Registration Statement continuously effective for the period required by the
intended method of disposition or to describe the terms of any offering made
from an effective Shelf Registration, and to comply with the provisions of the
Securities Act with respect to the disposition of all the Registrable
Securities covered by such Registration Statement during such period in
accordance with the intended methods of disposition set forth in the
Registration Statement;
4. File any necessary listing applications or
amendments to existing listing applications to cause the Registrable Securities
covered by the Registration Statement to be then listed or quoted on the
primary exchange or quotation system on which similar securities issued by the
Company are then listed or quoted;
5. Notify the Holder, and confirm in writing,
any request by the SEC for amendments or supplements to the Registration
Statement or the prospectus related thereto or for additional information. In
addition, the Company shall promptly notify the Holder of, and confirm in
writing, the filing of the Registration Statement, any prospectus supplement
related thereto or any post-effective amendment to the Registration Statement
and the effectiveness of any post-effective amendment;
6. Promptly notify the Holder, at all times when
a prospectus relating to the Registration Statement is required to be delivered
under the Securities Act, of the happening of any event which causes the
prospectus included in the Registration Statement, as then in effect, to
include an untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading. In
such event, the Company shall promptly prepare and furnish, as and when such is
completed and available, to the Holder a reasonable number of copies of a
supplement to or an amendment of such prospectus as may be necessary so that,
as thereafter delivered to the purchasers of Registrable Securities, such
prospectus shall not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they are made,
not misleading;
7. File such documents as may be reasonably
necessary to register or qualify Registrable Securities covered by the
Registration Statement under the securities or "Blue Sky" laws of such states
as the Holder may reasonably request; provided, however, that the Company shall
not be obligated to: (a) qualify to do business under the laws of any such
state in which it is not then qualified; (b) file any general consent to
service of process in any such state; (c) subject itself to taxation in any
such jurisdiction; or (d) qualify such Registrable Securities in a given
jurisdiction where expressions of investment interest are not sufficient in
such jurisdiction to reasonably justify the expense of qualification in that
jurisdiction or where such qualification would require the Company to register
as a broker or dealer in such jurisdiction. Once effective, the Company shall
-6-
<PAGE> 7
use its reasonable commercial efforts to keep such filings effective until the
earlier of (a) such time as all of the Registrable Securities covered by the
Registration Statement have been disposed of in accordance with the intended
methods of disposition by the Holder as set forth in the Registration
Statement, (b) in the case of a particular state, such time as the Holder has
notified the Company that it no longer requires an effective filing in such
state in accordance with its original request for filing, or (c) the date on
which the Registration Statement ceases to be effective. The Company shall
promptly notify the Holder of, and confirm in writing, the receipt by the
Company of any notification with respect to the suspension of the qualification
of the Registrable Securities for sale under the securities or "Blue Sky" laws
of any jurisdiction;
8. Provide a transfer agent and registrar for
all of the Registrable Securities covered by the Registration Statement not
later than the effective date of the Registration Statement and thereafter
maintain such a transfer agent and registrar; and otherwise cooperate with the
sellers and the managing underwriter to facilitate the timely preparation and
delivery of certificates representing Registrable Securities to be sold and not
bearing any restrictive legends, and enable such Registrable Securities to be
in denominations and registered in such names as the managing underwriter may
reasonably request at least two (2) business days prior to any sale of
Registrable Securities to the underwriters;
9. Enter into such customary agreements (including
underwriting agreements in customary form) and take all such other actions as
the Holder (or, if Other Holders of Registrable Securities exist, the Holder
and/or the Other Holders of a majority of the Registrable Securities being
sold) or the underwriters, if any, reasonably request in order to expedite or
facilitate the disposition of such Registrable Securities including without
limitation:
a. Making such representations and warranties
to the underwriters in form, substance and scope, reasonably satisfactory to the
managing underwriter, as are customarily made by issuers to underwriters in
primary underwritten offerings;
b. Obtaining opinions and updates thereof of
counsel which counsel and opinions to the Company (in form, scope and substance)
shall be reasonably satisfactory to the managing underwriter, addressed to the
managing underwriter covering the matters customarily covered in opinions
requested in underwritten offerings and such other matters as may be reasonably
requested by the managing underwriter;
c. Causing the underwriting agreements to
set forth in full the indemnification provisions and procedures of Section 6
hereof (or such other substantially similar provisions and procedures as the
managing underwriter shall reasonably request) with respect to all parties to
be indemnified pursuant to said Section; and
d. Delivering such documents and
certificates as may be reasonably requested by the sellers to evidence
compliance with the
-7-
<PAGE> 8
provisions of this Section 4.a.ix and with any customary conditions contained
in the underwriting agreement or other agreement entered into by the Company;
10. Upon receipt by the Company of reasonable
confidentiality agreements, make available for inspection by any underwriter
participating in any disposition pursuant to such registration statement and
any attorney, accountant or other agent retained by any such underwriter, all
financial and other records, pertinent corporate documents and properties of
the Company, and cause the Company's officers, directors, employees and
independent accountants to be available on a reasonable basis and cooperate
with such parties' "due diligence" and to supply all information reasonably
requested by any such underwriter, attorney, accountant or agent in connection
with such registration statement;
11. Otherwise use its best efforts to comply with
all applicable rules and regulations of the SEC and make available to its
security holders, as soon as reasonably practicable, an earnings statement
covering the period of at least twelve (12) months beginning with the first day
of the Company's first full calendar quarter after the effective date of the
registration statement, which earnings statement shall satisfy the provisions
of Section 11(a) of the Securities Act and Rule 158 thereunder;
12. Permit the Holder of Registrable Securities
covered by the Registration Statement, which Holder, in its sole and exclusive
judgment, might be deemed to be an underwriter or a controlling person of the
Company, to participate in the preparation of such registration or comparable
statement and to require the insertion therein of material, furnished to the
Company in writing, which in the reasonable judgment of the Holder and its
counsel should be included;
13. Make available appropriate management
personnel for participation in the preparation and drafting of such
registration or comparable statement, for due diligence meetings and for "road
show" meetings;
14. In the event of the issuance of any stop
order suspending the effectiveness of the Registration Statement, or of any
order suspending or preventing the use of any related prospectus or suspending
the qualification of any Registrable Securities included in the Registration
Statement for sale in any jurisdiction, use its reasonable best efforts
promptly to obtain the withdrawal of such order;
15. Obtain a cold comfort letter from the
Company's independent public accountants addressed to the Holder of Registrable
Securities covered by the Registration Statement in customary form and covering
such matters of the type customarily covered by cold comfort letters as the
Holder (or, if Other Holders of Registrable Securities exist, the Holder and/or
the Other Holders of a majority of the Registrable Securities being sold)
reasonably request;
16. Use its reasonable efforts to cause the
Registrable Securities covered by the Registration Statement to be registered
with or approved by such other governmental agencies or authorities as may be
-8-
<PAGE> 9
necessary by virtue of the business and operations of the Company to enable the
Holder to consummate the disposition of such Registrable Securities; and
17. At its own expense, make available its
officers and employees as reasonable requested by the Holder to make
presentations and otherwise appear and participate in meetings and the like in
connection with road shows and similar efforts undertaken by the Holder and/or
any underwriter or manager in any underwritten offering of any Registrable
Securities by the Holder hereunder. The Company, at its own expense, will also
prepare and deliver to such underwriter or manager such information, analyses,
and other materials and presentations reasonably requested by such underwriter
and/or manager in connection with any offering of Registrable Securities
pursuant to the Registration Statement.
B. Holder agrees that, upon receipt of any notice from
the Company of the happening of any event of the kind described in subsections
4.a.vi or 4.a.xiv, above, Holder shall forthwith discontinue disposition of
such Registrable Securities until receipt of the copies of an appropriate
supplement or amendment to the prospectus under subsection 4.a.vi or until the
withdrawal of such order under subsection 4.a.xiv. If any such registration or
comparable statement refers to any Holder by name or otherwise as the Holder of
any securities of the Company and if, in the Holder's reasonable judgment, the
Holder is or might be deemed to be a controlling person of the Company, the
Holder shall have the right to require (i) the insertion therein of language,
in form and substance satisfactory to the Holder and presented to the Company
in writing, to the effect that the holding by the Holder of such securities is
not to be construed as a recommendation by the Holder of the investment quality
of the Company's securities covered thereby and that such holding does not
imply that the Holder will assist in meeting any future financial requirements
of the Company, or (ii) in the event that such reference to the Holder by name
or otherwise is not required by the Securities Act or any similar federal
statute then in force, the deletion of the reference to the Holder; provided
that with respect to this clause (ii) the Holder shall furnish to the Company
an opinion of counsel to such effect, which opinion and counsel shall be
reasonably satisfactory to the Company. The parties further agree that the
Company shall not be deemed to have used its reasonable best efforts to keep a
Registration Statement effective during the applicable period if it voluntarily
takes any action that would result in Holders not being able to sell such
Registrable Securities during that period, unless (x) such action is required
under applicable law, and (y) the Company has filed a post-effective amendment
to the Registration Statement and the SEC has not declared it effective. In
the event that the events described in clause (y) occur, the Company shall file
a new registration statement on an appropriate form under the Securities Act
for all of the Registrable Securities to be registered. The Company will use
its reasonable efforts to keep any such registration statement effective until
the later of (i) the date that is nine (9) months after the date of
effectiveness of the Registration Statement or (ii) the date set forth in
Section 1.c, above.
VI. Registration Expenses. Except as otherwise provided elsewhere
in this Agreement, all expenses incident to the Company's performance of or
compliance with its registration and all other obligations under this
Agreement, including without limitation, all registration, qualification and
-9-
<PAGE> 10
filing fees, fees and expenses of compliance with securities or blue sky laws,
printing expenses, messenger and delivery expenses, escrow fees and fees and
disbursements of counsel for the Company and all independent certified public
accountants solely related to the registration, underwriters (excluding
underwriting discounts and commissions which shall be paid by the Holder out of
the proceeds of the offering) and other Persons retained by the Company, and
all road show and related expenses of the Holders and the Company, including
travel, lodging, promotion, and all other related expenses, will be borne by
the Company.
VII. Indemnification.
A. The Company agrees, to the extent permitted by law,
to indemnify the Holder, the officers, directors, shareholders, partners,
employees, trustees, agents and representatives of the Holder, and each person
or entity, if any, that controls Holder within the meaning of the Securities
Act against any and all losses, claims, damages, actions, liabilities,
reasonable costs and expenses incurred or suffered by such persons (including
without limitation, reasonable attorneys' fees, expenses and disbursements
documented in writing), arising out of or based upon any untrue or alleged
untrue statement of material fact contained in the Registration Statement or
any prospectus contained therein (or any amendment or supplement thereto), or
any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, except insofar as and
to the extent that such statement or omission arose out of or was based upon
information which was furnished in writing to the Company by the person seeking
indemnification expressly for use therein or by the Holder's failure to deliver
a copy of the Registration Statement or prospectus or any amendments or
supplements thereto after the Company has furnished the Holder with a
sufficient number of copies of the same. In connection with an underwritten
offering, the Company will indemnify such underwriters, their officers and
directors and each person or entity who controls (within the meaning of the
Securities Act) such underwriters to the same extent as provided above with
respect to the indemnification of the Holder.
B. In connection with any Registration Statement in
which Holder is participating, the Holder shall furnish to the Company in
writing such information relating to the Holder or otherwise known to the
Holder as the Company reasonably requests for use in connection with any such
Registration Statement or prospectus (and any amendment or supplement) and, to
the extent permitted by law, shall indemnify the Company and its subsidiaries
(including corporate, partnership, and other subsidiaries), and the officers,
directors, shareholders, partners, employees, trustees, agents and
representatives and each person who controls (within the meaning of the
Securities Act) any such person against any losses, claims, damages, actions,
liabilities, reasonable costs and expenses incurred or suffered by such persons
(including, without limitation, reasonable attorneys' fees, expenses and
disbursements documented in writing), arising out of or based upon any untrue
or alleged untrue statement of material fact contained in the Registration
Statement, or any prospectus contained therein (or any amendment or supplement
thereto), or any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the
-10-
<PAGE> 11
statements therein, in light of the circumstances under which they were made,
not misleading, but only to the extent that such statement or omission is
contained in any information furnished by the Holder to the Company for
inclusion in the Registration Statement or any prospectus (or amendment or
supplement thereto) and is reasonably relied upon in conformity with such
written information and provided that the obligation to indemnify set forth in
this paragraph will be individual to the Holder and will be limited to the net
amount of proceeds received by the Holder from the sale of Registrable
Securities pursuant to such Registration Statement.
C. Any person or entity entitled to indemnification
hereunder shall (i) give reasonably prompt written notice to the indemnifying
party of any claim with respect to which it seeks indemnification and (ii)
unless in such indemnified party's reasonable judgment a conflict of interest
between such indemnified and indemnifying parties may exist with respect to
such claim, permit such indemnifying party to assume the defense of such claim
with counsel reasonably satisfactory to the indemnified party. If such defense
is assumed, the indemnifying party shall not be subject to any liability for
any settlement made by the indemnified party without its consent (but such
consent will not be unreasonably withheld). An indemnifying party who is not
entitled to, or elects not to, assume the defense of a claim shall not be
obligated to pay the fees and expenses of more than one counsel for all parties
indemnified by such indemnifying party with respect to such claim, unless in
the reasonable judgment of any indemnified party a conflict of interest may
exist between such indemnified party and any other of such indemnified parties
with respect to such claim.
D. The indemnification provided for under this Agreement
shall remain in full force and effect regardless of any investigation made by
or on behalf of the indemnified party or any officer, director or controlling
person or entity of such indemnified party and shall survive the transfer of
Registrable Securities. The Company also agrees to make such provisions, as
are reasonably requested by any indemnified party, for contribution to such
party in the event the Company's indemnification is unavailable for any reason.
Such right to contribution shall be in such proportion as is appropriate to
reflect the relative fault of and benefits to the Company on the one hand and
the selling Holder on the other (or, if Other Holders of Registrable Securities
exist, in such proportions that the selling Holder and any Other Holders are
severally, not jointly, responsible for the balance), in connection with the
statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable
considerations. The relative benefits to the indemnifying party and
indemnified parties shall be determined by reference to, among other things,
the total proceeds received by the indemnifying party and indemnified parties
in connection with the offering to which such losses, claims, damages,
liabilities or expenses relate. The relative fault of the indemnifying party
and indemnified parties shall be determined by reference to, among other
things, whether the action in question, including any untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a
material fact, has been made by, or relates to information supplied by, such
indemnifying party or the indemnified parties, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such action.
-11-
<PAGE> 12
The parties hereto agree that it would not be just or
equitable if contribution pursuant hereto were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediate preceding paragraph.
No person or entity found guilty of any fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not found guilty of such fraudulent
misrepresentation. Notwithstanding the provisions of this Section 6.d, the
Holder (or Other Holders, if any) shall not be required to contribute any
amount in excess of the amount of the total price at which the Registrable
Securities of such selling holder was offered to the public.
VIII. Participation in Underwritten Registrations. No person may
participate in any registration hereunder which is underwritten unless such
person (a) agrees to sell such person's securities on the basis provided in any
underwriting arrangements approved by the persons or persons entitled hereunder
to approve such arrangements and (b) completes and executes all questionnaires,
powers of attorney, indemnities, underwriting agreements and other documents
required under the terms of such underwriting arrangements; provided that the
Holder, in any underwritten, registration shall not be required to make any
representations or warranties to the Company or the underwriters other than
representations and warranties regarding the Holder, the Holder's intended
method of distribution and the Holder's ownership of the Registrable
Securities.
IX. Reports and Information. The Company hereby agrees to provide
to the Holder, so long as the Holder continues to hold Registrable Securities,
copies of all filings made by the Company to the SEC promptly after such
filing. Subject to applicable securities laws and the receipt of
confidentiality undertakings, if appropriate, the Company further agrees to
provide to the Holder other detailed information regarding the Company and its
properties as is reasonably requested by the Holder promptly following any such
request.
X. Miscellaneous.
A. No Inconsistent Agreements. The Company will not
hereafter enter into any agreement with respect to its securities which is
inconsistent with or violates the rights granted to the Holder in this
Agreement.
B. Remedies. Any person having rights under any
provision of this Agreement shall be entitled to enforce such rights
specifically to recover damages caused by reason of any breach of any provision
of this Agreement and to exercise all other rights granted by law. The parties
hereto agree and acknowledge that money damages may not be an adequate remedy
for any breach of the provisions of this Agreement and that any party may in
its sole discretion apply to any court of law or equity of competent
jurisdiction (without posting any bond or other security) for specific
performance and for other injunctive relief in order to enforce or prevent
violation of the provisions of this Agreement.
-12-
<PAGE> 13
C. Amendments and Waivers. Except as otherwise provided
herein, the provisions of this Agreement may be amended or waived only upon the
prior written consent of the Company and Holder (or, if Other Holders of
Registrable Securities exist, the Holder and/or the Other Holders holding a
majority of the then outstanding shares of Registrable Securities).
D. Successors and Assigns. All covenants and agreements
in this Agreement by or on behalf of any of the parties hereto will bind and
inure to the benefit of the respective successors and assigns of the parties
hereto whether so expressed or not.
E. Severability. Whenever possible, each provision of
this Agreement will be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
prohibited by or invalid under applicable law, such provision will be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of this Agreement.
F. Counterparts. This Agreement may be executed
simultaneously in two or more counterparts, any one of which need not contain
the signatures of more than one party, but all such counterparts taken together
will constitute one and the same Agreement.
G. Descriptive. The descriptive headings of this
Agreement are inserted for convenience only and do not constitute a part of
this Agreement.
H. Governing Law. The corporate laws of the State of
Delaware will govern all questions concerning the relative rights of the
Company or its shareholders. All other questions concerning the construction,
validity and interpretation of this Agreement will be governed by and construed
in accordance with the domestic laws of the State of California, without giving
effect to any choice of law or conflict of law provision or rule (whether of
the State of California or any other jurisdiction) that would cause the
application of the laws of any jurisdiction other than the State of California.
I. Notices. All notices, demands or other
communications to be given or delivered under or by reason of the provisions of
this Agreement shall be in writing and shall be deemed to have been delivered
when delivered personally to the recipient, sent to the recipient by reputable
express courier service (charges prepaid) or mailed to the recipient by
certified or registered mail, return receipt requested and postage prepaid.
Such notices, demands and other communications shall be sent to the Company and
the Holder as set forth below (or at such other address for any as shall be
specified by like notice, provided that notices of a change of address shall be
effective only upon receipt thereof):
If to the Company: Inco Homes Corporation
1282 West Arrow Highway
Post Office Box 970
Upland, California 91785
Attn: Ira C. Norris
13
<PAGE> 14
If to the Holder: Overland Opportunity Fund, LLC
147 East Olive Avenue
Monrovia, California 91016
Attn: Fred E. Liao
J. Entire Agreement. This Agreement represents the
entire agreement of the parties with respect to the subject matter contained
herein and supersedes all prior agreements and understandings between the
parties with respect to such subject matter.
K. Time. Time is of the essence in connection with this
Agreement.
L. Attorney's Fees. In the event of any action or
proceeding brought by either party against the other in this Agreement, the
prevailing party shall be entitled to recover its actual attorneys' fees and
all fees, costs, and expenses incurred for prosecution, defense, consultation
or advice in such action or proceeding. In addition to the foregoing, the
prevailing party shall be entitled to its actual attorneys' fees and all fees,
costs and expenses incurred in any post-judgment proceedings to collect or
enforce the judgment. This provision is separate and several and shall survive
the merger of this Agreement into any judgment on this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
"COMPANY"
INCO HOMES CORPORATION,
a Delaware corporation
By:
-----------------------------
Title:
-----------------------------
Name:
-----------------------------
"HOLDER"
OVERLAND OPPORTUNITY FUND, LLC,
a California limited liability
company
By:
-----------------------------
Title:
-----------------------------
Name:
-----------------------------
-14-
<PAGE> 1
EXHIBIT 21.1
INCO HOMES CORPORATION
SUBSIDIARIES OF THE REGISTRANT
STATE OF INCORPORATION
NAME OR ORGANIZATION
- ---- ---------------
Norris Homes, Inc. (formerly Inco Homes) California
Inco Development Corporation California
Inco Homes Sales Group, Inc. California
Freedom Mortgage, Inc. California
Inco Insurance Services, Inc. California
<PAGE> 1
INCO HOMES CORPORATION
EXHIBIT 23.1 -- CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated March 19, 1996, except to Note 12,
second paragraph, as to which the date is March 20, 1996, included in the Annual
Report on Form 10-K of Inco Homes Corporation for the year ended December 31,
1996, with respect to the consolidated financial statements as of December 31,
1995 and for the years ended December 31, 1995 and 1994 included in this Form
10-K.
ERNST & YOUNG LLP
Los Angeles, California
April 14, 1997
<PAGE> 1
INCO HOMES CORPORATION
EXHIBIT 23.2 -- CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 Registration No. 33-68220) of Inco Homes Corporation 1992 Stock Option/Stock
Issuance Plan of our report dated March 27, 1997 appearing on page F-2 of this
Form 10-K.
PRICE WATERHOUSE LLP
Costa Mesa, California
March 27, 1997
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