SCHEDULE 14A INFORMATION
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Meritage Corporation
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[LOGO] MERITAGE CORPORATION
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
DATE: WEDNESDAY, MAY 8, 2002
TIME: 9:00 a.m.
LOCATION: DOUBLETREE HOTEL DALLAS - LINCOLN CENTRE
5410 LBJ FREEWAY
DALLAS, TEXAS
To Our Stockholders:
You are invited to attend the Meritage Corporation 2002 Annual Meeting of
Stockholders for the following purposes:
1. To elect three Class I Directors, each to hold office for a two-year
term;
2. To approve an amendment to our 1997 Stock Option Plan that will
increase the total number of shares authorized for issuance by
300,000, and the number of shares that may be issued to any one person
under the plan from 100,000 to 150,000; and
3. To transact any other business that may properly come before the
meeting. We are not currently aware of any other matters that may come
before the meeting.
Only stockholders of record at the close of business on March 29, 2002 are
entitled to notice of and to vote at the annual meeting. A copy of our 2001
Annual Report to Stockholders, which includes audited financial statements, is
enclosed.
By Order of the Board of Directors
/s/ Larry W. Seay
----------------------------------------
Scottsdale, Arizona Larry W. Seay
April 2, 2002 Secretary
YOUR VOTE IS IMPORTANT.
WHETHER OR NOT YOU PLAN TO ATTEND, PLEASE SIGN AND DATE THE ENCLOSED
PROXY CARD AND RETURN IT AS SOON AS POSSIBLE IN THE ENVELOPE PROVIDED
TO ENSURE THAT YOUR SHARES WILL BE REPRESENTED. YOU MAY ALSO VOTE BY
CALLING THE 800-NUMBER LISTED ON YOUR PROXY CARD.
MERITAGE CORPORATION
6613 NORTH SCOTTSDALE ROAD
SUITE 200
SCOTTSDALE, ARIZONA 85250
--------------------------
PROXY STATEMENT
--------------------------
This Proxy Statement is furnished to you in connection with the
solicitation of proxies to be used in voting at our Annual Meeting of
Stockholders on May 8, 2002. The meeting will be held at 9:00 a.m. at the
Doubletree Hotel Dallas - Lincoln Centre, 5410 LBJ Freeway, Dallas, Texas 75240.
THE MERITAGE BOARD OF DIRECTORS IS SOLICITING PROXIES. The proxy materials
relating to the annual meeting were mailed on or about April 10, 2002 to
stockholders of record at the close of business on March 29, 2002 (the "record
date").
You are entitled to revoke your proxy at any time before it is exercised by
attending the annual meeting and voting in person, duly executing and delivering
a proxy bearing a later date, or sending written notice of revocation to the
Corporate Secretary at the above address. Whether or not you plan to be present
at the annual meeting, we encourage you to sign and return the enclosed proxy
card or to use telephone or internet voting. Refer to your proxy card for
instructions about voting by telephone, internet or mail.
We will bear the entire cost of proxy solicitation, including charges and
expenses of brokerage firms and others for forwarding solicitation material to
beneficial owners of our outstanding common stock. We may solicit proxies
through the mail, by personal interview or telephone.
VOTING SECURITIES OUTSTANDING
As of the record date, there were 5,662,873 shares of Meritage common stock
outstanding. Each share is entitled to one vote on each proposal to be voted on
at the annual meeting. Only holders of record of common stock at the close of
business on the record date will be permitted to vote at the meeting, either in
person or by valid proxy. Abstentions and broker non-votes will be treated as
shares that are present and entitled to vote for purposes of determining a
quorum, but as unvoted for purposes of determining the approval of any matter.
The following information should be reviewed along with the audited
consolidated financial statements, notes to consolidated financial statements,
report of independent auditors and other information included in our 2001 Annual
Report that was mailed to you along with this Proxy Statement.
2
ELECTION OF DIRECTORS
(PROPOSAL NO. 1)
Our Board of Directors has seven members. The directors are divided into
two classes serving staggered two-year terms. This year our Class I directors
are up for election. The Board has nominated Steven J. Hilton and Raymond Oppel,
who are incumbent Class I Directors, for re-election and William G. Campbell as
a new Director. William W. Cleverly, a current Class I Director will not stand
for re-election. Management is deeply grateful to William Cleverly for his
dedicated service to Meritage.
All nominees have consented to serve as directors. The Board of Directors
has no reason to believe that any of the nominees will be unable to act as a
director. However, if a nominee becomes unable to serve or if a vacancy should
occur before election, the Board may either reduce its size or designate a
substitute nominee. If a substitute nominee is named, the Board will vote the
proxies held by it for the election of the substitute nominee.
Directors will be elected by a plurality of the votes cast at the Annual
Meeting. This means that the three nominees that receive the largest number of
FOR votes cast will be elected as Directors. In the vote on the election of
three Director nominees, stockholders may:
* vote FOR all nominees;
* vote to WITHHOLD votes for all nominees; or
* WITHHOLD votes as to specific nominees.
Unless you tell us by your proxy to vote differently, we will vote your
properly completed proxies FOR the Board's nominees.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE "FOR" APPROVAL OF PROPOSAL NO. 1.
3
DIRECTOR AND OFFICER INFORMATION
JOHN R. LANDON, 44, has served as co-chairman and co-chief executive
officer (or co-managing director) since April 1998 and served as our chief
operating officer and co-chief executive officer from the combination of Legacy
Homes and Meritage in July 1997 to April 1998. Mr. Landon founded Legacy Homes
in 1987 and, as its president, managed all aspects of the company's business.
Mr. Landon is a member of the National Association of Homebuilders and the
Dallas Home and Apartment Builders' Association.
STEVEN J. HILTON, 40, has served as co-chairman and co-chief executive
officer (or co-managing director) since April 1998 and served as our president
and co-chief executive officer from December 31, 1996 to April 1998. In 1985,
Mr. Hilton co-founded Monterey Homes, which merged with Homeplex Mortgage
Investment Co., the Company's predecessor, and was its treasurer, secretary and
director until December 31, 1996. Mr. Hilton is a member of the Central Arizona
Homebuilders' Association and the National Association of Homebuilders.
ROBERT G. SARVER, 40, has served as a director since December 1996, and is
currently a director of Skywest Airlines. He was the chairman and chief
executive officer of California Bank and Trust from 1998 to 2001. From 1995 to
1998, he served as chairman of Grossmont Bank. In 1990, Mr. Sarver co-founded
and currently serves as the executive director of Southwest Value Partners and
Affiliates, a real estate investment company. Mr. Sarver was the founder of the
National Bank of Arizona and was its President until its acquisition by Zions
Bancorporation in 1994.
C. TIMOTHY WHITE, 41, has served as a director since December 1996, and
served as a director of Monterey Homes from February 1995 until December 1996.
Since 1989, Mr. White has been an attorney with the law firm of Tiffany & Bosco,
P.A. in Phoenix, Arizona, which provides legal services to Meritage.
RAYMOND OPPEL, 45, has served as a director since December 1997. He was the
co-founder, chairman and chief executive officer of the Oppel Jenkins Group, a
regional homebuilder in Texas and New Mexico, which was sold to the public
homebuilder KB Home. Mr. Oppel has served as president of the Texas Panhandle
Builder's Association and is a licensed real estate broker. Mr. Oppel currently
is active as a private investor in real estate development, banking and a new
automobile dealership.
PETER L. AX, 43, has served as a director since September 2000 and is the
managing partner of Phoenix Capital Management, an investment banking and
merchant-banking firm. Mr. Ax is the former chairman and chief executive officer
of SpinCycle, Inc., the nation's largest consolidator and developer of
coin-operated laundromats. Prior to his involvement in SpinCycle, Mr. Ax served
as Head of the Private Equity Division and Senior Vice President of Lehman
Brothers in New York. Mr. Ax is also on the Board of Directors of CashX, Inc.
and Medit Marketing, Inc. Mr. Ax is a certified public accountant and holds an
M.B.A. from the Wharton School at the University of Pennsylvania.
WILLIAM G. CAMPBELL, 43, is nominated to serve as a director this year. Mr.
Campbell is a co-founder and managing director of Knightsbridge Capital
Corporation, an advisory firm that plans and implements capitalization
strategies for commercial real estate. Prior to forming Knightsbridge, Mr.
Campbell was division manager of FINOVA Realty Capital, the commercial real
estate financing division of The FINOVA Group. From 1995 until its acquisition
by FINOVA in 1997, Mr. Campbell was chief operating officer of Belgravia Capital
Corporation, a nationwide commercial mortgage banking firm. Mr. Campbell holds
an M.B.A. from Pepperdine University and is a certified public accountant.
LARRY W. SEAY, 46, has served as chief financial officer and vice
president-finance since December 31, 1996, and has also served as our secretary
and treasurer since 1997. Mr. Seay was chief financial officer and vice
president-finance of Monterey Homes from April 1996 to December 31, 1996. Prior
to 1996, Mr. Seay served as vice president and treasurer of UDC Homes, Inc. Mr.
Seay is a certified public accountant and a member of the American Institute of
Certified Public Accountants.
RICHARD T. MORGAN, 46, has served as vice president since April 1998 and
also served as chief financial officer of our Texas division since July 1997.
Mr. Morgan was appointed Legacy's chief financial officer in 1997.
4
STOCK OWNED BY PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table summarizes, as of March 15, 2002, the number and
percentage of outstanding shares of our common stock beneficially owned by the
following:
* each person or group management knows to beneficially own more than 5%
of such stock;
* all Meritage directors and nominees for director;
* all executive officers named in the compensation summary under
"Executive Compensation"; and
* all Meritage directors and executive officers as a group.
The address for our directors and executive officers is c/o Meritage
Corporation, 6613 North Scottsdale Road, Suite 200, Scottsdale, Arizona 85250.
The number of shares includes shares of common stock owned of record by such
person's spouse and minor children and by other related individuals and entities
over whose shares of common stock such person has custody, voting control or the
power of disposition.
RIGHT TO
NUMBER ACQUIRE TOTAL PERCENT OF
OF SHARES BY MAY BENEFICIAL OUTSTANDING
NAME OF BENEFICIAL OWNER POSITION WITH COMPANY OWNED 30, 2002 SHARES SHARES (1)
------------------------ --------------------- ----- -------- ------ ----------
John R. Landon Class II Director, Co-Chairman and Co-CEO 750,734(2) 32,280 783,014 13.8%
Steven J. Hilton Class I Director, Co-Chairman and Co-CEO 672,341 75,147 747,488 13.0%
Robert G. Sarver Class II Director, Audit and 264,800(3) 12,500 277,300 4.9%
Compensation Committee Member
C. Timothy White Class II Director 316 12,500 12,816 *
Raymond Oppel Class I Director, Audit and -- 12,500 12,500 *
Compensation Committee Member
Peter L. Ax Class II Director, Audit and -- 3,500 3,500 *
Compensation Committee Member
William G. Campbell Class I Director Nominee -- -- -- *
William W. Cleverly Class I Director 1,000 -- 1,000 *
Larry W. Seay Chief Financial Officer, Vice 4,354 15,900 20,254 *
President-Finance, Secretary and
Treasurer
Richard T. Morgan Vice President 1,500 15,700 17,200 *
All directors, nominees and executive officers as a group (10 persons) 1,695,045 180,027 1,875,072 33.3%
NAME OF BENEFICIAL OWNER ADDRESS OF BENEFICIAL OWNER
------------------------ ---------------------------
Capital Growth Management LP One International Place, Boston MA 02110 576,200(4) -- 576,200 10.2%
- ----------
* Represents less than 1%.
(1) The percentages shown include the shares of common stock actually owned as
of March 15, 2002, and the shares which the person or group had the right
to acquire within 60 days of that date. In calculating the percentage of
ownership, all shares of common stock which the identified person had the
right to acquire within 60 days of March 15, 2002 upon exercise of options
are considered as outstanding for computing the percentage of the shares
owned by that person or group, but are not considered as outstanding for
computing the percentage of the shares of stock owned by any other person.
(2) 647,267 shares are owned with Eleanor Landon, spouse, as tenants-in-common.
(3) Mr. Sarver beneficially owns 1,500 shares through his spouse and 500 shares
through a minor child.
(4) Based on Schedule 13G, filed with the SEC on February 8, 2002. Capital
Growth Management LP ("CGM") has sole voting power with respect to 576,200
shares and shared dispositive power with respect to those 576,200 shares.
The Schedule 13G also states that CGM disclaims any beneficial interest in
the shares.
MEETINGS OF THE BOARD OF DIRECTORS AND ITS COMMITTEES
THE BOARD OF DIRECTORS met nine times in fiscal 2001. Each director attended at
least 75% of the Board and committee meetings of which he is a member.
THE COMPENSATION COMMITTEE reviews the performance of the Co-CEO's and
will, at the appropriate times, review plans for management succession. The
Committee also reviews and approves the Company's compensation policies as they
relate to the Co-CEO's and administers Meritage's Executive Management Incentive
Plan.
5
THE AUDIT COMMITTEE recommends appointment of our independent auditors, reviews
our financial statements and considers other matters in relation to the external
audit of financial affairs to promote accurate and timely reporting. The Audit
Committee members are independent as described by Sections 303.01(B)(2)(a) and
(3) of the New York Stock Exchange Listing Standards.
The following summarizes the membership of the Compensation and Audit
Committees, and the number of times each met during 2001.
COMPENSATION COMMITTEE AUDIT COMMITTEE
---------------------- ---------------
Robert G. Sarver x x
Raymond Oppel x x
Peter L. Ax x x
Number of meetings in 2001 2 5
OTHER COMMITTEES. We do not maintain a standing nominating committee or other
committee performing similar functions. The entire Board performs those duties.
DIRECTOR COMPENSATION
Non-employee directors received an annual retainer of $13,200 in 2001, plus
expenses related to attending Board and Committee meetings. Non-employee
directors receive no additional cash compensation for attending Board or
Committee meetings. In 2001, each non-employee director was granted options to
acquire 5,000 shares of our common stock as additional consideration for their
services. All non-employee director stock options vest in equal share increments
on each of the first two anniversary dates of the date of grant and have an
exercise price equal to the closing price of our common stock on the grant date.
EXECUTIVE COMPENSATION
The following table summarizes the compensation we paid in 2001, 2000 and
1999 to our co-chief executive officers and other most highly compensated
executive officers who were paid in excess of $100,000 in 2001.
2001 SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------ ----------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS(#) COMPENSATION(2)
--------------------------- ---- -------- ---------- ------------ ---------- ---------------
John R. Landon - Co-Chairman and 2001 $425,000 $1,417,401 -- 49,000 $ 57,277
Co-Chief Executive Officer 2000 400,000 975,597 -- 11,200 63,257
1999 375,000 475,000 -- 30,000 63,504
Steven J. Hilton - Co-Chairman and 2001 425,000 1,417,401 -- 49,000 40,964
Co-Chief Executive Officer 2000 400,000 975,597 -- 11,200 35,005
1999 375,000 475,000 -- 30,000 33,212
Larry W. Seay - Chief Financial Officer, 2001 191,308 225,000 45,000(1) 19,500 15,229
Vice President-Finance, Secretary and 2000 161,428 175,000 -- 7,500 14,654
Treasurer 1999 150,000 125,000 -- 20,000 12,611
Richard T. Morgan - Vice President 2001 150,000 90,000 40,000(1) 13,500 4,968
2000 122,500 80,000 -- -- 5,334
1999 110,833 60,000 -- 15,000 3,737
- ----------
(1) Represents deferred compensation, payable in December 2004.
(2) These amounts represent matching contributions by us to the officers'
accounts under the 401(k) plan, group medical, long-term disability and
life insurance plan premiums and automobile allowances paid by us as
follows:
6
GROUP,
LONG-TERM
DISABILITY
401(K) AND LIFE VEHICLE TOTAL OTHER
NAME YEAR MATCH INSURANCE ALLOWANCE COMPENSATION
---- ---- ------- --------- --------- ------------
John R. Landon 2001 $ 2,250 $38,347 $ 16,680 $ 57,277
2000 2,306 37,945 23,006 63,257
1999 3,000 37,500 23,004 63,504
Steven J. Hilton 2001 3,130 15,115 22,719 40,964
2000 2,423 16,889 15,693 35,005
1999 2,880 14,651 15,681 33,212
Larry W. Seay 2001 3,150 7,429 4,650 15,229
2000 3,060 7,394 4,200 14,654
1999 2,880 5,531 4,200 12,611
Richard T. Morgan 2001 2,362 2,606 -- 4,968
2000 2,460 2,874 -- 5,334
1999 1,237 2,500 -- 3,737
2001 OPTION GRANTS
The following table lists stock options granted in 2001 to the officers
named in the Summary Compensation Table above. The amounts shown as potential
realizable values rely on arbitrarily assumed share price appreciation rates
prescribed by the SEC over the five or seven-year term of the options. In
assessing those values, please note that the ultimate value of the options
depends on actual future share values and do not necessarily reflect
management's assessment of our future stock price performance and are not
intended to indicate the Company's assessment of the value of the options.
INDIVIDUAL GRANTS
----------------------------------------------------
PERCENTAGE POTENTIAL REALIZABLE VALUE
NUMBER OF OF TOTAL AT ASSUMED ANNUAL RATES
SHARES OPTIONS OF STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM
OPTIONS EMPLOYEES BASE PRICE EXPIRATION ---------------------------
NAME GRANTED (#) IN 2001 ($/SHARE) DATE 5% 10%
---- ----------- ------- --------- ---------- -------- --------
John R. Landon 49,000 15% $ 31.75 6/14/06 $249,091 $721,737
Steven J. Hilton 49,000 15% 31.75 6/14/06 249,091 721,737
Larry W. Seay 19,500 6% 28.86 3/13/08 229,104 533,910
Richard T. Morgan 13,500 4% 28.86 3/13/08 158,610 369,630
No options were granted at a below market price in 2001 and we do not have
a stock appreciation rights ("SAR") program.
7
AGGREGATED OPTION EXERCISES IN 2001
AND OPTION VALUES AT END OF FISCAL YEAR 2001
The following table lists the number of shares acquired and the value
realized as a result of options exercised during 2001 for the listed officers.
The table contains values for "in the money" options, which are those with a
positive spread between the exercise price and the December 31, 2001 share price
of $51.30. The values are the difference between the year-end price per share
and the exercise price per share, multiplied by the number of applicable shares
in the money. These values may never be realized. The options may never be
exercised, and the value, if any, will depend on the share price on the exercise
date.
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
SHARES YEAR-END (#) FISCAL YEAR END ($)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ---------- ----------- ------------- ----------- -------------
John R. Landon 166,667 $3,562,509 14,240 75,960 $ 517,769 $1,960,284
Steven J. Hilton 83,800 3,536,550 97,107 75,960 4,333,794 1,960,284
Larry W. Seay 7,000 213,513 8,500 40,000 316,300 1,235,240
Richard T. Morgan 2,000 72,780 12,000 24,500 479,100 721,990
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
THE FOLLOWING REPORT OF THE COMPENSATION COMMITTEE DOES NOT CONSTITUTE
SOLICITING MATERIAL AND SHOULD NOT BE DEEMED FILED OR INCORPORATED BY REFERENCE
INTO ANY COMPANY FILING UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES
EXCHANGE ACT OF 1934, EXCEPT TO THE EXTENT THE COMPANY SPECIFICALLY INCORPORATES
THIS REPORT.
It is the duty of the Compensation Committee to review and determine the
salaries and bonuses of the Co-CEO's, and to establish the general compensation
policies for such individuals. The Compensation Committee believes that the
compensation programs for each Co-CEO should reflect the Company's performance
and the value created for our stockholders. The Compensation Committee believes
that our compensation programs should support the goals and values of the
Company. In addition, the Compensation Committee administers Meritage's
Executive Management Incentive Plan.
GENERAL COMPENSATION POLICY AND PHILOSOPHY. Our philosophy is to provide
the Company's Co-CEO's with compensation that is based on their individual
performance and the financial performance of the Company. Each Co-CEO's
compensation is comprised of:
* a base salary;
* performance bonuses designed to reward performance based on financial
results; and
* stock-based incentives designed to tie the Co-CEO's overall
compensation to the interests of the Company's stockholders by
providing rewards to executives if stockholders benefit from stock
price appreciation.
The Co-CEO's also participate in various other benefit plans generally
available to all company employees, including medical, 401(k) and life insurance
plans.
The Company attempts to set executive compensation at levels that are
competitive within the industry. Each year the Company reviews Co-CEO
compensation against publicly available information for other homebuilders.
Periodically, the Company engages outside consultants to evaluate its
compensation programs.
A substantial portion of each Co-CEO's compensation is in the form of a
bonus program, which is tied to an annual budget. The Company believes that
tying compensation to financial performance aligns the interests of executives
with those of stockholders.
8
CEO COMPENSATION. Our two co-chief executive officers, John R. Landon and
Steven J. Hilton, were compensated during 2001 pursuant to employment agreements
they have with us. Mr. Landon's and Mr. Hilton's employment agreements provided
for a base salary, stock options and bonuses based on company performance. Both
agreements provided for an annual salary and annual performance bonus based on a
percentage of consolidated net income, as determined by the Board of Directors.
These agreements expired in 2001, and the Compensation Committee has
commissioned a compensation study to assist it in determining an appropriate
Co-CEO compensation program going forward.
During 2001, the Company continued to compensate Messrs. Landon and Hilton
under the parameters of their employment agreements after such agreements
expired. The performance bonus criteria for each Mr. Landon and Mr. Hilton was
based on consolidated net income. Based on 2001 financial results, Messrs.
Landon and Hilton each exceeded the minimum threshold consolidated net income
goal to qualify for a performance bonus. As a result, the Board of Directors
approved the following compensation for Messrs. Landon and Hilton:
* an annualized salary of $425,000;
* a performance bonus of $1,417,401; and
* a grant of 49,000 stock options vesting 20% per year for five years.
In 2001, the Board of Directors and stockholders approved the Meritage
Corporation Incentive Plan (the "Annual Incentive Plan"). The Annual Incentive
Plan provides for annual incentive awards to certain of the Company's key
executives. In determining awards to be made under the Annual Incentive Plan,
the Compensation Committee may approve a formula that is based on one or more
objective criteria, including performance criteria and performance goals.
Performance criteria must include one or more of the following: pre- or
after-tax earnings, revenue growth, operating income, operating cash flow,
return on net assets, return on stockholders' equity, return on assets, return
on capital, share price growth, stockholder returns, gross or net profit margin,
earnings per share, price per share and market share, any of which may be
measured either in absolute terms or as compared to any incremental increase, or
as compared to results of a peer group. It is the intent of the Company that
awards made pursuant to the Annual Incentive Plan constitute "qualified
performance-based compensation" satisfying the requirement of Section 162(m) of
the Internal Revenue Code (the "Code").
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(m). Section 162(m) of the
Code limits the deductibility of executive compensation paid by publicly held
corporations to $1 million for each executive officer named in this proxy
statement. The $1 million limitation generally does not apply to compensation
that is pursuant to a performance-based plan approved by stockholders. The
Company's policy is to comply with the requirements of Section 162(m) and
maintain deductibility for all executive compensation, except in circumstances
where the Compensation Committee concludes on an informed basis that it is in
the best interest of the Company and the stockholders to take actions with
regard to the payment of executive compensation which do not qualify for tax
deductibility.
Certain stock options granted to Mr. Landon in connection with the
Company's combination with Legacy Homes in 1997 do not satisfy the exceptions to
the non-deductibility of tax or $1 million threshold described above and, as a
result of substantial appreciation in the price of our common stock, have
resulted in Mr. Landon receiving compensation in excess of $1 million that is
not deductible.
Robert G. Sarver
Raymond Oppel
Peter L. Ax
9
REPORT OF THE AUDIT COMMITTEE
THE FOLLOWING REPORT OF THE AUDIT COMMITTEE DOES NOT CONSTITUTE SOLICITING
MATERIAL AND SHOULD NOT BE DEEMED FILED OR INCORPORATED BY REFERENCE INTO ANY
COMPANY FILING UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE ACT
OF 1934, EXCEPT TO THE EXTENT THE COMPANY SPECIFICALLY INCORPORATES THIS REPORT.
It is the duty of the Audit Committee to provide independent, objective
oversight of the Company's accounting functions and internal controls. The Audit
Committee is composed of independent directors, and acts under a written charter
that sets forth the audit related functions the committee is to perform. The
Board of Directors has adopted a written charter for the Audit Committee. The
audit functions of the Audit Committee are to:
* serve as an independent and objective party to monitor the Company's
financial reporting process and internal control system;
* review and appraise the audit efforts of the Company's independent
accountants; and
* provide an open avenue of communication among the independent
accountants, financial and senior management, and the Board of
Directors.
The Audit Committee meets with management periodically to consider the
adequacy of the Company's internal controls and the objectivity of its financial
reporting. We discuss these matters with the Company's independent auditors and
with appropriate Company financial personnel. We regularly meet privately with
the independent auditors, who have unrestricted access to the Committee. We also
recommend to the Board the appointment of the independent auditors and review
periodically their performance and independence from management. We have
considered the provision of additional services by our independent auditors and
believe that the provision of such additional services does not adversely impact
their independence.
Although the Committee reviews the Company's financing plans and reports
recommendations to the full Board for approval, management has primary
responsibility for the Company's financial statements and the overall reporting
process, including the Company's system of internal controls. The independent
auditors audit the annual financial statements prepared by management, express
an opinion as to whether those financial statements fairly present the financial
position, results of operations and cash flows of the Company in conformity with
generally accepted accounting principles and discuss with us any issues they
believe should be raised with us.
This year, we reviewed the Company's audited financial statements and met
with both management and KPMG LLP, the Company's independent auditors, to
discuss those financial statements. Management has represented to us that the
financial statements were prepared in accordance with generally accepted
accounting principles in the United States of America. We have received from and
discussed with KPMG LLP the written disclosure and the letter required by
Independence Standards Board Standard No. 1 (Independence Discussions with Audit
Committees). These items relate to that firm's independence from the Company. We
also discussed with KPMG LLP those matters required to be discussed by Statement
on Auditing Standards No. 61 (Communication with Audit Committees).
Based on these reviews and discussions, we recommended to the Board that
the Company's audited financial statements be included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2001.
Robert G. Sarver
Raymond Oppel
Peter L. Ax
10
EMPLOYMENT AGREEMENTS
We had employment agreements with our co-chairmen and co-chief executive
officers, John R. Landon and Steven J. Hilton, that expired on June 30, 2001 and
December 31, 2001, respectively. Both agreements provided for an annual base
salary and annual performance bonus based on a percentage of consolidated net
income, as determined by the Board of Directors. Both agreements provided for us
to pay each officer his base salary through the term of his agreement if he was
terminated without cause. In addition, both agreements contained traditional
non-compete provisions restricting each Mr. Landon and Mr. Hilton from engaging
in the homebuilding business (subject to certain defined exceptions), recruiting
or hiring our employees, and soliciting our customers and suppliers for a
competing business or otherwise attempting to induce any customer or supplier to
discontinue its relationship with us.
We have an employment agreement with Larry W. Seay, our chief financial
officer, which provides for an initial term through December 31, 2003. Mr.
Seay's agreement is designed to provide for a base salary and an annual bonus
based on the achievement of specific performance objectives. Compensation is
subject to continuing employment and standard employment policies.
If Mr. Seay is terminated without cause or he terminates his employment due
to a demotion in position, he will be entitled to receive:
* an amount equal to 75% of his base salary;
* 75% of his average bonus for the previous three fiscal years; and
* acceleration of vesting of his stock options as if he held them
through the end of the following fiscal year.
CHANGE OF CONTROL ARRANGEMENTS
We have senior executive severance agreements with Messrs. Landon, Hilton,
Seay and Morgan. Under these severance agreements, the executive officer is
entitled to a severance payment if his employment is terminated by the Company
without cause within two years of a change of control event. In addition, the
executive officer is entitled to the severance payment it he terminates his
employment for good reason within two years of a change in control event. The
severance payment equals the sum of:
* for Messrs. Landon and Hilton, two times their base salary (as
defined), and for Messrs. Seay and Morgan, one times their base salary
(as defined);
* for Messrs. Landon and Hilton, two times their annual incentive
compensation (as defined), and for Messrs. Seay and Morgan, one times
their annual incentive compensation (as defined); and
* immediate vesting of all their stock options.
11
PERFORMANCE GRAPH
The chart below graphs our performance in the form of cumulative total
return to stockholders for the past five years. Our total return is compared to
that of the Standard and Poor's 500 Index and of a cumulative return on the
common stock of seven publicly traded peer issuers, which is comprised of Beazer
Homes USA, Inc., Hovnanian Enterprises, Inc., MDC Holdings, Inc., Ryland Group,
Inc., Toll Brothers, Inc., Standard-Pacific Corporation and M/I Schottenstein
Homes, Inc. (the "Peer Group").
The comparison assumes $100 was invested on December 31, 1996 in Meritage
common stock and in each of the other indices and assumes reinvestment of
dividends.
AS OF DECEMBER 31,
-------------------------------------------------
1996 1997 1998 1999 2000 2001
---- ---- ---- ---- ---- ----
Meritage Corporation 100 167 168 150 514 708
S&P 500 Index 100 133 171 208 189 166
Peer Group 100 177 196 154 288 471
[GRAPH]
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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Executive officers, directors and "beneficial owners" of more than ten
percent of our common stock must file initial reports of ownership and reports
of changes in ownership with the Securities and Exchange Commission under
Section 16(a). Based solely on review of the copies of such forms furnished to
us, or representations that no forms were required, we believe that during our
preceding fiscal year all Section 16(a) filing requirements applicable to our
officers, directors and greater than ten percent beneficial owners were complied
with except Mr. Cleverly did not timely report stock transactions on one Form 4.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since 1997, we have leased office space in Plano, Texas from Home Financial
Services, a Texas partnership owned by John and Eleanor Landon. The lease
expires May 15, 2002. Rents paid to the partnership were $193,771 in 2001,
$185,613 in 2000 and $176,773 in 1999.
We paid legal fees to Tiffany & Bosco, P.A. of approximately $420,000 in
2001, $311,000 in 2000 and $334,000 in 1999. C. Timothy White, one of our
Directors, is a partner of Tiffany & Bosco, P.A.
William Cleverly resigned as a managing director effective March 18, 1999.
Mr. Cleverly has served as a Director of Meritage since 1996 and has indicated
that he will not stand for re-election as a Director following the expiration of
his term at the Annual Meeting. Mr. Cleverly also serves as a consultant to us.
In connection with Mr. Cleverly's resignation as a managing director in 1999,
Meritage and Mr. Cleverly entered into a separation and consulting agreement.
The separation was deemed a termination without cause under Mr. Cleverly's
employment agreement. For three years from the effective date of the separation
agreement, Mr. Cleverly agreed to consult on our new product development and
other areas agreed upon by the parties. The separation agreement contained a
non-compete provision that prohibited Mr. Cleverly from competing with us for
three years following the effective date, subject to various exceptions. In
consideration for Mr. Cleverly's agreement not to compete, he will be paid a
total of $285,000 in quarterly installments of $23,750 through March 31, 2002.
As of December 31, 2001, we have paid Mr. Cleverly $261,250 of this amount. In
connection with the separation agreement, both Mr. Cleverly and Meritage
released the other party from any liabilities or obligations either party had or
may have against such party in the future, subject to certain exceptions.
In 2001 we purchased 77 lots for development in Arizona from a business
controlled by Mr. Cleverly. The total amount paid for the lots was approximately
$3.5 million. We purchased 42 lots at a cost of approximately $2.4 million from
this same business in 2000.
During 2001, we chartered an aircraft from a company owned by Mr. Sarver.
The total amount paid for the charter service during 2001 was $101,000.
Management believes that the terms and fees negotiated for all transactions
listed above are no less favorable than those that could be negotiated in arm's
length transactions.
PROPOSAL TO APPROVE AMENDMENT TO THE MERITAGE CORPORATION
STOCK OPTION PLAN
(PROPOSAL NO. 2)
On January 16, 2002, our Board of Directors adopted, subject to shareholder
approval, amendments to the Meritage Corporation Stock Option Plan (the "Plan")
that would increase the number of shares of common stock reserved for issuance
under the plan from 775,000 to 1,075,000 and would increase the maximum amount
of shares that could be issued to one person from 100,000 to 150,000. Certain
material features of the plan are discussed below, however, the description is
subject to, and qualified by the full text of the plan, attached as EXHIBIT A,
which includes the proposed amendment highlighted in bold. The closing price for
our common stock on January 16, 2001, as reported on the New York Stock
Exchange, was $51.25 per share.
13
The affirmative vote of a majority of the shares of common stock present at
the annual meeting, in person or by proxy, and entitled to vote is required to
approve the proposal.
The Board believes the plan promotes success and enhances our value, as it
ties the personal interests of the participants to those of stockholders and
provides the participants with an incentive for outstanding performance. The
Board of Directors administers the plan, and has the exclusive authority over
it, including the power to determine a participant's eligibility, the types of
awards to be granted, the timing of the awards and the exercise price of awards.
GENERAL - DESCRIPTION OF AVAILABLE AWARDS
INCENTIVE STOCK OPTIONS. An Incentive Stock Option ("ISO") is a stock
option that satisfies the requirements specified in Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"). Under the Code, ISOs may only be
granted to employees. In order for an option to qualify as an ISO, the price
payable to exercise the option must be equal or greater than the fair market
value of the stock at the date of the grant, the option must expire no later
than 10 years from the date of the grant, and the stock subject to ISOs that are
first exercisable by an employee in any calendar year must not have a value of
more than $100,000 as of the grant date. Certain other requirements must also be
met. The Board determines the amount of consideration to be paid to us upon
exercise of any options. Payment may be made in cash, common stock or other
property.
An optionee is not treated as receiving taxable income upon either the
grant or the exercise of an ISO. However, the difference between the exercise
price and the fair market value of the stock at the time of exercise is an item
of tax preference at the time of exercise in determining liability for the
alternative minimum tax, assuming that the common stock is either transferable
or is not subject to a substantial risk of forfeiture under Section 83 of the
Code. If at the time of exercise, the common stock is both nontransferable and
is subject to a substantial risk of forfeiture, the difference between the
exercise price and the fair market value of the common stock (determined at the
time the stock becomes either transferable or not subject to a substantial risk
of forfeiture) will be a tax preference item in the year in which the stock
becomes either transferable or not subject to a substantial risk of forfeiture.
If common stock acquired by the exercise of an ISO is not sold or otherwise
disposed of within two years from the date of its grant and is held for at least
one year after the date the stock is transferred to the optionee upon exercise,
any gain or loss resulting from its disposition is treated as long-term capital
gain or loss. If such common stock is disposed of before the expiration of the
above-mentioned holding periods, a "disqualifying disposition" occurs. If a
disqualifying disposition occurs, the optionee realizes ordinary income in the
year of the disposition in an amount equal to the difference between the fair
market value of the common stock on the date of exercise and the exercise price,
or the selling price of the common stock and the exercise price, whichever is
less. The balance of the optionee's gain on a disqualifying disposition, if any,
is taxed as a capital gain.
We are not entitled to any tax deduction as a result of the grant or
exercise of an ISO, or on a later disposition of the common stock received,
except in the event of a disqualifying disposition. In such case, we are
entitled to a deduction equal to the amount of ordinary income realized by the
optionee.
NON-QUALIFIED STOCK OPTIONS. A Non-Qualified Stock Option ("NQSO") is any
stock option other than an Incentive Stock Option. These options are referred to
as "non-qualified" because they do not meet the requirements of, and are not
eligible for, the favorable tax treatment provided by Section 422 of the Code.
The optionee realizes no taxable income upon the grant of an NQSO, nor are
we entitled to a tax deduction by reason of such grant. Upon the exercise of an
NQSO, the optionee realizes ordinary income in an amount equal to the excess of
the fair market value of the common stock on the exercise date over the exercise
price, and we are entitled to a corresponding tax deduction.
Upon subsequent sale or other disposition of common stock acquired through
exercise of an NQSO, the optionee realizes a short-term or long-term capital
gain or loss to the extent of any intervening appreciation or depreciation. Such
a resale by the optionee has no tax consequence to us.
CHANGE OF CONTROL
Upon the occurrence of a Corporate Transaction (as defined in the Plan), if
the surviving corporation or the purchaser does not assume Meritage's obligation
under the Plan, all outstanding options shall become immediately exercisable in
14
full and each option holder shall be given the opportunity to exercise their
options before the consummation of the Corporate Transaction so that the option
holder can participate in the Corporate Transaction. The Plan defines a
"Corporate Transaction" to include:
* a merger or consolidation in which the Company is not the surviving
entity;
* the sale, transfer or other disposition of all or substantially all of
the assets of the Company in a liquidation or dissolution of the
company; or
* any reverse merger in which the Company is the surviving entity but in
which the beneficial ownership of securities possessing more than 50%
of the total combined voting power of the Company's outstanding
securities are transferred to holders different from those who held
such securities immediately prior to such merger.
To the extent that the Plan is unaffected and assumed by the successor
corporation or its parent company, a Corporate Transaction will have no effect
on the outstanding options and the options shall continue in effect according to
their terms. Options which continue in effect shall be appropriately adjusted to
account for the number and class of securities which would have been issued to
the option holder in connection with the consummation of the Corporate
Transaction had the option holder exercised the option immediately prior to the
Corporate Transaction. Appropriate adjustments also shall be made to the
exercise price of such options, provided that the aggregate exercise price shall
remain the same.
PLAN BENEFITS
The following table sets forth grants of options made under the current
Plan during 2001 to (i) each of the executive officers named on page 5; (ii) all
current executive officers, as a group; (iii) all current directors and director
nominees who are not executive officers, as a group; and (iv) all employees,
including all current officers who are not executive officers, as a group.
Grants under the current Plan and the new Plan are made at the discretion of the
Board of Directors. Accordingly, future grants are not yet determinable.
NUMBER OF SHARES WEIGHTED AVERAGE
SUBJECT TO EXERCISE PRICE
INDIVIDUAL OF GROUP NAME OPTIONS GRANTED PER SHARE
- ------------------------ --------------- ---------
Executive Officers
John R. Landon 49,000 $ 31.75
Steven J. Hilton 49,000 $ 31.75
Larry W. Seay 19,500 $ 28.86
Richard T. Morgan 13,500 $ 28.86
--------
Executive Officer Group (4 persons) 131,000 $ 31.02
========
Director Group (6 persons) 25,000 $ 28.86
Employee Group (39 persons) 165,950 $ 30.03
AMENDMENTS TO PLAN
The Board of Directors has reviewed the options currently remaining in the
option pool for the Plan and has determined that it is appropriate to increase
the maximum number of shares authorized for issuance (i) under the Plan and (ii)
to any one person. As of March 15, 2002, (i) 161,780 shares have been issued
upon exercise of options and are included in the total number of shares
outstanding Common Stock, and (ii) option grants representing 595,030 shares
were outstanding under the Plan. The total number of shares of common stock
available for awards under the Plan currently is 18,190. The Board believes that
an increase in the number of authorized shares is necessary for the continued
optimal use of the Plan, thus increasing the Plan's success and its impact on
our value. In addition, Messrs. Landon and Hilton, our co-chief executive
officers have each been issued 90,200 options under the Plan. Therefore, the
Board is proposing the amendment to the Plan that would increase the number of
shares authorized for issuance under the Plan to be increased from 775,000 to
1,075,000, and that the number of options granted for issuance to any one person
be increased from 100,000 to 150,000.
15
SECURITIES ACT REGISTRATION
We intend to register the additional shares of common stock available for
issuance under a Registration Statement on Form S-8 to be filed with the
Securities and Exchange Commission.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" APPROVAL OF THIS PROPOSAL TO
AMEND THE MERITAGE CORPORATION STOCK OPTION PLAN.
INDEPENDENT AUDITORS
KPMG LLP served as our principal independent auditors for the fiscal year
ended December 31, 2001 and the firm has been appointed as our independent
auditors for the fiscal year ending December 31, 2002. We expect representatives
of KPMG LLP to be present at our Annual Meeting to answer questions, and they
will be given an opportunity to make a statement if they wish to.
AUDIT FEES
The aggregate fees billed by KPMG LLP for professional services rendered
for the annual audit of our financial statements and the reviews of the
financial statements included in our Forms 10-Q for the fiscal year ended
December 31, 2001 were $150,000.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
For the fiscal year ended December 31, 2001, KPMG LLP did not provide,
directly or indirectly, any services relating to the design or implementation of
our information system, local area network, or any hardware or software system.
ALL OTHER FEES
Other audit related fees paid to KPMG LLP in 2001 were $101,808 for
services related to our filing of Form S-4 and $9,000 for the audit of our
401(k) plan. The aggregate fees paid to KPMG LLP for other professional services
during the fiscal year ended December 31, 2001 were $265,031, which were
comprised of $240,845 for income tax consulting and tax compliance, including
preparation of our state and federal income tax returns and $24,186 for
management advisory services.
16
STOCKHOLDER PROPOSALS
The Board of Directors will consider nominations from stockholders for the
class of directors whose terms expire at the year 2003 Annual Meeting.
Nominations must be made in writing to our Corporate Secretary, received at
least 90 days prior to the 2003 Annual Meeting, and contain sufficient
background information concerning the nominee's qualifications. Our Corporate
Secretary must receive any other stockholder proposals for the 2003 Annual
Meeting by December 6, 2002 to be considered for inclusion in our 2003 Proxy
Statement. Proposals to be presented at the 2003 Annual Meeting that are not
intended for inclusion in the Proxy Statement must be submitted in accordance
with the Company's Bylaws. A nomination or other proposal will be disregarded if
it does not comply with the above procedures.
OTHER MATTERS
The Board of Directors is not aware of any other matters to be presented at
the meeting. If any other business should properly come before the meeting, the
proxy holders will vote according to their best judgment.
Meritage Corporation
/s/ Larry W. Seay
------------------------------------------------
Larry W. Seay
Chief Financial Officer, Vice President-Finance,
Secretary and Treasurer
April 2, 2002
17
EXHIBIT A
MERITAGE CORPORATION
STOCK OPTION PLAN
1. ESTABLISHMENT, PURPOSE AND DEFINITIONS.
a. The Stock Option Plan (the "Option Plan") of Meritage Homes (the
"Company") is hereby adopted. The Option Plan shall provide for the
issuance of incentive stock options ("ISOs") and nonqualified stock
options ("NSOs").
b. The purpose of this Option Plan is to promote the long-term success of
the Company by attracting, motivating and retaining key executives,
consultants and directors (the "Participants") through the use of
competitive long-term incentives which are tied to stockholder
interests by providing incentives to the Participants in the form of
stock options which offer rewards for achieving the long-term
strategic and financial objectives of the Company.
c. The Option Plan is intended to provide a means whereby Participants
may be given an opportunity to purchase shares of Stock (as defined
herein) of the Company pursuant to (i) options which may qualify as
ISOs under Section 422 of the Internal Revenue Code of 1986, as
amended (the "Internal Revenue Code"), or (ii) NSOs which may not so
qualify.
d. The term "Affiliates" as used in this Option Plan means parent or
subsidiary corporations, as defined in Section 424(e) and (f) of the
Code (but substituting "the Company" for "employer corporation"),
including parents or subsidiaries which become such after adoption of
the Option Plan.
2. ADMINISTRATION OF THE PLAN
a. The Option Plan shall be administered by members of the Board of
Directors of the Company (the "Board") qualifying as "non-employee
directors" as such term is defined in Rule 16b-3 promulgated by the
Securities and Exchange Commission (the "Commission").
b. The Board may from time to time determine which employees of the
Company or its Affiliates or other individuals or entities (each an
"option holder") shall be granted options under the Option Plan, the
terms thereof (including without limitation determining whether the
option is an incentive stock option and the times at which the options
shall become exercisable), and the number of shares of Stock for which
an option or options may be granted.
c. If rights of the Company to repurchase Stock are imposed, the Board
may, in its sole discretion, accelerate, in whole or in part, the time
for lapsing of any rights of the Company to repurchase shares of such
Stock or forfeiture restrictions.
d. If rights of the Company to repurchase Stock are imposed, the
certificates evidencing such shares of Stock awarded hereunder,
although issued in the name of the option holder concerned, shall be
held by the Company or a third party designated by the Board in escrow
subject to delivery to the option holder or to the Company at such
times and in such amounts as shall be directed by the Board under the
terms of this Option Plan. Share certificates representing Stock that
is subject to repurchase rights shall have imprinted or typed thereon
a legend or legends summarizing or referring to the repurchase rights.
e. The Board shall have the sole authority, in its absolute discretion,
to adopt, amend and rescind such rules and regulations, consistent
with the provisions of the Option Plan, as, in its opinion, may be
advisable in the administration of the Option Plan, to construe and
interpret the Option Plan, the rules and regulations, and the
instruments evidencing options granted under the Option Plan and to
make all other determinations deemed necessary or advisable for the
administration of the Option Plan. All decisions, determinations and
interpretations of the Board shall be binding on all option holders
under the Option Plan.
18
3. STOCK SUBJECT TO THE PLAN
a. "Stock" shall mean Common Stock of the Company or such stock as may be
changed as contemplated by Section 3(c) below. Stock shall include
shares drawn from either the Company's authorized but unissued shares
of Common Stock or from reacquired shares of Common Stock, including
without limitation shares repurchased by the Company in the open
market. THE MAXIMUM NUMBER OF SHARES OF COMMON STOCK THAT CAN BE
ISSUED UNDER THIS OPTION PLAN IS 1,075,000 SHARES, AND THE MAXIMUM
NUMBER OF SHARES OF COMMON STOCK THAT CAN BE ISSUED TO ANY ONE PERSON
UNDER THIS OPTION PLAN IS 150,000 SHARES.
b. Options may be granted under the Option Plan from time to time to
eligible persons. Stock options awarded pursuant to the Option Plan
which are forfeited, terminated, surrendered or canceled for any
reason prior to exercise shall again become available for grants under
the Option Plan (including any option canceled in accordance with the
cancellation regrant provisions of Section 6(f) herein).
c. If there shall be any changes in the Stock subject to the Option Plan,
including Stock subject to any option granted hereunder, through
merger, consolidation, recapitalization, reorganization,
reincorporation, stock split, reverse stock split, stock dividend,
combination or reclassification of the Company's Stock or other
similar events, an appropriate adjustment shall be made by the Board
in the number of shares of Stock. Consistent with the foregoing, in
the event that the outstanding Stock is changed into another class or
series of capital stock of the Company, outstanding options to
purchase Stock granted under the Option Plan shall become options to
purchase such other class or series and the provisions of this Section
3(c) shall apply to such new class or series.
d. The aggregate number of shares of Stock approved by the Option Plan
may not be exceeded without amending the Option Plan and obtaining
stockholder approval within twelve months of such amendment.
4. ELIGIBILITY
Persons who shall be eligible to receive stock options granted under the
Option Plan shall be those individuals and entities as the Board in its
discretion determines should be awarded such incentives given the best
interests of the Company; provided, however, that (i) ISOs may only be
granted to employees of the Company and its Affiliates and (ii) any person
holding capital stock possessing more than 10% of the total combined voting
power of all classes of Stock of the Company or any Affiliate shall not be
eligible to receive ISOs unless the exercise price per share of Stock is at
least 110% of the fair market value of the Stock on the date the option is
granted.
5. EXERCISE PRICE FOR OPTIONS GRANTED UNDER THE PLAN
a. All ISOs and NSOs will have option exercise prices per option share
not less than the fair market value of a share of the Stock on the
date the option is granted, except that in the case of ISOs granted to
any person possessing more than 10% of the total combined voting power
of all classes of stock of the Company or any Affiliate the price
shall be not less than 110% of such fair market value. The price of
ISOs or NSOs granted under the Option Plan shall be subject to
adjustment to the extent provided in Section 3(c) above.
b. The fair market value on the date of grant shall be determined based
upon the closing price on an exchange on that day or, if the Stock is
not listed on an exchange, on the average of the closing bid and asked
prices in the Over the Counter Market on that day.
6. TERMS AND CONDITIONS OF OPTIONS
a. Each option granted pursuant to the Option Plan shall be evidenced by
a written stock option agreement (the "Option Agreement") executed by
the Company and the person to whom such option is granted. The Option
Agreement shall designate whether the option is an ISO or an NSO.
b. The term of each ISO and NSO shall be no more than 10 years, except
that the term of each ISO issued to any person possessing more than
10% of the voting power of all classes of stock of the Company or any
Affiliate shall be no more than 5 years. Subsequently issued options,
if Stock becomes available because of further allocations or the lapse
of previously outstanding options, will extend for terms determined by
the Board or the Committee but in no event shall an ISO be exercised
after the expiration of 10 years from the date of its grant.
19
c. In the case of ISOs, the aggregate fair market value (determined as of
the time such option is granted) of the Stock to which ISOs are
exercisable for the first time by such individual during any calendar
year (under this Option Plan and any other plans of the Company or its
Affiliates if any) shall not exceed the amount specified in Section
422(d) of the Internal Revenue Code, or any successor provision in
effect at the time an ISO becomes exercisable.
d. The Option Agreement may contain such other terms, provisions and
conditions regarding vesting, repurchase or other provisions as may be
determined by the Board. To the extent such terms, provisions and
conditions are inconsistent with this Option Plan, the specific
provisions of the Option Plan shall prevail. If an option, or any part
thereof, is intended to qualify as an ISO, the Option Agreement shall
contain those terms and conditions, which the Board determines, are
necessary to so qualify under Section 422 of the Internal Revenue
Code.
e. The Board shall have full power and authority to extend the period of
time for which any option granted under the Option Plan is to remain
exercisable following the option holder's cessation of service as an
employee, director or consultant, including without limitation
cessation as a result of death or disability; provided, however, that
in no event shall such option be exercisable after the specified
expiration date of the option term.
f. As a condition to option grants under the Option Plan, the option
holder agrees to grant the Company the repurchase rights as the
Company may at its option require and as may be set forth in a
separate repurchase agreement. Any option granted under the Option
Plan may be subject to a vesting schedule as provided in the Option
Agreement and, except as provided in this Section 6 herein, only the
vested portion of such option may be exercised at any time during the
Option Period. All rights to exercise any option shall lapse and be of
no further effect whatsoever immediately if the option holder's
service as an employee is terminated for "Cause" (as hereinafter
defined) or if the option holder voluntarily terminates the option
holder's service as an employee. The unvested portion of the option
will lapse and be of no further effect immediately upon any
termination of employment of the option holder for any reason. In the
remaining cases where the option holder's service as an employee is
terminated due to death, permanent disability, or is terminated by the
Company (or its affiliates) without Cause at any time, unless
otherwise provided by the Committee, the vested portion of the option
will extend for a period of three (3) months following the termination
of employment and shall lapse and be of no further force or effect
whatsoever only if it is not exercised before the end of such three
(3) month period. "Cause" shall be defined in an Employment Agreement
between Company and option holder and if none there shall be "Cause"
for termination if (i) the option holder is convicted of a felony,
(ii) the option holder engages in any fraudulent or other dishonest
act to the detriment of the Company, (iii) the option holder fails to
report for work on a regular basis, except for periods of authorized
absence or bona fide illness, (iv) the option holder misappropriates
trade secrets, customer lists or other proprietary information
belonging to the Company for the option holder's own benefit or for
the benefit of a competitor, (v) the option holder engages in any
willful misconduct designed to harm the Company or its stockholders,
or (vi) the option holder fails to perform properly assigned duties.
g. No fractional shares of Stock shall be issued under the Option Plan,
whether by initial grants or any adjustments to the Option Plan.
7. USE OF PROCEEDS
Cash proceeds realized from the sale of Stock under the Option Plan shall
constitute general funds of the Company.
8. AMENDMENT, SUSPENSION OR TERMINATION OF PLAN
a. The Board may at any time suspend or terminate the Option Plan, and
may amend it from time to time in such respects as the Board may deem
advisable provided that (i) such amendment, suspension or termination
complies with all applicable state and federal requirements and
requirements of any stock exchange on which the Stock is then listed,
including any applicable requirement that the Option Plan or an
amendment to the Option Plan be approved by the stockholders, and (ii)
the Board shall not amend the Option Plan to increase the maximum
number of shares of Stock subject to ISOs under the Option Plan or to
change the description or class of persons eligible to receive ISOs
under the Option Plan without the consent of the stockholders of the
Company sufficient to approve the Option Plan in the first instance.
20
The Option Plan shall terminate on the earlier of (i) tenth
anniversary of the Plan's approval or (ii) the date on which no
additional shares of Stock are available for issuance under the Option
Plan.
b. No option may be granted during any suspension or after the
termination of the Option Plan, and no amendment, suspension or
termination of the Option Plan shall, without the option holder's
consent, alter or impair any rights or obligation under any option
granted under the Option Plan.
c. [Reserved.]
d. Nothing contained herein shall be construed to permit a termination,
modification or amendment adversely affecting the rights of any option
holder under an existing option theretofore granted without the
consent of the option holder.
9. ASSIGNABILITY OF OPTIONS AND RIGHTS
Each ISO and NSO granted pursuant to this Option Plan shall, during the
option holder's lifetime, be exercisable only by the option holder, and
neither the option nor any right to purchase Stock shall be transferred,
assigned or pledged by the option holder, by operation of law or otherwise,
other than upon a beneficiary designation executed by the option holder and
delivered to the Company or the laws of descent and distribution.
10. PAYMENT UPON EXERCISE
Payment of the purchase price upon exercise of any option or right to
purchase Stock granted under this Option Plan shall be made by giving the
Company written notice of such exercise, specifying the number of such
shares of Stock as to which the option is exercised. Such notice shall be
accompanied by payment of an amount equal to the Option Price of such
shares of Stock. Such payment may be (i) cash, (ii) by check drawn against
sufficient funds, (iii) such other consideration as the Board, in its sole
discretion, determines and is consistent with the Option Plan's purpose and
applicable law, or (iv) any combination of the foregoing. Any Stock used to
exercise options to purchase Stock (including Stock withheld upon the
exercise of an option to pay the purchase price of the shares of Stock as
to which the option is exercised) shall be valued in accordance with
procedures established by the Board. If accepted by the Committee in its
discretion, such consideration also may be paid through a broker-dealer
sale and remittance procedure pursuant to which the option holder (i) shall
provide irrevocable written instructions to a designated brokerage firm to
effect the immediate sale of the purchased Stock and remit to the Company,
out of the sale proceeds available on the settlement date, sufficient funds
to cover the aggregate option price payable for the purchased Stock plus
all applicable Federal and State income and employment taxes required to be
withheld by the Company in connection with such purchase and (ii) shall
provide written directives to the Company to deliver the certificates for
the purchased Stock directly to such brokerage firm in order to complete
the sale transaction.
11. WITHHOLDING TAXES
a. Shares of Stock issued hereunder shall be delivered to an option
holder only upon payment by such person to the Company of the amount
of any withholding tax required by applicable federal, state, local or
foreign law. The Company shall not be required to issue any Stock to
an option holder until such obligations are satisfied.
b. The Board may, under such terms and conditions as it deems
appropriate, authorize an option holder to satisfy withholding tax
obligations under this Section 11 by surrendering a portion of any
Stock previously issued to the option holder or by electing to have
the Company withhold shares of Stock from the Stock to be issued to
the option holder, in each case having a fair market value equal to
the amount of the withholding tax required to be withheld.
12. RATIFICATION
This Option Plan and all options issued under this Option Plan shall be
void unless this Option Plan is or was approved or ratified by (i) the
Board; and (ii) a majority of the votes cast at a stockholder meeting at
which a quorum representing at least a majority of the outstanding shares
of Stock is (either in person or by proxy) present and voting on the Option
Plan within twelve months of the date this Option Plan is adopted by the
Board. No ISOs shall be exercisable prior to the date such stockholder
approval is obtained.
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13. CORPORATE TRANSACTIONS
a. For the purpose of this Section 13, a "Corporate Transaction" shall
include any of the following stockholder-approved transactions to
which the Company is a party:
(i) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose
of which is to change the State of the Company's incorporation;
(ii) the sale, transfer or other disposition of all or substantially
all of the assets of the Company in liquidation or dissolution
of the Company; or
(iii) any reverse merger in which the Company is the surviving entity
but in which beneficial ownership of securities possessing more
than fifty percent (50%) of the total combined voting power of
the Company's outstanding securities are transferred to holders
different from those who held such securities immediately prior
to such merger.
b. Upon the occurrence of a Corporate Transaction, if the surviving
corporation or the purchaser, as the case may be, does not assume the
obligations of the Company under the Option Plan, then irrespective of
the vesting provisions contained in individual option agreements, all
outstanding options shall become immediately exercisable in full and
each option holder will be afforded an opportunity to exercise their
options prior to the consummation of the merger or sale transaction so
that they can participate on a pro rata basis in the transaction based
upon the number of shares of Stock purchased by them on exercise of
options if they so desire. To the extent that the Option Plan is
unaffected and assumed by the successor corporation or its parent
company a Corporate Transaction will have no effect on outstanding
options and the options shall continue in effect according to their
terms.
c. Each outstanding option under this Option Plan which is assumed in
connection with the Corporate Transaction or is otherwise to continue
in effect shall be appropriately adjusted, immediately after such
Corporate Transaction, to apply and pertain to the number and class of
securities which would have been issued to the option holder in
connection with the consummation of such Corporate Transaction had
such person exercised the option immediately prior to such Corporate
Transaction. Appropriate adjustments shall also be made to the option
price payable per share, provided the aggregate option price payable
for such securities shall remain the same. In addition, the class and
number of securities available for issuance under this Option Plan
following the consummation of the Corporate Transaction shall be
appropriately adjusted.
d. The grant of options under this Option Plan shall in no way affect the
right of the Company to adjust, reclassify, reorganize or otherwise
change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its
business or assets.
14. REGULATORY APPROVALS
The obligation of the Company with respect to Stock issued under the Plan
shall be subject to all applicable laws, rules and regulations and such
approvals by any governmental agencies or stock exchanges as may be
required. The Company reserves the right to restrict, in whole or in part,
the delivery of Stock under the Plan until such time as any legal
requirements or regulations have been met relating to the issuance of
Stock, to their registration or qualification under the Securities Exchange
Act of 1934, if applicable, or any applicable state securities laws, or to
their listing on any stock exchange at which time such listing may be
applicable.
15. NO EMPLOYMENT/SERVICE RIGHTS
Neither the action of the Company in establishing this Option Plan, nor any
action taken by the Board or the Committee hereunder, nor any provision of
this Option Plan shall be construed so as to grant any individual the right
to remain in the employ or service of the Company (or any parent,
subsidiary or affiliated corporation) for any period of specific duration,
and the Company (or any parent, subsidiary or affiliated corporation
retaining the services of such individual) may terminate or change the
terms of such individual's employment or service at any time and for any
reason, with or without cause.
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16. MISCELLANEOUS PROVISIONS
a. The provisions of this Option Plan shall be governed by the laws of
the State of Arizona, as such laws are applied to contracts entered
into and performed in such State, without regard to its rules
concerning conflicts of law.
b. The provisions of this Option Plan shall insure to the benefit of, and
be binding upon, the Company and its successors or assigns, whether by
Corporate Transaction or otherwise, and the option holders, the legal
representatives of their respective estates, their respective heirs or
legatees and their permitted assignees.
c. The option holders shall have no dividend rights, voting rights or any
other rights as a stockholder with respect to any options under the
Option Plan prior to the issuance of a stock certificate for such
Stock.
d. If there is a conflict between the terms of any employment agreement
pursuant to which options under this Plan are to be granted and the
provisions of this Plan, the terms of the employment agreement shall
prevail.
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