================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _________to _________.
Commission file number: 0-28024
THE FORTRESS GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 54-1774997
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
1650 Tysons Boulevard, Suite 600, McLean, Virginia 22102
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (703) 442-4545
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 __
As of May 12, 2000 there were outstanding 12,278,097 shares of common
stock, par value $.01, of the registrant.
================================================================================
<PAGE>
THE FORTRESS GROUP, INC.
QUARTER ENDED March 31, 2000
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1.
The Fortress Group, Inc.
Consolidated Balance Sheets (unaudited) 3
Consolidated Statements of Operations
(unaudited) 4
Consolidated Statements of Cash Flows
(unaudited) 5
Condensed Notes to Consolidated Financial Statements
(unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II - OTHER INFORMATION
Item 2. Changes in Securities 17
Item 4. Submission of matters to a vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K. 17
(a) Exhibits.
(b) Reports on Form 8-K.
PART III -
SIGNATURES 18
EXHIBIT INDEX 19
2
<PAGE>
THE FORTRESS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
(unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 10,817 $ 17,526
Accounts and notes receivable 13,551 12,748
Real estate inventories 342,163 328,513
Mortgage loans 18,286 20,229
Investments in land partnerships 1,432 1,518
Property and equipment, net 11,556 12,392
Prepaid expenses and other assets 22,062 22,803
Goodwill, net 34,816 35,452
-------- --------
Total assets $454,683 $451,181
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued construction liabilities $ 31,067 $ 38,915
Notes and mortgages payable 313,028 301,658
Accrued expenses 19,557 18,905
Customer deposits 11,284 10,530
-------- --------
Total liabilities 374,936 370,008
-------- --------
Minority interest 79 79
Obligation under Preferred Stock Redemption Agreement (See Note 6) 1,421 1,421
Shareholders' equity
Preferred stock, all classes and series, $.01 par value, 1 million 1 1
authorized (See Note 6 )
Common stock, $.01 par value, 99 million authorized,
12,543,197 and 12,496,260 issued, respectively 125 125
Additional paid-in capital 52,916 54,308
Retained earnings 26,426 26,460
Treasury stock, at cost, 265,100 shares (1,221) (1,221)
-------- --------
Total shareholders' equity 78,247 79,673
-------- --------
Total liabilities and shareholders' equity $454,683 $451,181
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
THE FORTRESS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Three For the Three
Months Ended Months Ended
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
TOTAL REVENUES $ 143,147 $ 150,724
---------- ----------
HOMEBUILDING:
Residential sales $ 139,721 $ 148,267
Lot sales and other 2,039 1,073
---------- ----------
Homebuilding revenues 141,760 149,340
Cost of sales 121,498 127,712
---------- ----------
Gross profit 20,262 21,628
Selling 9,742 10,569
General and administrative 8,371 8,801
Special charges 0 1,270
Goodwill amortization 636 780
---------- ----------
Net operating income 1,513 208
---------- ----------
Other expense (income):
Interest expense 974 1,145
Interest (income) (178) (109)
Other, net (330) (701)
---------- ----------
Homebuilding income/(loss) before taxes 1,047 (127)
FINANCIAL SERVICES:
Operating revenues 1,387 1,384
General, administrative and other expenses 1,286 1,310
Interest expense 312 242
Interest (income) (237) (205)
---------- ----------
Financial Services income before taxes 26 37
Loss on sale of Landmark Homes (see Note 8) (2,900)
Total income/(loss) before taxes 1,073 (2,990)
Provision/(benefit) for income taxes 440 (1,046)
---------- ----------
Net income/(loss) $ 633 $ (1,944)
========== ==========
Loss applicable to common shareholders, basic $ (34) $ (2,973)
========== ==========
Loss applicable to common shareholders, diluted $ (34) $ (2,973)
========== ==========
NET INCOME PER SHARE DATA (See Note 7):
Net (loss) per share, basic and diluted $ (0.00) $ (0.25)
========== ==========
Weighted average shares outstanding, basic and diluted 12,233,739 11,950,920
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
THE FORTRESS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
For the Three For the Three
Months Ended Months Ended
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
Cash flows from operating activities
Net income/(loss) $ 633 $ (1,944)
Adjustments to reconcile net income to net cash (used in)/
provided by operating activities:
Depreciation and amortization 2,136 2,881
Special charges 0 1,270
(Gain) on sale of investment in land partnerships 0 (247)
Loss on sale of Landmark Homes 0 2,900
Loss on sale of property and equipment 7 23
Changes in operating assets and liabilities
Accounts and notes receivable (803) (913)
Real estate inventories (13,507) (28,409)
Land held for resale 0 (33)
Mortgage loans 1,943 (991)
Prepaid expenses and other assets 741 (401)
Accounts payable and accrued construction liabilities (7,848) (2,146)
Accrued expenses 2,572 468
Customer deposits 754 3,626
--------- ---------
Net cash (used in) operating activities (13,372) (23,916)
--------- ---------
Cash flows from investing activities
Proceeds from sale of Landmark Homes, net of cash sold 0 3,078
Payment of contingent consideration (3,319) (2,372)
Purchase of property and equipment (597) (2,214)
Proceeds from sale of property and equipment 63 21
Change in investment in land partnerships 86 (422)
--------- ---------
Net cash (used in) investing activities (3,767) (1,909)
--------- ---------
Cash flows from financing activities
Borrowings under notes and mortgages payable 156,075 160,949
Repayment of notes and mortgages payable (144,985) (135,558)
Borrowings from related parties 15 0
Repayment of related party borrowings (63) (254)
Conversion of preferred stock 0 (1,693)
Other (net) 29 (169)
Preferred dividends (641) (1,600)
--------- ---------
Net cash provided by financing activities 10,430 21,675
--------- ---------
Net (decrease) in cash and cash equivalents (6,709) (4,150)
Cash and cash equivalents, beginning of period 17,526 23,102
--------- ---------
Cash and cash equivalents, end of period $ 10,817 $ 18,952
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
THE FORTRESS GROUP, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BUSINESS AND ORGANIZATION
The Fortress Group, Inc. ("Fortress" or the "Company") was formed in June 1995
to create a national homebuilding company for the acquisition and development of
land or improved lots and the construction of residential for-sale housing.
Fortress began operations simultaneous with the closing of its initial public
offering on May 21, 1996 (the "Offering"), and the acquisition of four
homebuilding companies. Currently, the Company operates under the following
names in fifteen different markets:
<TABLE>
<S> <C>
Homebuilder Market(s)
Brookstone Homes ("Brookstone") Janesville, Madison, and Milwaukee Wisconsin
Christopher Homes ("Christopher") Las Vegas, Nevada
Fortress Homes and Communities of Florida Jacksonville, Florida
("Fortress Florida")
Don Galloway Homes ("Galloway") Charlotte, North Carolina and Charleston, South Carolina
The Genesee Company ("Genesee") Denver and Fort Collins, Colorado and Tucson, Arizona
Iacobucci Homes ("Iacobucci") Philadelphia, Pennsylvania and Atlantic City, New Jersey
Quail Homes ("Quail") Portland, Oregon
Sunstar Homes ("Sunstar") Raleigh-Durham, North Carolina
Whittaker Homes ("Whittaker") St. Louis, Missouri
Wilshire Homes ("Wilshire") Austin and San Antonio, Texas
</TABLE>
Beginning in the first quarter of 1999, the Company took steps to exit or
reposition itself in the following markets:
<TABLE>
<S> <C> <C>
Homebuilder Action Market(s) exited
Landmark Homes ("Landmark") Sold assets, March Wilmington, North Carolina and Myrtle
1999 Beach, South Carolina
Buffington Homes ("Buffington") Merged with Wilshire, Exited certain communities in Austin
Buffington name and San Antonio, Texas
discontinued, first
quarter 1999
WestBrook Homes ("WestBrook") Liquidated operation Loudoun County, Virginia
throughout 1999
</TABLE>
In January 1997, Fortress formed Fortress Mortgage, Inc. ("Fortress Mortgage"),
a wholly-owned subsidiary, to provide a mortgage lending source to the Company's
builder subsidiaries. Fortress Mortgage is licensed as a mortgage banker in
Arizona, Alaska, California, Colorado, Florida, Missouri, Nevada, North
Carolina, Oregon, Pennsylvania, South Carolina, Texas, Virginia, Washington and
Wisconsin.
The accompanying consolidated financial statements of Fortress have been
prepared by the Company. Certain information and footnote disclosures normally
included in financial statements presented in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted. The Company believes the disclosures made are adequate to make the
information presented not misleading. However, the financial statements should
be read in conjunction with the financial statements of the Company and notes
thereto included in the 1999 Annual Report on Form 10-K.
Interim results are not necessarily indicative of fiscal year performance
because of the impact of seasonal and short-term variations.
6
<PAGE>
NOTE 2 - BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Fortress, a Delaware corporation, and its majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Certain amounts in the prior period financial statements have been reclassified
to conform to the current presentation.
NOTE 3 - REAL ESTATE INVENTORIES
Real estate inventories are summarized as follows (in thousands):
March 31, December 31,
2000 1999
---- ----
(unaudited)
Work-in-progress
Sold homes $129,389 $100,759
Speculative 66,860 70,228
-------- --------
Total work-in-progress 196,249 170,987
Land
Finished lots 75,800 105,432
Land under development 38,230 22,420
Unimproved land held for development 16,006 13,924
-------- --------
Total land 130,036 141,776
Lumber yard inventory 2,742 2,404
Model homes 13,136 13,346
-------- --------
$342,163 $328,513
======== ========
NOTE 4 - INTEREST
Information regarding interest is as follows (in thousands):
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
------------------------------------
2000 1999
---- ----
(unaudited) (unaudited)
<S> <C> <C>
During the periods:
Interest incurred $ 8,447 $ 8,117
Interest capitalized (7,161) (6,730)
Relief of previously capitalized interest 5,747 5,678
-------- --------
Total interest expensed in statement of operations $ 7,033 $ 7,065
======== ========
At the end of the periods:
Capitalized interest in ending inventory $ 24,495 $ 24,162
======== ========
</TABLE>
7
<PAGE>
NOTE 5 - NOTES AND MORTGAGES PAYABLE
Notes and mortgages payable consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
(unaudited)
<S> <C> <C>
13.75% Senior Notes due 2003 $100,000 $100,000
Project specific land, land development and
construction loans 196,825 183,298
Mortgage warehouse lines of credit 17,144 19,242
Other loans 2,511 2,850
-------- --------
316,480 305,390
Less: Unamortized debt issuance costs (3,452) (3,732)
-------- --------
$313,028 $301,658
======== ========
</TABLE>
The Company pays interest on the Senior Notes in arrears on May 15 and November
15 of each year at the rate of 13.75% per annum. The Senior Notes may not be
redeemed at any time prior to maturity. The Senior Notes are unsecured and rank
pari passu with, or senior in right of payment to, all other existing and future
unsecured indebtedness of the Company. The Senior Notes, however, are
effectively subordinated to secured debt of the Company to the extent of any
collateral, as well as to the Company's subsidiaries indebtedness. The Company
is required to maintain a consolidated tangible net worth of at least $15
million and other financial covenants, as defined, in the Senior Note Indenture.
The Company was in compliance with all financial covenants at March 31, 2000.
In addition, the Senior Note Indenture restricts certain payments including
dividends and repurchase or redemptions of stock. As of March 31, 2000, the
Company had in excess of $8 million available for such payments. However, the
Company may make payments such as those described above from cash generated from
subsidiaries or other assets designated as "unrestricted" as defined in the
Senior Note Indenture.
The loan agreements for project specific land, land development and construction
loans are secured by a lien on the applicable residential development project or
a specific unit under construction. Repayment of the loans are generally due
upon sale of the collateral property. The loans bear interest at annual variable
rates ranging primarily from .0625% below to 0.75% over prime rate and fixed
rates primarily at 8.0%. Certain of the subsidiary credit facilities contain
covenants that limit the Company's overall ratio of debt to tangible net worth,
and other covenants including minimum tangible net worth, current ratio and
interest coverage. In addition, many of the credit facilities include similar
covenants at the subsidiary level. The Company and its subsidiaries were in
compliance with all such covenants as of March 31, 2000.
The Company's mortgage subsidiary has two lines of credit outstanding for the
purpose of originating loans. The lines of credit are secured by the mortgage
loans held for sale and are repaid upon sale of the mortgage loans. These lines
bear interest at variable rates ranging from 1.0% over the Eurodollar rate to
2.0% over the Fed Funds rate based on the type of loan and lending requirements.
The aggregate commitment available under these lines at March 31, 2000 was
$35,000,000.
One of the Company's subsidiaries has a line of credit for the purpose of
purchasing lumber yard inventory. The line of credit matures October 1, 2001 and
bears interest at prime minus 1/2%. At March 31, 2000, the total commitment
available is $2 million with $1.65 million outstanding. This outstanding portion
is included in "other loans" above. The remainder of "other loans" consists
primarily of debt financed corporate insurance policies which bear interest at
rates ranging from 6.6% to 7.3%.
8
<PAGE>
NOTE 6 - CONVERTIBLE PREFERRED STOCK
The Company has authorized 1 million shares of $.01 par value preferred stock.
The following are the Company's classes and series of preferred stock, amounts
designated, and amounts outstanding at March 31, 2000 and December 31, 1999:
Class AA cumulative convertible (rate of 12% per annum decreased to 6% on
March 6, 1998), 53,333 designated, 0 issued and outstanding
Class AAA cumulative convertible (rate of 9% per annum), 40,000 designated,
28,500 issued and outstanding ($28.5 million aggregate liquidation
preference)
Series A 11% cumulative convertible, 20,000 designated, 0 issued and
outstanding
Series B convertible, 40,000 designated, 0 issued and outstanding
Series C convertible, 70,000 designated, 4,284 and 18,493, respectively,
issuable (see below)
Series D convertible, 67,500 designated, 30,000 issued and outstanding
($3,000,000 aggregate liquidation preference)
Series E convertible, 50,000 designated, 17,443 issued and outstanding
($1,744,300 aggregate liquidation preference)
Series F convertible, 5,000 designated, 0 issued and outstanding
Under a Restructuring Agreement dated December 31, 1998 between the Company and
Prometheus Homebuilders LLC ("Prometheus"), the Company agreed to issue to
Prometheus 40,000 shares of Class AAA Redeemable Convertible Preferred Stock
having an initial liquidation value of $40,000,000 in exchange for the
outstanding 40,000 shares of Class AA Convertible Preferred Stock having a
liquidation value of $40,000,000 held by Prometheus. This exchange was effective
February 4, 1999.
The Company has the right to redeem the Class AAA preferred stock at any time
until December 31, 2000 for its liquidation value plus dividends that, when
combined with dividends previously paid on the Class AA preferred stock and
subsequent dividend payments on the Class AAA preferred stock, will provide a
20% annual return from the inception of Prometheus' investment in the Company.
Any redemption of the Class AAA preferred stock is subject to compliance with
the Company's Senior Note Indenture, which restricts the amount of stock
redemptions or repurchases. As of March 31, 2000, the Company has redeemed $11.5
million in Class AAA preferred stock.
In conjunction with the issuance of the Class AAA preferred stock, the Company
also issued Supplemental Warrants. Subject to the stock price and revenue tests
described below, the Supplemental Warrants would become exercisable on September
30, 2001 with an exercise price of $0.01 per share of common stock and would
expire on March 31, 2004. The number of shares of common stock subject to the
Supplemental Warrants is subject to adjustment depending upon the 60 day average
closing price of the common stock between the period from September 30, 2001 and
September 30, 2003. If during such period the closing price remains greater than
$12.00 per share, no shares would be issuable pursuant to the Supplemental
Warrants. If during such period the closing price is $12.00 per share or less,
the number of shares of common stock issuable upon the exercise of the
Supplemental Warrants could be adjusted, up to five times per year, in
accordance with the following table:
<TABLE>
<CAPTION>
Issue Price ($) Warrants
--------------- --------
$40 million $28.5 million
liquidation value at liquidation value as
issuance of March 31, 2000
<S> <C> <C>
$12.01 or greater 0 0
10.01 - 12.00 606,061 431,818
8.01 - 10.00 1,333,333 950,000
6.01 - 8.00 3,333,333 2,375,000
4.01 - 6.00 6,666,667 4,750,000
2.01 - 4.00 13,333,333 9,500,000
0.00 - 2.00 33,333,333 23,750,000
</TABLE>
The number of common shares issuable upon the exercise of the Supplemental
Warrants would be further reduced on a pro rata basis if any Class AAA preferred
stock were to be redeemed prior to December 31, 2000.
9
<PAGE>
The number of shares into which each Supplemental Warrant may be exercisable
will also be subject to certain customary anti-dilution adjustments. The
exercisability of the Supplemental Warrants would also be subject to a revenue
test, which provides that the Supplemental Warrants may not be exercised unless
the Company's consolidated revenues for the most recent 16 full fiscal quarters
exceeds $2,429,190,500. The revenue test is subject to adjustment for the sale
of any Company subsidiary. As of March 31, 2000, for purposes of the revenue
test, the Company's cumulative consolidated revenues for the most recent sixteen
quarters was $2,244,756,000. In addition, the Company is required to maintain a
minimum annualized revenue amount of $625 million for the four quarters tested,
which is adjusted to $590 million for the four quarter period ended March 31,
2001 and June 30, 2001. The minimum annualized revenue is subject to further
adjustment for the sale of Company subsidiaries.
In addition, should the Company elect to redeem all or a portion of the Class
AAA preferred stock, the Company will then be obligated under a "make-whole"
provision relating to Prometheus' common stock investment of 898,845 shares of
common stock which was purchased upon the second closing of the Class AA
preferred stock. The Company is obligated to arrange for the sale of Prometheus'
common stock at any time during the period from November 15, 2000 to February
15, 2001 and deliver cash proceeds, provided that such proceeds result in
Prometheus receiving no less than $5.50 per share. The number of shares the
Company would be obligated to sell is pro-rata based on the percentage of the
Class AAA redeemed. As of March 31, 2000, the Company is obligated to sell
258,418 shares of Prometheus' common stock.
The Series C preferred stock (4,284 shares as of March 31, 2000) has been
treated as outstanding for the purpose of calculation earnings per share;
however, it will only be legally outstanding upon issuance.
Please refer to the Company's financial statements as reported on Form 10-K for
the year ended December 31, 1999 (Note 9-Shareholders' Equity) for further
information on the classes and terms of preferred stocks and warrants.
NOTE 7 - (LOSS) PER SHARE
The following table reconciles the numerators (income) and the denominators
(shares) of the basic and diluted per-share computations (dollars in thousands):
<TABLE>
<CAPTION>
For the three months ended
March 31,
2000 1999
---- ----
<S> <C> <C>
Net income/(loss) $ 633 $ (1,944)
Less preferred stock dividends (667) (1,029)
---------- ----------
(Loss) applicable to common shareholders $ (34) $ (2,973)
========== ==========
Basic EPS
(Loss) applicable to common shareholders $ (34) $ (2,973)
Weighted average number of common shares outstanding 12,233,739 11,950,920
Basic (loss) per share $ (0.00) $ (0.25)
========== ==========
Diluted EPS
(Loss) applicable to common shareholders, basic $ (34) $ (2,973)
Plus preferred stock dividends 0 0
---------- ----------
(Loss) applicable to common shareholders, diluted $ (34) $ (2,973)
========== ==========
Weighted average number of common shares outstanding 12,233,739 11,950,920
Effect of dilutive securities:
Preferred stock 0 0
Options 0 0
---------- ----------
Weighted avg. number of common shares outstanding, diluted 12,233,739 11,950,920
========== ==========
Diluted (loss) per share $ (0.00) $ (0.25)
========== ==========
</TABLE>
10
<PAGE>
The Company's intention upon conversion or redemption (as the case may be) of
Series C, D, and E preferred stock (See Note 9-Shareholders' Equity Form 10-K)
is to issue Common Stock on the basis of the 10-for-1 conversion ratio
contemplated in the respective agreements and to pay cash for the difference
between the $100 liquidation value per share and the market value of the Common
Stock converted at 10-for-1. Accordingly, the Company would normally include in
its calculation of earnings per share additional shares of common stock to be
issued under the "if converted" method at the 10-for-1 conversion ratio.
However, given the loss available to common shareholders for the three months
ended March 31, 2000 and 1999, no common stock equivalents of the Company's
various classes of preferred stock were included in the computation of diluted
earnings per share because the effect of adding back the related dividends and
weighted average common shares would be antidilutive. The following shares were
not included in the computation of diluted EPS:
<TABLE>
<CAPTION>
Outstanding at Convertible into Potential Common
March 31, Common Shares as of Stock outstanding,
--------- March 31, three months
--------- ended March 31,
---------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Class/ Series
Class AA 0 0 0 0 0 7,555,500
Class AAA 28,500 40,000 4,750,000 6,666,667 4,750,000 4,148,167
Series C 4,284 18,493 42,840 184,930 150,580 356,590
Series D 30,000 45,000 300,000 450,000 300,000 450,000
Series E 17,443 19,381 174,430 193,810 174,430 193,810
Series F 0 5,000 0 50,000 0 16,670
</TABLE>
NOTE 8 - SALE OF ASSETS AND SPECIAL CHARGES
On March 26, 1999, the Company sold the assets of Landmark and realized a loss
of $2.9 million. As of the disposition date, Landmark had total assets of
approximately $11.3 million, which included unrecovered goodwill of
approximately $3.0 million. The total selling price was approximately $8.3
million.
Included in operating expenses for the three months ended March 31, 1999 were
special charges totaling $1,270,000 related to the restructuring and phasing out
of two of the Company's other operating subsidiaries. The Company's Wilshire
division (formerly operating as Buffington) decided to exit certain communities
and accrued restructuring charges of approximately $480,000. In addition, the
Company recorded charges of approximately $790,000 (including $294,000 in
unrecovered goodwill), as a result of its decision to wind down the operations
of its WestBrook division. As of the end of 1999, substantially all of the
restructuring costs accrued in the first quarter of 1999 had been paid and
charged against the liability established as of March 31, 1999.
NOTE 9 - SUBSEQUENT EVENTS
On April 14, 2000 the Company dismissed PricewaterhouseCoopers LLP as its
independent accountants and appointed Ernst and Young LLP. The Company filed a
Current Report on Form 8-K on April 19, 2000 to report these transactions.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following table sets forth for the periods indicated certain items of the
Company's consolidated results of operations and those results as a percentage
of the Company's total revenues and its segment revenues:
(dollars expressed in thousands)
<TABLE>
<CAPTION>
For the Three Months For the Three Months
Ended Mar. 31, 2000 Ended Mar. 31, 1999
------------------- -------------------
% of % of % of % of
Total Segment Total Segment
----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Total revenues $143,147 100.0% $150,724 100.0%
Homebuilding revenues 141,760 99.0% 100.0% 149,340 99.1% 100.0%
Gross profit 20,262 14.2% 14.3% 21,628 14.3% 14.5%
Operating expenses (incl.
amortization & restructuring) 18,749 13.1% 13.2% 21,420 14.2% 14.3%
Homebuilding pre-tax income 1,047 .7% .7% (127) -.1% -.1%
Mortgage revenues 1,387 1.0% 100.0% 1,384 0.9% 100.0%
Mortgage expenses 1,361 1.0% 98.1% 1,347 0.9% 97.3%
Mortgage pre-tax income 26 0% 1.9% 37 0% 2.7%
Loss on Sale of Landmark Homes 0 0% 0% (2,900) -1.9%
Pre-tax income 1,073 .7% (2,990) -2.0%
</TABLE>
Consolidated Results of Operations
Comparison of the Company's Results of Operations for the Three Months Ended
March 31, 2000 and 1999.
Homebuilding Operations
General
<TABLE>
<CAPTION>
New Orders, Net Closings Backlog
--------------- -------- -------
Three months ended Three months ended As of March 31,
March 31, March 31,
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
State
Arizona 35 14 12 30 28 18
Colorado 111 103 52 63 263 223
Florida 179 302 188 162 288 439
Missouri 124 128 77 124 143 192
Nevada 28 44 32 16 77 114
New Jersey 15 0 5 0 20 0
North Carolina 153 206 100 154 208 295
Oregon/Washington 33 31 20 26 27 18
Pennsylvania 41 34 23 39 57 48
South Carolina 27 35 25 31 77 85
Texas 167 190 165 202 237 288
Virginia 1 10 2 8 0 19
Wisconsin 56 66 23 44 74 83
--- ----- --- --- ----- -----
Total 970 1,163 724 899 1,499 1,822
</TABLE>
12
<PAGE>
The Company achieved net new orders of 970 homes for the three months ended
March 31, 2000, compared to 1,163 homes for the same period of 1999, a decrease
of 16.6%. 5.4% of this decline is attributable to the disposition of a number of
the Company's operations (See Note 8 - Sale of Assets and Special Charges). The
remaining decline, associated with the Company's ongoing operations (969 new
orders for the first quarter of 2000 versus 1,091 new orders for the same period
of 1999), is primarily due to decreased new orders in its Jacksonville division.
This division, which serves the first time buyer segment of the market,
experienced strong first quarter 1999 new orders, and the decline from 1999 to
2000 is attributed to softer demand which we believe was primarily caused by
increases in mortgage interest rates. Excluding Jacksonville, new orders for the
Company's other ongoing operations were relatively unchanged on an aggregate
basis, with increases in the Denver, Tucson and Philadelphia operations
offsetting declines in several other markets. Although the Company has
experienced a decline of buyer demand in its North Carolina operations, it also
has encountered third party developer delays in which certain new communities
and new phases of existing communities did not open for sale as planned.
The Company has a combined backlog of 1,499 homes, with a dollar value of $322.2
million at March 31, 2000, as compared to 1,822 homes, with a dollar value of
$359.8 million at March 31, 1999. This represents a 17.7% decrease in backlog
units and a 10.4% decrease in backlog value. 3.5% of the decrease in units and
3.3% of the decrease in dollar value is the result of the dispositions
previously discussed, with declines in new orders from ongoing operations over
the past several quarters accounting for the remainder. The average price of a
home in backlog increased from $197,400 to $214,900 from March 31, 1999 to March
31, 2000, an increase of 8.8%.
Revenues
Homebuilding revenues for the first quarter of 2000 were $141.8 million, as
compared to $149.3 million for the same period of 1999, representing a decrease
of 5.1%. After accounting for dispositions discussed previously, revenue from
ongoing operations increased from $134.6 million to $140.8 million. While these
ongoing operations generated fewer home closings in the first quarter of 2000
(722) versus the first quarter of 1999 (796), increases in the average price of
a home closed increased from $167,800 to $192,300 to more than offset the
decline in unit closings. This large increase in average price was attributable
mainly to a large quarter over quarter increase in closings and revenue at the
Company's Las Vegas division, which skewed the Company's average price
significantly upward in the first quarter of 2000, a trend the Company expects
to continue throughout the year. However, in the second half of 2000, as closing
volume increases elsewhere throughout the Company, the Las Vegas division is
expected to have a less significant impact on the overall results of the
Company.
Gross Profit
Gross profit for the quarter ended March 31, 2000 was $20.3 million, as compared
to $21.6 million for the comparable period of 1999. As discussed in the revenue
section above, the Company's Las Vegas division contributed significantly to the
volume increases quarter over quarter for ongoing operations. However, the
Company's gross profit margins continue to be adversely affected by reduced
margin levels in Las Vegas. As noted previously, the Las Vegas division is
expected to have a less significant impact on the Company's overall gross profit
margins in the latter part of 2000. Excluding the results of the Las Vegas
division from both periods, gross profit margins increased from 14.8% during the
first quarter of 1999 to 15.7% during the first quarter of 2000.
Operating Expenses
Operating expenses (including selling, general and administrative, special
charges, and goodwill amortization) for the quarters ended March 31, 2000 and
1999 were $18.7 million (13.2% of revenue) and $21.4 million (14.3% of revenue),
respectively. The Company recognized $1.3 million in special charges during the
quarter ended March 31, 1999 pertaining to restructuring costs associated with
several of its subsidiaries (See Note 8 - Sale of Assets and Special Charges).
Excluding the impact of these charges, total operating expenses for the three
months ended March 31, 2000 and 1999 would have been $18.7 million (13.2% of
revenue) and $20.2 million (13.5% of revenue), respectively
During the second quarter of 2000, the Company anticipates increases in selling
and marketing expenses in an effort to to generate increased buyer demand, and
in general and administrative expenses in anticipation of higher future closing
volume. These higher operating expense levels will precede any revenue increases
attributable to these efforts, and thus are expected to
13
<PAGE>
have a negative impact on operating expenses as a percentage of revenue for the
quarter. However, this trend is expected to reverse in the second half of the
year, as these operating expenses are expected to be absorbed by higher gross
profits.
Selling expenses decreased to $9.7 million (6.9% of homebuilding revenue) for
the quarter ended March 31, 2000, as compared to $10.6 million (7.1% of
homebuilding revenue) for the same period of 1999. The decrease in absolute
dollar amounts quarter over quarter was primarily due to previously discussed
dispositions.
General and administrative expenses decreased to $8.4 million for the quarter
ended March 31, 2000, as compared to $8.8 million for the same period of 1999,
once again due primarily to dispositions. General and administrative costs as a
percentage of homebuilding revenue remained unchanged at 5.9%. Additionally, in
February 2000, the Company reorganized the personnel of its Las Vegas operations
and reduced its payroll costs in excess of $1.0 million on an annualized basis.
Due to severance payments, this action did not have a significant impact on the
first quarter of 2000, but is expected to reduce the Las Vegas operations'
overhead in future quarters.
Homebuilding Pretax
Homebuilding pretax income for the first quarter of 2000 was $1.0 million, as
compared to a loss of $127,000 for the first quarter of 1999. Excluding the
impact of special charges taken during the first quarter of 1999 as previously
noted, homebuilding pretax income for that period would have been $1.1 million.
Reduced volume in 2000 due to the Company's dispositions was the primary reason
for the slight decline in earnings before special charges.
Financial Services Operations
Fortress Mortgage's results for the first quarter of 2000 remained essentially
unchanged from the same period of 1999. Revenue was approximately $1.4 million
for both periods, and pretax income was $26,000 for the first quarter of 2000
versus $37,000 for the comparable period of 1999.
Improving capture rates (the percentage of the Company's home closings financed
by loans originated by the Fortress Mortgage) allowed Fortress Mortgage to
obtain relatively flat operating results despite the decreased volume level of
the Company's homebuilding segment noted previously. The capture rates for the
markets served by the mortgage company for the three months ended March 31, 2000
and 1999 were 56.3% and 33.6%, respectively. The capture rate of homes in
backlog at March 31, 2000 is 61.4%. Currently, Fortress Mortgage serves all of
the Company's homebuilding markets with the exception of Las Vegas,
Philadelphia, Atlantic City and Charleston.
Loss on Sale of Landmark Homes
The Company sold the assets of Landmark Homes in March 1999 as part of its
strategy to redeploy capital invested in under-performing assets. Concurrent
with the sale of these assets the Company exited the Wilmington, North Carolina
and Myrtle Beach, South Carolina markets. The Company recognized a pretax loss
of $2.9 million on this disposition, due primarily to unrecovered goodwill of
approximately $3.0 million.
Net Income
Due to the previously described factors and the income tax effect thereof, net
income for the three months ended March 31, 2000 was $633,000, as compared to a
loss of $1.9 million in the same period of 1999. Excluding the impact of the
sale of Landmark Homes and special charges noted above, net income for the three
months ended March 31, 1999 would have been approximately $700,000.
Earnings per common share for the quarter ended March 31, 2000 was $0.00, on
both a basic and diluted basis. For the comparable period of 1999, loss per
share was $0.25. Excluding the impact of special charges and the sale of
Landmark, the Company's loss per share would have been $0.03 for the three
months ended March 31, 1999. Decreased preferred dividends, resulting from
redemptions of the Company's Class AAA preferred stock during 1999 had a
positive impact on the Company's earnings per common share in the first quarter
of 2000 as compared to 1999.
14
<PAGE>
Earnings before interest, taxes, depreciation and amortization (EBITDA)
increased to $9.8 million (6.9% of revenue) for the three months ended March 31,
2000, as compared to $9.6 million (6.4% of revenue) for the same period in 1999.
EBITDA is provided as a supplemental measurement of the Company's operating
performance. EBITDA does not represent cash flows from operations as defined by
GAAP and should not be considered as an alternative to net income as an
indicator of the Company's operating performance or to cash flows as a measure
of liquidity. In addition, EBITDA measures presented by the Company may not be
comparable to other similarly titled measures of other companies.
Liquidity and Capital Resources
The Company's operating activities involve several components, principally home
construction, land development, and mortgage loan origination for home
purchasers. During the three months ended March 31, 2000, the Company's
operating activities, taken in the aggregate, utilized approximately $13.4
million of cash. This cash utilization was primarily the result of increases in
inventories of approximately $13.5 million, which is consistent with the
Company's growth in its backlog since year end and the seasonal nature of the
homebuilding industry. In addition, accounts payable were reduced by
approximately $7.8 million. A significant volume of closings occurred during the
last several days of 1999 with much of the related costs being paid during the
first quarter of 2000 and charged against the reserves established for them at
December 31, 1999.
The Company's investing activities utilized approximately $3.8 million in cash,
primarily due to additional consideration of approximately $3.3 million paid
under the earnout provisions of prior period acquisitions. In addition,
purchases of property and equipment totaled $.6 million.
Financing activities provided $10.4 million of cash flow. Net borrowings under
notes and mortgages payable of $11.1 million were used to finance the buildup of
inventory discussed in the cash flows from the operating paragraph above.
Offsetting these net borrowing was $.6 million for the payment of preferred
dividends.
The Company regularly refinances existing loan agreements and executes new loan
agreements. Approximately $485 million of secured financing commitments were in
place at the subsidiary level at March 31, 2000. Under these credit facilities,
the Company has borrowed $213 million at March 31, 2000. The total amount
available under these commitments varies based on individual loan covenants and
inventory levels.
Management believes that funds available through the existing credit facilities
coupled with the cash on hand and cash generated through operations will be
adequate for the anticipated cash needs of its current operations for the
foreseeable future. As of March 31, 2000 the Company had cash and cash
equivalents on hand of $10.8 million.
At March 31, 2000, the Company had 5,270 lots in inventory beyond those already
in backlog. This represents, in aggregate, an estimated seventeen-month supply
of land based on sales absorption rates for the first quarter of 2000. One of
the Company's operating strategies is to keep a relatively low supply of
finished lots and lots under development in order to manage and minimize risk
associated with land ownership. The Company utilizes land options and
investments in land limited partnerships as methods of controlling and
subsequently acquiring land. In markets where lot options are not readily
available to meet its needs, the Company is pursuing additional off-balance
sheet arrangements to reduce its economic risk and grow its liquidity. The
Company plans to continue these practices and expects to exercise, subject to
market conditions, substantially all of its option contracts. At March 31, 2000,
the Company had an additional 9,880 lots under option representing approximately
a 33-month supply of land based on the same absorption rates as above.
Year 2000
The Company assessed its computer systems and other business equipment during
1998 and 1999 to determine if they would be able to accurately process certain
data before, during or after January 1, 2000. The Company completed the testing
of its various systems and equipment during the fourth quarter of 1999 and made
inquiries as to whether third parties with which the Company has a material
relationship are Y2K compliant. To date the Company has experienced no adverse
effects from Y2K related issues.
15
<PAGE>
Statement on Forward-Looking Information
Certain information included in this report is "forward-looking" within the
meaning of the Private Securities Litigation Reform Act of 1995. You can
identify this information by use of words like "may," "will," "expect,"
"anticipate," "estimate," or "continue" or similar expressions. Such statements
represent the Company's judgment and involve known and unknown risks,
uncertainties and other factors that may cause actual results to differ
materially from those expressed or implied in the forward-looking statements.
Such risks, uncertainties and other factors include, but are not limited to,
fluctuations in interest rates, availability of raw materials and labor costs,
levels of competition, housing demand in our markets, the effect of government
regulation, the availability of capital, the price of the Company's common
stock, weather conditions, changes in general economic conditions and other
factors which may adversely effect The Fortress Group's operating results
including earnings and/or those of acquired homebuilders or earnings per share.
16
<PAGE>
PART II - OTHER INFORMATION
Item 2. Changes in Securities
On March 10, 2000, the Company, pursuant to the previously reported terms of the
asset purchase agreement between the Company, D.W. Hutson Construction, Inc.
("Hutson") and the principal shareholder of Hutson, paid an earnout for 1999 in
the amount of $1,420,932. This cash payment reduced the number of issuable
shares of Class C preferred stock from 18,493 to 4,284.
Item 4. Submission of matters to a vote of Security Holders.
A special meeting of the common shareholders of the Company was held on March
16, 2000. The following item was submitted for approval by the shareholders with
the voting results as noted:
Shareholders voted to approve an amendment to the Company's Articles of
Incorporation which authorized the Company's Board of Directors to implement a
reverse stock split of the Company's common stock, at any time up until March
15, 2001, at a ratio not to exceed 1 for 5.
The vote for the approval of the amendment was as follows:
<TABLE>
<CAPTION>
For Against Abstained
--- ------- ---------
<S> <C> <C> <C>
- -Common Shares 4,535,806 10,375 100
- -28,500 shares Class AAA Convertible Preferred 4,750,000 0 0
Stock, voting on as "as converted" basis
</TABLE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Number Description
------ -----------
10.18 First Amended Operating Agreement of Star
Canyon/Summerlin, L.L.C., by and among the Brentwood
Members, L.L.C., J. Christopher Stuhmer and
Christopher Homes Custom Home Division, Inc., dated
February 26, 1999.
10.19 Agreement between Christopher Homes Custom Home
Division, Inc. and J. Christopher Stuhmer pertaining
to First Amended Operating Agreement of Star
Canyon/Summerlin L.L.C, dated January 6, 2000.
10.20 Operating Agreement of Southern Highlands/Christopher
Homes I, L.L.C, by and among Southern Highlands
Development Corporation, J. Christopher Stuhmer and
Christopher Homes Custom Home Division, Inc., dated
September 10, 1999.
10.21 Agreement between Christopher Homes Custom Home
Division, Inc. and J. Christopher Stuhmer pertaining
to the Operating Agreement of Southern Highlands
Development Corporation, dated January 6, 2000.
27 Financial Data Schedule
(b) Reports on Form 8-K.
Form 8-K filed April 19, 2000, pursuant to Item 4, the dismissal
of PricewaterhouseCoopers LLP and the appointment of Ernst and
Young LLP as the Company's independent accountants.
17
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
THE FORTRESS GROUP, INC.
Date: 5/15/00 By: /s/ George C. Yeonas
------------------- ----------------------------------
George C. Yeonas
Chief Executive Officer
Date: 5/15/00 By: /s/ Jeffrey W. Shirley
------------------- ----------------------------------
Jeffrey W. Shirley
Chief Financial Officer,
And Principal Accounting Officer
18
<PAGE>
EXHIBIT INDEX
Number Description
------ -----------
10.18 First Amended Operating Agreement of Star
Canyon/Summerlin, L.L.C., by and among the Brentwood
Members, L.L.C., J. Christopher Stuhmer and
Christopher Homes Custom Home Division, Inc., dated
February 26, 1999.
10.19 Agreement between Christopher Homes Custom Home
Division, Inc. and J. Christopher Stuhmer pertaining
to First Amended Operating Agreement of Star
Canyon/Summerlin L.L.C, dated January 6, 2000.
10.20 Operating Agreement of Southern Highlands/Christopher
Homes I, L.L.C, by and among Southern Highlands
Development Corporation, J. Christopher Stuhmer and
Christopher Homes Custom Home Division, Inc., dated
September 10, 1999.
10.21 Agreement between Christopher Homes Custom Home
Division, Inc. and J. Christopher Stuhmer pertaining
to the Operating Agreement of Southern Highlands
Development Corporation, dated January 6, 2000.
27 Financial Data Schedule
Exhibit 10.18
FIRST AMENDED OPERATING AGREEMENT
OF
STAR CANYON/SUMMERLIN, L.L.C.,
a Nevada Limited Liability Company
This First Amended Operating Agreement of Star Canyon/Summerlin,
L.L.C., a Nevada limited liability company (the "Company") organized pursuant to
the Nevada Limited Liability Company Act, is entered into as of the Effective
date, by and among the Brentwood Members, L.L.C., a Nevada limited liability
company (the "Brentwood Member") and J. Christopher Stuhmer (the Stuhmer Member)
and Christopher Homes Custom Home Division, Inc., a Nevada corporation (the
"Manager"). Unless otherwise defined herein, all capitalized terms shall have
the meanings which are set forth for such terms in Article 16.
R E C I T A L S:
This First Amended Operating Agreement is entered into based upon the
following facts and stated purposes:
A. The Brentwood Member owned approximately 35.87 acres of land (the
"Land") which constitutes Lots 1 through 17, inclusive, 20 through 25,
inclusive, and 29 through 35, inclusive, in Block One; and Lots 1 through 10,
inclusive, 12, 13, and 15 through 25, inclusive, in Block Two, and Common Lots
"A", "E" and "F" of Star Canyon as shown by map thereof on file in Book 81 of
Plats, page 29, in the Office of the County Recorder of Clark County, Nevada.
B. The Land was acquired by the Brentwood Member from Howard Hughes
Properties Limited Partnership, a Delaware Limited Partnership, and the property
is subject to purchase money financing obligations (the "Purchase Money
Obligation") in favor of Howard Hughes Properties Limited Partnership, including
an existing Purchase Money Deed of Trust and Assignment of Rents which
constitute a first priority lien on the Land referred to hereinabove. The
Purchase Money Deed of Trust shall be referred to herein as the "HHP Deed of
Trust."
C. The Brentwood Member has previously contributed the Land to the
Company, subject to the HHP Deed of Trust, and subject to a subordinate Deed of
Trust and other obligations of record.
D. On November 30, 1998, the Brentwood Member, the Company, Christopher
Homes, and Howard Hughes Properties, Inc., a Nevada corporation, entered into an
Agreement Regarding Star Canyon Restructuring, which provided, among other
things, that on the "Transaction Date" as defined in paragraph 1 of said
Agreement, Howard Hughes Properties, Inc., a Nevada corporation, would assign to
Christopher Homes, all of its rights under the Company's original Operating
Agreement (the "Operating Agreement") with the consent of the Brentwood Member,
and thereby admit Christopher
1
<PAGE>
Homes as a Substitute Member of the Company. Christopher Homes has assigned to
J. Christopher Stuhmer, all of its rights in the Agreement Regarding Star Canyon
Restructuring with the express consent of the parties to said assignment. Howard
Hughes Properties, Inc. has also consented to and assigned to J. Christopher
Stuhmer, all of its rights under the Operating Agreement and to the admission of
J. Christopher Stuhmer as a Substitute Member of the Company. J. Christopher
Stuhmer has accepted the assignment of Christopher Homes' rights in the
Agreement Regarding Star Canyon Restructuring, and has accepted the assignment
as a Substitute Member upon the condition that the Brentwood Member and J.
Christopher Stuhmer enter into this First Amended Operating Agreement in
accordance with the terms of Article 14 of the Operating Agreement.
NOW, THEREFORE, the undersigned Members which constitute all of the
Members of the Company, adopt this First Amended Operating Agreement of Star
Canyon/Summerlin, L.L.C., and agree as follows:
ARTICLE I
FORMATION
1.1 Organization. The Company has been organized as a Nevada Limited
Liability Company pursuant to the provisions of the Act.
1.2 Amendment of Operating Agreement. The Operating Agreement of the
Company is hereby amended pursuant to Article 14 thereof by striking it and all
Exhibits thereto in their entirety, and substituting in its place the within
First Amended Operating Agreement of Star Canyon/Summerlin, L.L.C.
1.3 Agreement. For and in consideration of the mutual covenants herein
contained and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Members agree to the terms and
conditions of this First Amended Operating Agreement, and as it may from time to
time be amended according to its terms. It is the express intention of the
Members that this First Amended Operating Agreement shall be the sole source of
agreement of the parties.
1.4 Name. The name of the Company is Star Canyon/Summerlin, L.L.C., and
all business of the Company shall be conducted under that name or under any
other name approved by the Members, but in any case, only to the extent
permitted by applicable law.
1.5 Effective Date. This First Amended Operating Agreement is effective
as of the Effective Date, which is the "Transaction Date" referenced in the
Agreement Regarding Star Canyon Restructuring.
1.6 Term. The Company shall be dissolved and its affairs wound up in
accordance with the Act and this First Amended Operating Agreement on January
31, 2009, unless, in accordance
2
<PAGE>
with the Act, the term shall be extended by amendment to this First Amended
Operating Agreement and the Articles, or unless the Company shall be sooner
dissolved and its affairs wound up in accordance with the Act or this First
Amended Operating Agreement.
1.7 Resident Agent and Registered Office. The resident agent and the
registered office shall be that person and location reflected in the Articles.
The Manager may, from time to time, change the resident agent and registered
office through appropriate filings with the Nevada Secretary of State. In the
event the resident agent ceases to act as such for any reason or the registered
office shall change, the Manager shall promptly designate a replacement agent or
file a notice of change of address as the case may be.
ARTICLE 2
NATURE OF BUSINESS
The Company is formed for the purpose of owning, developing,
constructing, marketing, selling, and otherwise dealing with the Land. The
Company shall be authorized to do any lawful act now and hereafter permitted by
the laws of the State of Nevada in furtherance of, or convenient to,
accomplishing its stated purpose or any other business the Company may be
authorized to engage in. In connection with the foregoing, the Company shall be
authorized to conduct any authorized business of the Company in any of the
states of the United States and any foreign country, to the extent permitted by
the law of such jurisdictions.
ARTICLE 3
ACCOUNTING AND RECORDS
3.1 Records to be Maintained. The Company shall maintain the following
records at the Records Office:
3.1.1 A current list of the full name and last known business
address of each Member and Manager;
3.1.2 A copy of the filed Articles and all amendments thereto,
together with executed copies of any powers of attorney pursuant to which any
Articles have been executed; and
3.1.3 A copy of this First Amended Operating Agreement,
including all amendments thereto.
3.2 Reports to Members.
3.2.1 The Manager shall provide reports to the Members at such
time and in such manner as the Manager may determine to be reasonable.
3.2.2 The Manager shall provide all Members with information
returns required by the Code or the Act.
3
<PAGE>
3.2.3 The Manager shall maintain a record of the Capital
Account for each Member in accordance with Article 7.
ARTICLE 4
MEMBERSHIP CERTIFICATES AND THEIR TRANSFER
4.1 Certificates. Membership certificates evidencing the Membership
Interests of the Members in the Company shall be in such form as shall be
approved by the Manager. Membership certificates shall be signed by the Manager.
All Membership certificates shall be consecutively numbered or otherwise
identified. In the case of a lost, destroyed or mutilated Membership
certificate, a new one may be issued upon such terms, and subject to such
indemnity to the Company as the Members may prescribe.
4.2 Certificate Roster. The Company shall maintain a certificate roster
of the Company containing (in alphabetical order) the name and last known
address of each Member, existing and promised or contingent Capital
Contributions to the Company, and the terms of any promised or contingent
contributions. If the interests in profits and losses of Members are other than
proportional to their stated Capital Contributions, the certificate roster shall
so state. The certificate roster shall also contain (in alphabetical order) the
name and last known address of each Manager.
4.3 Right of First Refusal
4.3.1 In the event a Member (for purposes of this section the
"Selling Member") wishes to sell its interest in the Company or any portion
thereof through a voluntary sale, the Selling Member shall first notify the
Company, in writing, of the identity of the proposed purchaser or purchasers,
the interest in the Company proposed to be sold (the "Offered Interest") and the
proposed price and terms of sale. Once such notice is given, it is irrevocable.
The Company shall thereupon have a right of first refusal to purchase the
Offered Interest at the price and on the terms proposed to, or offered by the
proposed purchaser or purchasers.
4.3.2 The Company shall give written notice to the Selling
Member of its intention to exercise its right of first refusal within twenty
(20) days following receipt of the notice from the Selling Member. The Company's
notice of intention shall specify the amount of the Offered Interest it intends
to purchase. If the Company does not exercise its right to purchase, or if it
exercises it right to purchase with respect to less than all of the Offered
Interest, the Company shall notify the Selling Member and the other Member(s) in
writing, within such twenty (20) days, providing such other Member(s) with a
copy of the Selling Member's original notification and a copy of its notice of
intention with
4
<PAGE>
respect to its right of first refusal. The other Member(s) shall have the right
to purchase any of the Offered Interest not purchased by the Company at the same
price and terms as were available to the Company. In order to exercise such
purchase rights, the other Member(s) (the Purchasing Member(s)) shall, within
twenty (20) days after receiving notice from the Company that it intends to
purchase none or less than all of the Offered Interest, deliver to the Company
and the Selling Member a written notice of intention to exercise the right to
purchase so much of the Offered Interest as such Member may desire to purchase.
If the total amount of the Offered Interest that the Purchasing Member(s) desire
to purchase exceeds the amount of the Offered Interest, each such Purchasing
Member(s) shall have priority, up to the amount of the Offered Interest set
forth in his written election, to that fraction of the Offered Interest in which
the numerator is the interest in the Company owned by the Purchasing Member(s)
giving notice of intention to purchase and the denominator is the amount of the
interests in the Company owned by all Purchasing Members giving notice of
intention to purchase (the "pro rata share"). Should any of the Purchasing
Member(s) desire to purchase an interest in the Offered Interest in excess of
such Purchasing Member's pro rata share, and should any such Offered Interest
remain after allocation to each Purchasing Member of the lesser of (i) the
percentage of the Offered Interest that such Purchasing Member has elected to
purchase, or (ii) such Member's pro rata share of the available Offered
Interest, then, unless the Purchasing Member(s) desiring such remaining offered
Interest shall agree upon some other basis for allocation, any such remaining
Offered Interest shall be allocated to the remaining Purchasing Member(s)
desiring to purchase the remaining Offered Interest, pro rata based on that
fraction of the remaining Offered Interest in which the numerator is the
interest in the Company owned by the remaining Purchasing Member giving notice
of intention to purchase and the denominator is the amount of the interests in
the Company owned by all remaining Purchasing Member(s) giving notice of
intention to purchase the remaining Offered Interest, until all of the Offered
Interest has been purchased or all of the remaining Purchasing Member(s) have
purchased all of the remaining Offered Interest which they elected to purchase.
Any or all of the Purchasing Member(s) shall have the right prior to the closing
of the sale of the offered Interest to designate a Person controlled by the
Purchasing Member(s) to purchase the Offered Interest. The Selling Member and
all Purchasing Member(s) shall execute such documents and instruments as may be
necessary or appropriate to effect the sale of the Offered Interest pursuant to
the terms of this Section 4.3.
4.3.2.1 If the Company and/or the other Member(s) do not give
written notice of an intention to exercise the right to purchase, within the
time period provided herein, with respect to all of the Offered Interest, the
Company and/or the other Member(s) shall not be entitled to purchase any of the
Offered
5
<PAGE>
Interest and the Selling Member shall then be free for a period of ninety (90)
days thereafter to sell the entire Offered Interest, to the same purchaser or
purchasers, at the same price and on the same terms as set forth in the Selling
Member's notice of intended sale. If such sale is not consummated within such
ninety (90) days, the Offered Interest may not be sold by the Selling Member
without again complying with the provisions of Section 4.3.
4.3.2.2 After giving any written notice, the Selling Member shall have
no right to participate, as a Member or Manager, in the Company's decision on
whether or not to purchase the Offered Interest, unless such participation is
required by any relevant provision of law. In the event of such required
participation, the Selling Member agrees to cooperate with the Manager and the
other Member(s) in every reasonable way to effectuate the purposes of this
Agreement. Except as provided herein, the Selling Member shall be bound by the
restrictions and limitations imposed by this Agreement after any notice of an
Offered Interest is given and whether or not any such sale actually occurs.
4.3.2.3 Notwithstanding any other provision contained in this Agreement,
any transferee, other than an existing Member, of a Membership Interest, or any
portion thereof, without first obtaining the consent of all remaining Members,
but with written notice to the Manager, is an Assignee, but not a Substituted
Member. An Assignee shall have no right to participate in the management of the
business and affairs of the Company, or to become a Member, or obtain any of the
voting and other rights of Members described herein, nor shall an Assignee be
treated as a Member for the purposes of the certificate roster. The Assignee is
only entitled to receive the share of the profits or other compensation by way
of income, and the turn of contributions to which the transferor Member would
otherwise be entitled.
4.3.2.4 A transferee of a Membership Interest, or any portion thereof,
with the unanimous approval of the remaining Members, shall be a Substitute
Member subject to all of the terms, conditions, restrictions and obligations of
this Agreement and any such transferee shall execute and deliver to the Company
a written assumption agreement in form satisfactory to the Company, which
statement shall contain an agreement by the transferee to be bound by all of the
terms and conditions and to assume all obligations of the transferring Member
under this Agreement.
4.3.2.5 Any transfer or assignment of a Membership Interest which would
result in termination of the Company's treatment as a "partnership" under
Section 708 of the Code, or any corresponding provision of any future tax law,
must be approved by the unanimous vote of the Members.
6
<PAGE>
4.3.2.6 The Members may vote to make an election under Section
754 of the Code, or any corresponding provision of any future tax law, to adjust
the basis of the Company's assets to reflect the purchase price paid by an
Assignee or a Substitute Member.
4.4 Admission of Additional Members. By unanimous consent of the
Members, Additional Members may be admitted to the Company subject to the
contribution of such consideration to the Company as may be determined by the
Members and the execution of an agreement that such Additional Member agrees to
be bound by the terms of this First Amended Operating Agreement.
4.5 Deemed and Involuntary Transfers. Except as otherwise set forth
herein, the cumulative transfer or change in excess of 33% of the voting power
of a corporate Member or 33% of the interest in the capital or profits of a
limited liability company or partnership Member or an involuntary transfer to a
creditor upon a foreclosure or other similar exercise of creditor's rights shall
be deemed a transfer of a Membership Interest governed by Section 4.3 by the
unanimous vote of the other Members within ninety (90) days of the receipt of
written notice to the Company of the change. In the event of a deemed transfer
under this Section 4.5, all of the Membership Interest of the transferring
Member shall be offered to the Company and Members under the procedures set
forth in Section 4.3, provided, however, that the purchase price of the Offered
Interests shall be as agreed upon within ten (10) days after the purchase is
mandated. If the parties cannot agree upon a price within the time period set
forth above, the price shall be determined by appraisal in accordance with the
following provisions, as of the close of business on the lst day of the calendar
month preceding the deemed transfer: (a) the Selling Member and the Company, or
in the event that Company is not purchasing any of the Membership Interest, the
other Members collectively, shall select their own appraiser; (b) if the lower
of the two appraisals results in a fair market value less than eight-five
percent (85%) of the higher appraisal, then the two appraisers will select a
third appraiser whose determination of fair market value shall be final and
conclusive; (c) if the lower of the two appraisals is eighty-five percent (85%)
or more of the higher appraisal, then fair market value shall be the mean
between the two appraisals; and (d) the Selling Member and the purchasers shall
share equally the fees and expenses of appraisers jointly named, but each party
shall be responsible for the fees and expenses of any appraiser named solely by
it. Each party shall bear its own expenses in presenting evidence to the
appraisers.
In the case of a deemed transfer resulting from a transfer of ownership
interests in partnership, corporation or limited liability company, the price to
be paid for the subject Membership Interest shall be the appraised value of such
Membership Interest,
7
<PAGE>
determined as provided herein, less the amount of distributions paid to the
Selling Member between the date of valuation and the effective date of purchase
of the Offered Interest. In the case of an involuntary transfer, the price to be
paid shall be the less or (i) eighty-five percent (85%) of such appraised value,
less the amount of distributions paid to the Selling Member between the date of
valuation and the effective date of purchase of the Offered Interest or (ii) the
price paid for such Membership Interest by the transferee thereof, less the
amount of distributions paid to the Selling Member between the date of valuation
and the effective date of purchase of the Offered Interest. In either case, the
purchase shall be completed, in cash, by the electing Company or Members within
ninety (90) days after the date of notice to the Company and all Members other
than the Selling Member of the deemed or involuntary transfer.
Nothwithstanding the foregoing, any changes amongst the existing Members
of the Brentwood Member shall not be deemed a transfer of a Membership Interest
hereunder. Furthermore, any transfer by Michael Forche of his Membership
Interest (whether or not such interest is increased to an amount in excess of
thirty-three percent) to a Member of his Family Group shall not be deemed a
transfer of a Membership Interest hereunder. In addition, any transfer by J.
Christopher Stuhmer of his Membership Interest (whether or not such interest is
increased to an amount in excess of thirty-three percent) to a Member of his
Family Group shall not be deemed a transfer of a Membership Interest hereunder.
The term "Family Group" means the spouse, descendants and any trust created or
existing solely for the benefit of Mr. Forche, Mr. Stuhmer, and/or their
respective spouses and respective descendants.
Further to the above, the Stuhmer Member shall have the right to
transfer and assign a portion or all of the Stuhmer Member's Membership Interest
to an entity in which J. Christopher Stuhmer is and remains the Chief Executive
Officer of such entity, which transfer and assignment shall not be deemed a
transfer of a Membership Interest hereunder (whether or not such transfer,
assignment or change is in excess of thirty-three percent) of the Stuhmer
Member's Membership Interest.
4.5.1 The Brentwood Member's Right to Elect Dissolution. In
the event that J. Christopher Stuhmer does not remain the Chief Executive
Officer of the Manager during the term of this First Amended Operating
Agreement, then the Brentwood Member shall have the right to elect to declare a
Dissolution Event as set forth in Article 12.1.3, and thereafter cause the
dissolution and winding up of the Company in accordance with the provisions of
Article 12 hereof, provided such election is made and delivered in writing
within sixty (60) days from the date that the Brentwood Member obtains knowledge
that J. Christopher Stuhmer is no longer the Chief Executive Officer of
Christopher Homes. Provided,
8
<PAGE>
however, that the Brentwood Member shall not have the right to elect to declare
a dissolution event as set forth hereinabove unless the Stuhmer Member fails to
appoint another entity as Manager and in which entity J. Christopher Stuhmer
shall be the Chief Executive Officer, thereby replacing Christopher Homes as
Manager, within sixty (60) days from the date that J. Christopher Stuhmer no
longer remains as the Chief Executive officer of Christopher Homes. For purposes
of this Agreement, nothing set forth herein shall impair the right of the
Stuhmer Member to remove the Manager as set forth in paragraph 6.8 hereinabove.
4.6 Securities Law Restrictions. In addition to any restrictions on the
transferability of any Membership Interest, each of the Members expressly
acknowledges that the Membership Interests have not been registered under the
Securities Act of 1933 (the "1933 Act"), or applicable state securities laws.
Each Member understands that the Membership Interests have been issued in
reliance on an applicable exemption from registration under the 1933 Act. Each
Member represents and warrants that (i) its Membership Interest is being
acquired solely for its own account, for investment purposes only, and is not
for distribution, subdivision, or fractionalization thereof; and (ii) other than
as disclosed herein, it has no agreement or other arrangement, formal or
informal, with any person to sell, transfer or pledge any part of the Membership
Interest, or which would guarantee to it any profit, or protect it against any
loss, with respect to the Membership Interest and it has no plans to enter into
any such agreement or arrangement. Each Member further understands that it must
bear the economic risk of the investment in the Membership Interest for an
indefinite period of time.
ARTICLE 5
RIGHTS AND DUTIES OF MEMBERS
5.1 Meetings. Meetings of the Members, for any purpose or purposes, may
be called by a Manager or by any Member. So long as the same is required by the
Act, the Members shall meet at least annually.
5.2 Notice of Meeting. Written notice, by mail or by telecopy, stating
the place, day and hour of the meeting, and the purposes for which the meeting
is called, shall be delivered not less than five (5) days before the date of the
meeting, either personally or by mail, by or at the direction of the Manager, to
each Member of record entitled to vote at such meeting on the certificate roster
as of the date the notice is prepared for delivery. If mailed, such notice shall
be deemed to be delivered when deposited in the United States mail, addressed to
the Member at its address as it appears on the certificate roster, with postage
thereon prepaid. When all the Members of the Company are present at any meeting,
or if those not present sign a written waiver of notice of such meeting, or
subsequently ratify all of
9
<PAGE>
the proceedings thereof, the transactions of such meeting are as valid as if the
meeting were formally called and notice had been given.
5.3 Quorum. At any meeting of the Members, the presence of all Members
as reflected on the certificate roster, represented in person or by proxy, shall
constitute a quorum for the transaction of business.
5.4 Order of Business. The order of business at all meetings of the
Members shall be as follows:
1. Roll call.
2. Proof of notice of meeting or waiver of notice.
3. Reading of minutes of preceding meeting.
4. Report of the Manager.
5. Report of Committees.
6. Unfinished Business.
7. New Business.
5.5 Proxies. At all meetings of Members, a Member may vote by proxy
executed in writing by the Member or by its duly authorized attorney-in-fact.
Such proxy shall be filed with a Manager of the Company before or at the time of
the meeting. No proxy shall be valid after six (6) months from the date of
execution, unless otherwise provided in the proxy.
5.6 Voting by Certain Members. Membership certificates standing in the
name of a corporation, partnership, limited liability company or other entity
may be voted by such officer, partner, manager, member, agent or proxy as the
bylaws or other governing document of such entity may prescribe or, in the
absence of such provision, as the Board of Directors or other authorized
representative of such entity may determine. Membership certificates held by a
trustee, personal representative, administrator, executor, guardian or
conservator may be voted by such person, either in person or by proxy, without a
transfer of such certificates into such person's name.
5.7 Manner of Acting.
5.7.1 For any action by the Members the unanimous approval of
all Members shall be required.
5.7.2 The Manager of the Company shall preside at meetings of
the Members, and if also a Member, may move or second any item of business. A
record shall be maintained of the meetings of the Members. The Members may adopt
their own rules of procedure which shall not be inconsistent with the laws of
Nevada or this First Amended Operating Agreement.
5.7.3 A Member who is present at a meeting of the Members at
which action on any matter is taken shall be presumed
10
<PAGE>
to have assented to the action taken, unless the Member's dissent shall be
entered in the minutes of the meeting or unless the Member shall file a written
dissent to such action with the person acting as the secretary of the meeting
before the adjournment thereof or shall forward such dissent by certified mail
to the secretary of the meeting within five (5) days following the adjournment
of the meeting. Such right to dissent shall not apply to a Member who voted in
favor of such action.
5.8 Telephonic Meetings. Members may participate in any meeting of the
Members by means of conference telephone or similar communication if all persons
participating in such meeting can hear one another for the entire discussion of
the matter(s) to be voted upon. Participating in a meeting pursuant to this
Section shall constitute presence in person at such meeting.
5.9 Action by Consent. Unless otherwise provided by the laws of Nevada,
any action required or permitted to be taken at a meeting of the Members, may be
taken without a meeting if a consent in writing, setting forth the action so
taken, shall be signed by the required number of Members entitled to vote as set
forth in Section 5.7.1 with respect to the subject matter thereof.
5.10 Voting Rights of Members. The following matters require the
unanimous consent of the Members:
5.10.1 Approval of the Land Development Budget as well as any
substantial changes thereto. For purposes of this subsection 5.10.1, a
"substantial change" shall be deemed to mean, without limitation, any change of
more than ten percent (10%) in the aggregate of the Development Budget, or any
change in the Development Budget, after an aggregate net increase in the
Development Budget (i.e., after giving effect to decreases and increases), of
$200,000.
5.10.2 Approval of the terms and provisions of all loans and
other financing arrangements obtained by the Company or secured by Company
assets, including the terms of all loan agreements, notes, deeds of trust and
other security agreements.
5.10.3 Approval of the Marketing Budget as well as any
substantial changes thereto. For purposes of this subsection, a "substantial
change" shall be deemed to mean, without limitation, any change of more than ten
percent (10%) in the aggregate of the Annual Marketing Budget.
5.10.4 Any change in the stated purpose of the Company,
including the acquisition of additional real property.
5.10.5 Except as specifically allowed and authorized as set
forth herein, any cash or other monetary distribution by the Company.
11
<PAGE>
5.10.6 Removal of Manager, except as otherwise provided in
Section 6.8;
5.10.7 Election of an accounting year other than a calendar
year;
5.10.8 Amendment to the Articles of organization;
5.10.9 Dissolution of the Company;
5.10.10 Admission of Additional or Substitute Members; and
5.10.11 The consent to continue the business of the Company
pursuant to Section 12.1.3.
Until otherwise modified or repealed by the unanimous consent of the
Members, the authority to act, except for the matters set forth above or
otherwise reserved to the Members pursuant to the Act or as otherwise set forth
herein, on all matters on behalf of the Company shall be vested in the Manager.
5.11 Other Rights of Members. By way of illustration, and not
limitation, Members may:
5.11.1 Purchase Membership Interests, if the Company declines,
pursuant to Article 4;
5.11.2 Object to transfers of Membership Interests;
5.11.3 Review the books and records of the Company;
5.11.4 Receive notice of resignation of Manager and officers;
and
5.11.5 Receive distributions pursuant to Article 8.
5.11.6 Within five (5) days after execution or completion, as
the case may be, the Brentwood Member shall receive copies of Purchase
Contracts, material agreements, material amendments thereto, Marketing Reports
and Closing Statements for the sale of the Lots and Residences thereon.
5.12 Conflicts of Interest.
5.12.1 A Member shall be entitled to enter into transactions
that may be considered to be competitive with, or a business opportunity that
may be beneficial to, the Company, it being expressly understood that some of
the Members may enter into transactions that are similar to the transactions
into which the Company may enter. Notwithstanding the foregoing, Members shall
account to the Company and hold as trustee for it any property, profit, or
benefit derived by the Member, without the consent of the other Members, in the
conduct and winding up of the Company
12
<PAGE>
business or from a use or appropriation by the Member of Company Property
including information developed exclusively for the Company and opportunities
expressly offered to the Company.
5.12.2 A Member, including a Manager, does not violate a duty
or obligation to the Company merely because the Member's conduct furthers the
Member's own interest. A Member may lend money to and transact other business
with the Company. The rights and obligations of a Member who lends money to or
transacts business with the Company are the same as those of a person who is not
a Member, subject to other applicable law. No transaction with the Company shall
be voidable solely because a Member has a direct or indirect interest in the
transaction if either the transaction is fair to the Company or the
disinterested Manager or disinterested Member(s), in either case knowing the
material facts of the transaction and the Member's interest, authorize, approve
or ratify the transaction.
ARTICLE 6
MANAGERS
6.1 Appointment and Authority. Until its removal or resignation,
Christopher Homes shall constitute the Manager for the Company. The Manager need
not be a Member of the Company. In the event of any vacancy in the office of the
Manager or any successor Manager, a new Manager shall either be elected by
unanimous vote of all of the Members, or in the alternative, a new Manager may
be elected and appointed solely by the Stuhmer Member provided that J.
Christopher Stuhmer is and continues to act as the Chief Executive Officer of
the new Manager. All ordinary and usual decisions concerning the business
affairs of the Company shall be made by the Manager. The Manager shall have the
authority to act for, and on behalf of, the Company for all matters not
otherwise expressly reserved to the Members pursuant to Section 5.10 hereinabove
or otherwise reserved to the Members pursuant to the Act or as otherwise set
forth herein.
6.2 Term of Office. The Manager shall serve until the removal of such
Manager pursuant to Section 6.8 below.
6.3 Authority of Manager to Bind the Company. Only the Manager and its
authorized officers, and authorized officers of the Company, shall have
authority to bind the Company. Authorized officers of the Manager and authorized
officers of the Company shall include sales agents employed by the Manager. No
Member other than a Manager or authorized officer shall take any action as a
Member to bind the Company, and shall indemnify the Company for any costs or
damages incurred by the Company as a result of the unauthorized action of such
Member. Any authorized officer or any Manager shall have the power, on behalf of
the Company, to do all things necessary or convenient to carry out the business
and affairs of the Company (except as otherwise may be specifically
13
<PAGE>
limited pursuant to Article 5 hereinabove, or as otherwise reserved to the
Members pursuant to the Act), including without limitation, the following:
6.3.1 The institution, prosecution and defense of any
proceeding in the Company's name;
6.3.2 The purchase, receipt, lease or other acquisition,
ownership, holding, improvement, use and other dealing with, Company Property,
wherever located;
6.3.3 The marketing and sale of the Land, and any improvements
constructed thereon;
6.3.4 The procurement of financing for the Company, and the
mortgage, pledge, lease, exchange, hypothecation and other disposition of the
Company assets in connection with all financing procured for the Company;
6.3.5 The entering into of contracts and obligations of the
Company; incurring of liability; borrowing money; issuance of notes, bonds and
other obligations; and securing of any of its obligations by mortgage, pledge or
hypothecation of any Company Property, income or account receivables;
6.3.6 The lending of money, investment or reinvestment of the
Company's funds, and receipt and holding of Property as security for repayment,
including, without limitation, loaning money to, and otherwise helping Members,
officers, employees, and agents;
6.3.7 The conduct of the Company's business, the establishment
of Company offices, and the exercise of the powers of the Company within or
without Nevada;
6.3.8 The appointment of employees and agents of the Company,
the defining of their duties, the establishment of their compensation;
6.3.9 Any other act that furthers the business and affairs of
the Company;
6.3.10 The payment of compensation, or additional compensation
to any or all Members and employees, and to the Manager, on account of services
rendered to the Company, whether or not an agreement to pay such compensation
was made before such services were rendered;
6.3.11 The purchase of insurance on the life of any of its
Members, or employees for the benefit of the Company;
6.3.12 The indemnification of Members or any other Person; and
14
<PAGE>
6.3.13 The approval of changes to the Development Budget
which, under Section 5.10.3, do not constitute a "substantial change."
6.4 Actions of the Manager. The Manager has the power to bind the
Company as provided in this Article 6. The act of the Manager, for the purpose
of apparently carrying on in the usual way the business or affairs of the
Company, including the exercise of the authority indicated in this Article 6,
shall bind the Company and no person dealing with the Company shall have any
obligation to inquire into the power or authority of such Manager acting on
behalf of the Company.
6.5 Compensation of Manager. The Manager shall be reimbursed for all of
the following expenses incurred in managing the Company referenced hereinbelow,
all of which shall be paid to the Manager first, and on an ongoing basis, and
prior to repayment of capital and/or distribution of profit:
1. General and Administration Expense Reimbursement for general
management and administration of the Company as set forth in Exhibit "A"
attached hereto and incorporated herein;
2. Sales and Marketing Expense Reimbursement as set forth on Exhibit
"B" attached hereto and incorporated herein; and
3. Construction Overhead Reimbursement for indirect expenses in
accordance with the formula set forth on Exhibit "C" attached hereto and
incorporated herein.
6.6 Manager's Standard of Care. A Manager's duty of care in the
discharge of the Manager's duties to the Company and other Members is limited to
refraining from engaging in grossly negligent or reckless conduct, intentional
misconduct, or a knowing violation of the law. In discharging its duties, a
Manager shall be fully protected in relying in good faith upon the records
required to be maintained under Article 3 and upon such information, opinions,
reports or statements by any of the Members, or agents, or by any other person,
as to matters the Manager reasonably believes are within such other person's
professional or expert competence and who has been selected with reasonable care
by or on behalf of the Company, including information, opinions, reports or
statements as to the value and amount of the assets, liabilities, profits or
losses of the Company or any other facts pertinent to the existence and amount
of assets from which distributions to Members might properly be paid.
6.7 Officers. The Manager shall act as the General Manager and
President of the Company and shall function as the Chief Operating Officer of
the Company. The Members may also elect from time to time additional officers
including, without limitation, one or more Vice Managers or Vice Presidents, a
secretary and one
15
<PAGE>
or more assistant secretaries, and a Treasurer and one or more Assistant
Treasurers, which officers may be elected by the unanimous approval of the
Members. If the Members do not elect such additional officers, the Manager may
appoint such additional Officers from time to time. An officer need not be
selected from among the Members. One person may hold two or more offices.
6.8 Resignations and Removal. Any Manager or officer may resign at any
time by giving written notice to all of the Members, and, unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective. The Manager and any officer elected by the Members may be
removed at any time by the unanimous vote of the Members, with or without cause.
In addition, the Stuhmer Member may remove the Manager at any time, with or
without cause, in which event the Stuhmer Member shall have the right to appoint
another Manager for the Company provided that J. Christopher Stuhmer is the
newly-appointed Manager, or provided that J. Christopher Stuhmer is and remains
the Chief Executive Officer of the newly appointed Manager. In the event that
the Stuhmer Member removes the Manager as set forth herein, and does not appoint
another Manager for the Company, then the Brentwood Member shall have the right
to appoint another Manager for the Company.
Any officer appointed by the Manager may be removed at any time by the
Manager or with the Members' unanimous consent, with or without cause.
6.9 Vacancies. A vacancy among the Managers may be filled for the
unexpired portion of the term by the Members.
ARTICLE 7
CONTRIBUTIONS, MEMBERSHIP INTERESTS, AND CAPITAL ACCOUNTS
7.1 Initial Contributions. For its initial capital contribution to the
Company, the Brentwood Member has executed and delivered to the Company (1) a
Grant, Bargain, Sale Deed conveying to the Company the Land, free and clear of
all liens, encumbrances and title exceptions except for those matters reflected
on and approved as permitted exceptions in a Preliminary Report or Title
Commitment to be issued by Nevada Title Company, and (2) an Assignment and
Assumption of Contract Rights affecting the Land.
With respect to the Promissory Note and Amendment to Promissory Note
secured by the Deed of Trust dated November 14, 1997, the beneficial interest of
which is held by Howard Hughes Properties, Limited Partnership, the obligations
under the Note and First Amendment to Note shall be paid on the "Transaction
Date" referred to in the Agreement Regarding Star Canyon Restructuring from Loan
proceeds obtained by the Company.
On or before the Transaction Date referred to in the Agreement
Regarding Star Canyon Restructuring, the Brentwood Member shall also cause to be
recorded a Reconveyance of the
16
<PAGE>
"Second Lien Deed of Trust", the beneficial interest of which is held by
Brentwood, Inc., a Nevada corporation, which Second Lien Deed of Trust is in the
principal amount of THREE MILLION SIX HUNDRED FIFTY THOUSAND DOLLARS
($3,650,000.00), and which was recorded in the Office of the County Recorder of
Clark County, Nevada, on December 31, 1996, at Book No. 961231 as Instrument No.
02317.
In addition to the foregoing capital contribution, the Brentwood Member
shall contribute as of the Transaction Date, a capital contribution of FIVE
MILLION DOLLARS ($5,000,000.00) for the operation of the Company, which amount
shall be contributed in accordance with the Schedule attached hereto as Exhibit
"D", and which is incorporated in full by this reference. Additionally, the
Brentwood Member shall be required to make Additional Contributions to Capital
as provided for in accordance with the provisions of Section 7.2 hereinbelow.
The Christopher Homes Member shall not be required to make a capital
contribution, and its capital account shall initially be zero. The Christopher
Homes Member shall contribute services to the Company in connection with the
Company's development, ownership, construction, marketing, and sale of the Land,
and will procure the financing for the Company to further the foregoing
purposes.
The Brentwood Member shall not be entitled to a "Preferred Return" on
its Capital Contribution.
The Brentwood Member shall be entitled to purchase one (1) Lot during
the term of this First Amended Operating Agreement for the amount, and upon the
terms set forth for such Lot in the Schedule attached to Exhibit D.
No Member shall have the right to withdraw or be repaid any Capital
Contribution except as provided in the Act or as otherwise provided in this
First Amended Operating Agreement.
The operating capital of the Company shall consist of the Capital
Contribution of the Brentwood Member as set forth on Exhibit 4, Buyers' deposits
to purchase the Land and improvements thereon, Loan proceeds obtained by the
Company, and proceeds from close of escrows.
7.2 Additional Contributions. In addition to the Initial Capital
Contributions, the Manager may determine from time to time that additional
contributions are needed to enable the Company to conduct its business. Upon
making such a determination and upon unanimous approval by the Members, the
Manager shall give Notice to all Members in writing at least thirty (30) days
prior to the date on which such contribution is due. Such Notice shall set forth
the amount of the additional contribution needed, the
17
<PAGE>
purpose for which the contribution is needed, and the date by which the Members
must contribute. Each Member shall be required to contribute a share of such
additional contribution, in proportion to their respective Membership Interest,
as a Commitment hereunder. Notwithstanding the foregoing, the Brentwood Member
shall not be required to make additional capital contributions which exceed a
total capital contribution of Five Million Dollars ($5,000,000.00) for the
operation of the Company.
7.3 Enforcement of Commitments. In the event any Member fails to
perform the Member's Commitment, such Member shall become a Delinquent Member
and the Manager shall give the Delinquent Member a Notice of the failure to meet
the Commitment. If the Delinquent Member fails to perform the Commitment
(including any costs associated with the failure to comply with the Commitment
and interest on such obligation at the Default interest Rate within ten (10)
business days of the giving of Notice, the Manager may take such action as
necessary to enforce the Commitment, including but not limited to enforcing the
Commitment in the court of appropriate jurisdiction in the state in which the
principal place of business is located. Each Member expressly agrees to the
jurisdiction of such courts. The Manager may elect to allow the other Members to
contribute the amount of the Commitment in proportion to such Members'
Membership Interests, with those Members who contribute (the "Contributing
Members") to contribute additional amounts equal to any amount of the Commitment
not contributed. The Contributing Members shall be entitled to treat the amounts
contributed pursuant to this section as a loan from the Contributing Members to
the Company bearing interest at the Default Interest Rate secured by the
Delinquent Member's interest in the Company. Until they are fully repaid, the
Contributing Members shall be entitled to all Distributions to which the
Delinquent Member would have been entitled, to offset and be applied against the
unpaid balance of the required Delinquent Member's Commitment and the interest
incurred thereon. Notwithstanding the foregoing, no Commitment or other
obligation to make an additional contribution may be enforced by a creditor of
the Company unless the Member expressly consents to such enforcement or to the
assignment of the obligation to such creditor.
7.4 Maintenance of Capital Accounts. The Company shall establish and
maintain Capital Accounts for each Member and Assignee. Each Member's Capital
Account shall be initially credited with the amount reflected on Exhibit D, and
increased by (1) the amount of any money actually contributed by the Member to
the capital of the Company, (2) the fair market value of any Property
contributed, as determined by the Company and the contributing Member at arm's
length at the time of contribution (net of liabilities assumed by the Company or
subject to which the company takes such Property, within the meaning of Section
752 of the Code), and (3) the Member's share of Net Profits and of any
18
<PAGE>
separately allocated items of income or gain (including any gain and income from
unrealized income with respect to accounts receivable allocated to the Member to
reflect the difference between the book value and tax basis of assets
contributed by the Member). Each Member's Capital Account shall be decreased by
(1) the amount of any money actually distributed to the Member from the capital
of the Company, (2) the fair market value of any Property distributed to the
Member, as determined by the Company and the contributing Member at arm's length
at the time of distribution (net of liabilities of the Company assumed by the
Member or subject to which the Member takes such property within the meaning of
Section 752 of the Code), and (3) the Member's share of Net Losses and of any
separately allocated items of deduction or loss (including any loss or deduction
allocated to the Member to reflect the difference between the book value and tax
basis of assets contributed by the Member).
7.5 Distribution of Assets. If the Company at any time distributes any
of its assets in-kind to any Member, the Capital Account of each Member shall be
adjusted to account for that Member's allocable share (as determined under
Article 8 below) of the Net Profits or Net Losses that would have been realized
by the Company had it sold the assets that were distributed at their respective
fair market values immediately prior to their distribution.
7.6 Sale or Exchange of Interest. In the event of a sale or exchange of
some or all of a Membership Interest in the Company, the Capital Account of the
transferring Member shall become the Capital Account of the transferee, to the
extent it relates to the portion of the interest transferred.
7.7 Compliance with Section 704(b) of the Code. The provisions of this
Article 7 as they relate to the maintenance of Capital Accounts are intended,
and shall be construed, and, if necessary, modified to cause the allocations of
profits, losses, income, gain and credit pursuant to Article 8 to have
substantial economic effect under the Regulations promulgated Under Section
704(b) of the Code, in light of the distributions made pursuant to Articles 8
and 12 and the Capital Contributions made pursuant to this Article 7.
Notwithstanding anything herein to the contrary, this First Amended Operating
Agreement shall not be construed as creating a deficit restoration obligation or
otherwise personally obligate any Member to make a Capital Contribution in
excess of the contributions required under this Article 7.
7.8 Compliance with Section 704(c) of the Code. If Section 704(c) of
the Code applies to Property contributed by a Member to the Company, then the
Members' Capital Accounts shall be adjusted in accordance with Section
1.704(b)(2)(iv)(g) of the Regulations.
19
<PAGE>
ARTICLE 8
ALLOCATIONS AND DISTRIBUTIONS
8.1 Allocations of Net Profits and Losses from Operations. Except as
may be required by Section 704(c) of the Code, Net Profits, Net Losses, and
other items of income, gain, loss, deduction and credit shall be allocated among
the Members in accordance with the following provisions:
8.1.1 Net Losses shall be allocated in equal proportions to
the Brentwood Member and the Stuhmer Member;
8.1.2 Net Profits shall be allocated in equal proportions to
the Brentwood Member and the Stuhmer Member.
8.2 Special Items. There shall be a Company Minimum Gain Chargeback,
Member Minimum Gain Chargeback and Qualified Income offset if and to the extent
required by the Code and Regulations.
8.3 Distributions. Distributions to the Members on account of their
respective Membership Interests shall be made for each Lot and residence in
accordance with the Distribution Schedules attached hereto as Exhibit "E".
8.4 Tax Distribution. Each Member shall be responsible for payment of
all taxes with respect to its interest in the Company's income. The Company has
no independent or additional obligation to make distributions to each of the
Members on account of such tax liability other than as provided in Section 8.3.
8.5 Limitations on Distributions. Notwithstanding the provisions of
Section 8.3, no distribution shall be declared and paid unless, after the
distribution is made, the assets of the Company are in excess of all liabilities
of the Company, except liabilities to Members on account of their Capital
Accounts.
ARTICLE 9
TAXES
9.1 Elections. The Manager may make any tax elections for the Company
allowed under the Code or the tax laws of any state or other jurisdiction having
taxing jurisdiction over the Company.
9.2 Taxes of Taxing Jurisdictions. To the extent that the laws of any
Taxing Jurisdiction require, each Member requested to do so by the Manager will
submit an agreement indicating that the Member will make timely income tax
payments to the Taxing Jurisdiction and that the Member accepts personal
jurisdiction of the Taxing Jurisdiction with regard to the collection of income
taxes attributable to the Member's income, and interest, and penalties assessed
on such income. If the Member fails to provide such agreement, the Company may
withhold and pay over to such Taxing Jurisdiction the amount of tax, penalty and
interest
20
<PAGE>
determined under the laws of the Taxing Jurisdiction with respect to such
income. Any such payments with respect to the income of a Member shall be
treated as a distribution for purposes of Article 8. The Manager may, where
permitted by the rules of any Taxing Jurisdiction, file a composite, combined or
aggregate tax return reflecting the income of the Company and pay the tax,
interest and penalties of some or all of the Members of such income to the
Taxing Jurisdiction, in which case the Company shall inform the Members of the
amount of such tax interest and penalties so paid.
9.3 Tax Matters Member. The Manager shall designate one Member to act
in a capacity similar to a tax matters partner of a partnership pursuant to
Section 6231(a)(7) of the Code. Such Member shall be designated as the tax
matters Member and shall take such action as may be necessary to cause each
other Member to come a notice member within the meaning of Section 6223 of the
Code. Any Member who is designated tax matters Member may not take any action
contemplated by Sections 6222 through 6232 of the Code without the consent of
the Manager.
9.4 Method of Accounting. The records of the Company shall be
maintained in accordance with the accounting method elected to be followed by
the Company for federal income tax purposes under the Code. The accounting
method elected to be followed by the Company shall be in accordance with
generally accepted accounting principles. (GAAP).
ARTICLE 10
DISSOCIATION OF A MEMBER
10.1 Dissociation. A Member shall cease to be a Member upon the
happening of any of the following events:
10.1.1 The death of a Member;
10.1.2 The retirement or resignation from the Company of a
Member with the consent of all the remaining Members;
10.1.3 A Member becoming a Bankrupt Member;
10.1.4 In the case of a Member that is an entity other than a
corporation, the dissolution and commencement of winding up such Member;
10.1.5 In the case of a Member that is a corporation, the
filing of a certificate of dissolution, or its equivalent, or the revocation of
the charter of such Member;
10.1.6 In the case of a Member who is a Member by virtue of
being a trustee of a trust, the termination of the trust (but not merely the
substitution of a new trustee); or
10.1.7 In the case of an estate, the distribution of the
estate's entire Membership Interest in the Company.
21
<PAGE>
10.2 Rights of Dissociating Member. In the event of a Dissociation of
any Member prior to the expiration of the term of the Company;
10.2.1 If the dissociation causes a dissolution and winding up
of the Company under Article 12, the Member shall be entitled to participate in
the winding up of the Company to the same extent as any other Member except that
any Distributions to which the Member would have been entitled shall be reduced
by the damages sustained by the Company as a result of the Dissolution and
winding up;
10.2.2 If the dissociation does not cause a dissolution and
winding up of the Company under Article 12, the remaining Members shall have the
option to purchase the entire Membership Interest of the Dissociating Member for
an agreed upon amount, or if no amount can be agreed upon, the fair market value
of such interest as determined by an independent qualified appraiser appointed
by the Members, including the Dissociating Member. If they cannot agree on an
appraiser, the remaining Members and the Dissociating Member shall each choose
an appraiser and the two appraisers shall choose one additional appraiser. The
three appraisers shall thereupon determine the fair market value of such
interest. The Dissociating Member shall thereupon be entitled to an amount equal
to such value of the Member's Membership Interest in the Company, to be paid
within six months of the date of dissociation. Notwithstanding the foregoing, if
the dissociation is other than as a result of the death or incompetence of the
Member, the Members may pay the value of the Member's Membership Interest in the
Company over a period not to exceed five (5) years, provided that the
Dissociating Member shall be entitled to participate as an Assignee in the
Company until the value of such Membership Interest plus interest at a rate
equal to the Reference Rate plus one and one-half percent (1.5%) is paid in
full. The value of the Member's Membership Interest shall include the amount of
any distributions to which the Member is entitled under this First Amended
Operating Agreement as of the date of dissociation based upon the Member's right
to share in distributions from the Company reduced by any damages sustained by
the Company as a result of the Member's dissociation.
ARTICLE 11
ADMISSION OF ASSIGNEES AND ADDITIONAL MEMBERS
11.1 Rights of Assignees. The Assignee of a Membership Interest has no
right to participate in the management of the business and affairs of the
Company or to become a Member. The Assignee is only entitled to receive the
Distributions and return of capital, and to be allocated the Net Profits and Net
Losses attributable to the assigned Membership Interest, or portion thereof.
22
<PAGE>
11.2 Admission of Substitute Members. An Assignee of a Membership
Interest shall be admitted as a Substitute Member and admitted to all the rights
of the Member who initially assigned the Membership Interest only with the
unanimous approval of the Members. The Members may grant or withhold the
approval of such admission in their sole and absolute discretion. If so
admitted, the Substitute Member has all the rights and powers and is subject to
all the restrictions and liabilities of the Member originally assigning the
Membership Interest. The admission of a Substitute Member, without more, shall
not release the Member assigning the Membership Interest from any liability to
the Company that existed prior to the approval.
ARTICLE 12
DISSOLUTION AND WINDING UP
12.1 Dissolution. The Company shall be dissolved and its affairs wound
up, upon the first to occur of the following events (which shall constitute
Dissolution Events):
12.1.1 The expiration of the term of the Company; or
12.1.2 The unanimous written consent of all of the Members.
12.1.3 The election by the Brentwood Member to declare a
Dissolution Event in accordance with the provisions of Article 4.5.1
hereinabove.
12.2 Effect of Dissolution. Upon dissolution the Company shall cease
carrying on its business as distinguished from the winding up of the Company
business. The Company will not be terminated, but will continue until the
winding up of the affairs of the Company is completed and the Articles of
Dissolution have been filed with the Nevada Secretary of State.
12.3 Distribution of Assets on Dissolution. Upon the winding up of the
Company, the Company Property shall be distributed:
12.3.1 To creditors, including Members who are creditors, to
the extent permitted by law, in satisfaction of Company Liabilities;
12.3.2 To Members in accordance with positive Capital Account
balances taking into account all Capital Account adjustments for the Company's
taxable year in which the liquidation occurs. Liquidation proceeds shall be paid
within sixty (60) days of the end of the Company's taxable year or, if later,
within ninety (90) days after the date of liquidation. Such distributions shall
be in cash or property (which need not be distributed proportionately) or partly
in both, as determined by the Manager.
23
<PAGE>
12.4 Winding Up and Certificate of Dissolution. The winding up of the
Company shall be completed when all debts, liabilities, and obligations of the
Company have been paid and discharged or reasonably adequate provision therefor
has been made, and all of the remaining property and assets of the Company have
been distributed to the Members. Upon the completion of winding up the Company,
Articles of Dissolution shall be delivered to the Nevada Secretary of State for
filing. The Articles of Dissolution shall set forth the information required by
the Act.
ARTICLE 13
DEVELOPMENT, CONSTRUCTION AND MARKETING OF THE PROJECT
13.1 Development and Construction of the Project. The Manager shall
perform the finished Lot work and all of the Developer's obligations under the
Development Declaration, and all Amendments to the Development Declaration. The
Manager shall have full authority and responsibility to complete the
construction and to oversee the development of the Project, including without
limitation, such matters as obtaining the appropriate zoning for the Project, if
necessary, hiring necessary engineers to complete the Plans and Specifications
for the preparation of the Land and improvements thereon, developing the Land
into finished Lots, constructing improvements and residences on the finished
Lots, preparing final Subdivision Maps, if necessary, effecting product
development for the Lots and Land, constructing and installing the streets,
curbs, gutters, lighting and all other Subdivision improvements on the Land.
Following the execution of this First Amended Operating Agreement, the
Manager shall update the Development Budget no less frequently than annually.
The Manager shall be responsible for securing construction financing
for the Company. The Brentwood Member may itself, either on its own or through
an affiliate, advance such construction loan funds to the Company, upon
commercially reasonable terms, and in such amounts required by the Development
Budget. Neither Member shall be required to provide any guarantees for financing
of the Project.
13.2 Marketing and Advertising. The Manager shall have full
responsibility and authority to perform the marketing and advertising for the
sale of the Lots and improvements by the Company in accordance with the
Developer's obligations under Sections 11 and 12 of the Development Declaration,
and all Amendments thereto. For its services, the Manager shall be reimbursed
the Sales and Marketing Expense Reimbursement in accordance with the provisions
of Exhibit "B". The Sales and Marketing Expense Reimbursement shall be made to
the Manager from available funds. If the Company does not have funds to pay the
Sales and Marketing Expense Reimbursement when due, then the Sales and Marketing
Expense Reimbursement shall be paid from available funds.
24
<PAGE>
Following the execution of this First Amended Operating Agreement, the
Manager shall update the Sales and Marketing Expense Budget no less frequently
than annually. Contemporaneously therewith, the Company or the Manager, as the
case may be, shall pay the difference between the Estimated Sales and Marketing
Expense Reimbursement paid for the prior year and the actual Sales and Marketing
Expenses incurred by the Manager for such prior year. For purposes of
illustration, in the event that the actual Sales and Marketing Expenses incurred
by the Manager exceed the estimated Sales and Marketing Expense Reimbursement
set forth on Exhibit "B", then the difference between the amount paid and the
amount actually incurred shall be paid to the Manager. Likewise, if the
estimated Sales and Marketing Expense Reimbursement paid by the Company exceeds
the actual Sales and Marketing Expenses incurred by the Manager, then the
Manager shall reimburse the Company or credit the amount to future estimated
Sales and Marketing Expense Reimbursement payments to be made by the Company.
13.3 Sales of Residences. Sales of Lots and Residences will be made
pursuant to the sales documents as may be approved by the Manager and as
modified from time to time (collectively, the "Approved Sales Documents"). Each
Lot and Residence closing shall occur through an escrow (an "escrow") to be
established with an escrow agent ("escrow agent"), selected by the Manager. All
closings shall occur at the office of the escrow agent or at such other location
as is mutually acceptable to the Company and the Purchaser. Any change to the
Lot prices from that set forth in the Schedule attached to Exhibit "D" shall
require the unanimous consent and approval of all Members.
ARTICLE 14
AMENDMENT
This First Amended Operating Agreement may be amended or modified from
time to time only by a written instrument adopted by all of the Members.
ARTICLE 15
MISCELLANEOUS PROVISIONS
15.1 Entire Agreement. This First Amended Operating Agreement
represents the entire agreement among all the Members and between the Members
and the Company.
15.2 No Partnership Intended for Nontax Purposes. The Members have
formed the Company under the Act, and expressly do not intend hereby to form a
Partnership under either the Nevada Uniform Partnership Act nor the Nevada
Uniform Limited Partnership Act. The Members do not intend to be partners one to
another, or partners as to any third party. To the extent any Member, by word or
action, represents to another person that any other Member is a
25
<PAGE>
partner or that the Company is a partnership, the Member making such wrongful
representation shall be liable to any other Member who incurs personal liability
by reason of such wrongful representation.
15.3 Rights of Creditors and Third Parties under First Amended
Operating Agreement. This First Amended Operating Agreement is entered into
among the Members for the exclusive benefit of the Company, its Members, and
their successors and assignees. This First Amended Operating Agreement is
expressly not intended for the benefit of any creditor of the Company or any
other person. Except and only to the extent provided by applicable statute, no
such creditor or third party shall have any rights under this First Amended
Operating Agreement or any agreement between the Company and any Member with
respect to any Capital Contribution or otherwise.
15.4 Indemnification by Company.
15.4.1 The Company shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, except an action by or in the name of the Company, by reason of
the fact that the person is or was a Manager, Member, employee or agent of the
Company, or is or was serving at the request of the Company as a manger, member,
officer, employee or agent of another limited-liability company, partnership,
joint venture, trust or other enterprise, against expenses, including attorney's
fees, judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in connection with the action, suit, or proceeding if the
person acted in good faith and in a manner which the person reasonably believed
to be in, or not opposed to the best interests of the Company, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe the
person's conduct was unlawful. The termination of any action, suit or proceeding
by judgment, order, settlement or conviction, or upon a plea of nolo contendere
or its equivalent, does not, of itself, create a presumption that the person did
not act in good faith and in a manner which the person reasonably believed to be
in or not opposed to the best interest of the Company and that, with respect to
any criminal action or proceeding, the person had reasonable cause to believe
that the person's conduct was unlawful.
15.4.2 Indemnification shall not be made to or on behalf of
any person (as defined in Nevada Revised Statutes) if a final adjudication
establishes that the person's acts or omissions involved intentional misconduct,
fraud or a knowing violation of the law and was material to the cause of action.
15.4.3 The expenses of Members and the Manager incurred in
defending a civil or criminal action, suit or proceeding must
26
<PAGE>
be paid by the Company as they are incurred and in advance of the final
disposition of the action, suit or proceeding, upon receipt of an undertaking by
or on behalf of the Manager or Member to repay the amount if it is ultimately
determined by a court of competent jurisdiction that he is not entitled to be
indemnified by the Company.
15.5 Gender and Number. Whenever the context requires, the gender of
all words used herein shall include the masculine, feminine and neuter, and the
number of all words shall include the singular and plural thereof.
15.6 Articles and Other Headings. The Articles and other headings
contained in this Agreement are for reference purposes only and shall not affect
the meaning or interpretation.
15.7. Counterparts. This Agreement may be executed in several
counterparts and all so executed shall constitute one Agreement, binding on all
of the Members, notwithstanding that all of the Members are not signatory to the
original or the same counterpart.
15.8 Successors. This Agreement shall be binding upon the successors
and assigns of the Members and shall inure to the benefit of the permitted
successors and assigns of the Members.
15.9 Governing Law. This Agreement shall be construed under the laws of
the State of Nevada as if this Agreement were executed in and to be performed
entirely within Nevada and all Members resident in Nevada. Any suit or action of
a Manager or a Member as plaintiff to which the Company is named a party shall
be instituted in a court of competent jurisdiction in Clark County, Nevada.
ARTICLE 16
DEFINITIONS
For purposes of this First Amended Operating Agreement (as defined
below), unless the context clearly indicates otherwise, the following terms
shall have the following meanings:
16.1 Act. The Nevada Limited Liability Company Act (Chapter 86 of the
Nevada Revised Statutes) and all amendments thereto.
16.2 Additional Member. A Member other than an Initial Member or a
Substitute Member who has acquired a Membership Interest from the Company.
16.3 Articles. The Articles of Organization of the Company as filed with
the Nevada Secretary of State together with all amendments thereto, and
restatements thereof, properly adopted in accordance with this First Amended
Operating Agreement and filed with the Nevada Secretary of State.
27
<PAGE>
16.4 Assignee. A transferee of a Membership Interest who has not been
admitted as a Substitute Member.
16.5 Available Cash. Available Cash shall mean the excess of all cash
receipts over the sum of cash expenditures payable in connection with the
generation thereof and provision for any reserves for expenses, contingencies,
or liabilities deemed appropriate by the Manager. Available Cash also includes
all amounts constituting Company reserves that are determined to be no longer
necessary as reserves.
16.6 Bankrupt Member. A Member who: (1) has become the subject of an
order for relief under the United States Bankruptcy Code, or (2) has initiated,
either in an original proceeding or by way of answer in any state insolvency or
receivership proceeding, an action for liquidation arrangement, composition,
readjustment, dissolution, or similar relief.
16.7 Brentwood Member. Brentwood Members, L.L.C., a Nevada limited
liability company, and its successors and assigns, who are admitted as
Substitute Members in accordance with the terms of this First Amended Operating
Agreement.
16.8 Capital Account. The account maintained for a Member or Assignee
determined in accordance with Article 7.
16.9 Capital Contribution. Any contribution to the Company of Property,
services or the obligation to contribute Property or services to the Company
made by or on behalf of a Member or Assignee.
16.10 Christopher Homes. The initial Manager, and its successors and
assigns, as further defined in Section 16.35 hereinbelow.
16.11 Code. The Internal Revenue Code of 1986, as amended from time to
time.
16.12 Commitment. The Capital Contributions that a Member is obligated
to make.
16.13 Company. Star Canyon/Summerlin, L.L.C., a Nevada limited
liability company formed under the laws of Nevada and the terms of this First
Amended Operating Agreement, and any successor limited liability company.
16.14 Company Liability. Any enforceable debt or obligation for which
the Company is liable or which is secured by any Company Property.
16.15 Company Minimum Gain. An amount determined by first computing for
each Company Nonrecourse Liability any gain the Company would realize if it
disposed of the Company Property
28
<PAGE>
subject to that liability for no consideration other than full satisfaction of
the liability, and then aggregating the separately computed gains. The amount of
Company Minimum Gain includes such minimum gain arising from a conversion,
refinancing, or other change to a debt instrument, only to the extent a Member
is allocated a share of that minimum gain. For any Taxable Year, the net
increase or decrease in Company Minimum Gain is determined by comparing the
Company Minimum Gain on the last day of the immediately preceding Taxable Year
within the Minimum Gain on the last day of the current Taxable Year.
Notwithstanding any provision to the contrary contained herein, Company Minimum
Gain and increases and decreases in Company Minimum Gain are intended to be
computed in accordance with Section 704 of the Code and the Regulations issued
thereunder, as the same may be issued and interpreted from time to time. A
Member's share of Company Minimum Gain at the end of any Taxable Year equals:
the sum of Nonrecourse Deductions (as defined in Section 1.7042 (b)(1) of the
Regulations) allocated to that Member (and to that Member's predecessors in
interest) up to that time and the distributions made to that Member (and to that
Member's predecessors in interest) up to that time of proceeds of a nonrecourse
liability allocable to an increase in Company Minimum Gain minus the sum of that
Member's (and that Member's predecessors' in interest) aggregate share of the
net decreases in Company Minimum Gain plus their aggregate share of decreases
resulting from revaluations of Company Property subject to one or more Company
Nonrecourse Liabilities.
16.16 Company Nonrecourse Liability. A Company Liability to the extent
that no Member or Related Person bears the economic risk of loss with respect to
the liability.
16.17 Company Property. The Land and any other Property owned by the
Company.
16.18 Contributing Members. Those Members making additional
contributions to the Company or contributions as a result of the failure of a
Delinquent Member to make the contributions required by the Commitment as
described in Article 7.
16.19 Default Interest Rate. The Reference Rate plus four percent (4%)
per annum.
16.20 Delinquent Member. A Member who has failed to meet the Commitment
required to be contributed by that Member as described in Article 7.
16.21 Development Budget. The initial Development Budget and each
interim budget of the Company's total projected costs for construction and
development through completion of the Project, as evidenced by the sale of all
of the Lots and improvements.
29
<PAGE>
16.22 Development Declaration. That certain Declaration of Development
Covenants and Restrictions recorded on December 31, 1996, in Book 961231 as
Instrument No. 02315, in the Office of the Clark County Nevada Recorder, as
amended.
16.23 Distribution. A transfer of Property and/or cash to a Member on
account of a Membership Interest as described in Article 8.
16.24 Disposition (Dispose). Any sale, assignment, transfer, exchange,
mortgage, pledge, grant, hypothecation, or other transfer, absolute or as
security or encumbrance (including dispositions by operation of law).
16.25 Dissociation. Any action which causes a Member to cease to be a
Member as described in Article 10 hereof.
16.26 Dissolution Event. An event, the occurrence of which will result
in the dissolution of the Company under Article 12 unless the Members agree to
the contrary.
16.27 Effective Date. The date on which the Articles were filed with
the Nevada Secretary of State.
16.28 Finished Lot Work. Completion of the Site Improvements and
Landscape Improvements (as such terms are defined in the Development
Declaration), as required by the Development Declaration.
16.29 Initial Capital Contribution. The Capital Contribution agreed to
be made by the Members as described in Article 7.
16.30 J. Christopher Stuhmer. J. Christopher Stuhmer, an individual,
and his successors and assigns who are admitted as Substitute Members in
accordance with the terms of this First Amended Operating Agreement.
16.31 Land. The approximately 35.87 acres of Land which comprises the
Lots described on page 1 of the First Amended Operating Agreement.
16.32 Lot. One of the custom lots within the Project.
16.33 Lot Sales Price. The purchase price established by the Manager
for each Lot as set forth on the Schedule attached to Exhibit "D", which
purchase price cannot be reduced without the unanimous consent and approval of
all Members.
16.34 Management Rights. The rights of a Member to participate in the
management of the Company, including the rights of information and to consent or
approve actions of the Company.
30
<PAGE>
16.35 Manager/Managers. Christopher Homes and its successors, and in
the event that additional Managers are elected or appointed in accordance with
the terms of the First Amended Operating Agreement, those persons or entities so
elected or appointed. All references in this First Amended Operating Agreement
to Manager or Managers shall be read in the singular or plural as the context
requires, based on the number of Managers at the time of such reading.
16.36 Marketing Budget. The Marketing Budget and any Amendments thereto
reflecting the total projected costs to be incurred by the Manager in connection
with its marketing and advertising the Lots and Residences for the sale to the
home buying public. Changes to the Marketing Budget may be prepared and made by
the Manager as set forth herein.
16.37 Member. Any Person who is an Initial Member, a Substitute Member
or an Additional Member.
16.38 Member Minimum Gain. An amount determined by first computing for
each Member Nonrecourse Liability any gain the Company would realize if it
disposed of the Company Property subject to that liability for no consideration
other than full satisfaction of the liability, and then aggregating the
separately computed gains. The amount of Member Minimum Gain includes such
minimum gain arising from a conversion, refinancing, or other change to a debt
instrument, only to the extent that Member is allocated a share of that minimum
gain. For any Taxable Year, the net increase or decrease in Member Minimum Gain
is determined by comparing the Members Minimum Gain on the last day of the
immediately preceding Taxable Year with the Member Minimum Gain on that last day
of the current Taxable Year. Notwithstanding any provision to the contrary
contained herein, Member Minimum Gain and increases and decreases in Member
Minimum Gain are intended to be computed in accordance with Section 704 of the
Code and the Regulations issued thereunder, as and the same may be amended and
interpreted from time to time.
16.39 Member Nonrecourse Liability. Any Company Liability to the extent
the liability is nonrecourse under state law, and on which a Member or Related
Person bears the economic risk of loss under Section 1.752-2 of the Regulations
because, for example, the Member or Related Person is the creditor of a
guarantor.
16.40 Membership Interest. The rights of a Member or, in the case of an
Assignee, the rights of the assigning Member in Distributions (liquidating or
otherwise) and allocations of the profits, losses, gains, deductions, and
credits of the Company.
16.41 Minimum Gain Chargeback. Allocations of gain attributable to a
decrease in Company Minimum Gain or Member Minimum Gain to the extent required
under Section 1.704-2 of the Regulations.
31
<PAGE>
16.42 Net Losses. The losses and deductions of the Company determined
in accordance with accounting principles consistently applied from year to year
employed under the method of accounting adopted by the Company and as reported
separately or in the aggregate, as appropriate, on the tax return of the Company
filed for federal income tax purposes.
16.43 Net Profits. The income and gains of the Company determined in
accordance with accounting principles consistently applied from year to year
employed under the method of accounting adopted by the Company and as reported
separately or in the aggregate, as appropriate, on the tax return of the Company
filed for federal income tax purposes.
16.44 Nonrecourse Liabilities. Nonrecourse liabilities include Company
Nonrecourse Liabilities and Member Nonrecourse Liabilities.
16.45 Notice. Notices shall be in writing. Notices of the Company shall
be considered given when mailed by first class mail postage prepaid addressed by
any Member to the Company at the address of the Company's principal place of
business. Notices to a Member shall be considered given when mailed by first
class mail postage prepaid addressed to the Member at the address of the
principal place of business of the Member.
16.46 Offsettable Decrease. Any allocation that unexpectedly causes or
increases a deficit in the Member's Capital Account as of the end of the taxable
year to which the allocation relates and is attributable to depletion allowances
under Section 1.704-1(b)(2)(iv)(k) of the Regulations, allocations of loss and
deductions under Sections 704(e)(2) or 706(d) of the Code or under Section
1.751-1(b)(2)(ii) of the Regulations, or distribution that, as of the end of the
year, are reasonably expected to be made to the extent that they exceed the
offsetting increases to such Member's Capital Account that reasonably are
expected to occur during or (prior to) the taxable years in which such
distributions are expected to be made (other than increases pursuant to a
Minimum Gain Chargeback).
16.47 First Amended Operating Agreement. This First Amended Operating
Agreement including all amendments adopted hereafter in accordance with this
First Amended Operating Agreement and the Act.
16.48 Person. Any individual, partnership, limited liabilit8 company,
corporation, trust, or other entity.
16.49 Project. The proposed development of the Land into a single
family residence community.
32
<PAGE>
16.50 Property. Any property real or personal, tangible or intangible,
including money and any legal or equitable interest in such property, but
excluding services and promises to perform services in the future.
16.51 Purchase Agreement. That certain Agreement for the Purchase and
Sale of Real Property dated December 20, 1996, by and between Howard Hughes
Properties, Limited Partnership, and Sunrise Alta, L.L.C., as amended, assigned
to the Brentwood Member pursuant to that certain Assignment of Rights under
Agreement for the Purchase and Sale of Real Property, effective December 31,
1996.
16.52 Records Office. The records office of the Company shall be
established to maintain the records of the Company pursuant to the Act and
Article 4 and may, but need not be, the principal place of business of the
Company.
16.53 Recourse Liability. A Company Liability is a recourse liability
to the extent that any Member or related person bears the economic risk of loss
for that liability under Section 1.752-2 of the Regulations.
16.54 Reference Rate. The rate of interest publicly announced by the
Bank of America National Trust and Savings Association in San Francisco,
California as its "Reference Rate." Any change in the Reference Rate shall take
effect on the opening of business on the day specified in the public
announcement of a change in the Reference Rate. Interest shall be computed on
the basis of a 365 or 366 day year, as the case may be. If Bank of America shall
discontinue the announcement of its Reference Rate, the Reference Rate shall be
the highest "prime rate" set forth in the "Money Rates" section of The Wall
Street Journal.
16.55 Regulations. Except where the context indicates otherwise, the
permanent, temporary, proposed, or proposed and temporary regulations of the
Department of the Treasury under the Code as such regulations may be lawfully
changed from time to time.
16.56 Related Person. A person having a relationship to a Member that
is described in Section 1.752-4(b) of the Regulations.
16.57 Resignation. The act, by written statement, by a Manager that he
or she is electing to cease to be a Manager pursuant to Section 7.8.
16.58 Qualified Income Offset. Qualified Income Offset shall have the
meaning set forth in Section 1.704-1(b)(2) of the Regulations.
33
<PAGE>
16.59 Substitute Member. An Assignee who has been admitted to all of
the rights of the Member who assigned the Membership Interest, including
Management Rights, by the unanimous consent of the Members, pursuant to this
First Amended Operating Agreement.
16.60 Taxable Year. The taxable year of the Company as determined
pursuant to the Code.
16.61 Taxing Jurisdiction. Any state, local, or foreign government that
collects tax, interest or penalties, however designated, on any Member's share
of the income or gain attributable to the Company.
THE UNDERSIGNED, being all of the Members of the Company, hereby
evidence their adoption and ratification of the foregoing First Amended
Operating Agreement of the Company as of the date indicated.
DATED this 25th day of February 1999.
---- -------- -
BRENTWOOD MEMBERS, LLC, a Nevada
Limited Liability Company
By: /s/ Illegible
----------------------------
Its: Manager
---------------------------
DATED this 26th day of February, 1999.
---- -------- -
J. CHRISTOPHER STUHMERC
By: /s/ J. Christopher Stuhmer
----------------------------
J. Christopher Stuhmer
DATED this 26th day of February, 1999.
---- -------- -
CHRISTOPHER HOMES CUSTOM HOME
DIVISION, INC., a Nevada corporation,
Manager
By: /s/ J. Christopher Stuhmer
----------------------------
J. Christopher Stuhmer
President
34
<PAGE>
EXHIBIT A
GENERAL AND ADMINISTRATION EXPENSE FEE
A fixed fee of four percent (4%) of all Sales Revenues determined by calculating
the total Sales Revenue from the sale of Lots, Residences,
Improvements/Options/Upgrades. The General and Administration Expense Fee shall
be paid for each Lot and each Residence upon the commencement of construction of
each Residence, or the close of escrow for each Lot. General and Administration
Expense Fee for each Lot and Residence shall be adjusted from time to time, if
appropriate, based upon changes, modifications, and increases in Sales Revenue.
The General and Administration Expense Fee shall be paid to the Manager on a
monthly basis during the term of the Operating Agreement. If cash and revenues
are not available, then the General and Administration Expense Fee shall accrue
and be payable when proceeds and revenues are available for payment of the same.
<PAGE>
General and Administrative Expenses shall include and cover the expense of the
following items:
CC# Personnel - For all offsite personnel and expenses
6000 Salaries & Wages (excluding Field, Sales, Marketing, and
Architecture personnel)
6010 Temporary Wages
6020 Bonuses
6030 Payroll Taxes
6040 Group Insurance
6050 Workers Comp Ins
6060 Retirement/401(k)
6065 Human Resources Outsourcing
6070 Auto Allowance
6077 Other Employee Benefits
6080 Training and Education
6085 Recruiting and Relocation
Total Personnel
Office
6100 Rent - Office
6150 Utilities - Office
6200 Repairs and Maintenance
6210 Telephone/ Communications
6230 Computer Expense
6240 Office Supplies
6250 Postage & Delivery
6260 Printing & Duplicating
6290 Miscellaneous Office Cost
64XX Depreciation
Total Office
Travel and Entertainment
6800 Travel
6810 Meals
6820 Entertainment
Total Travel and Entertainment
Professional
7000 Legal
7020 Consulting
7090 Other Professional
Total Professional
Insurance, Taxes & Other
7200 Insurance - Property & Liability.
7210 Insurance - Builders Risk
7240 Licenses
7250 Taxes
7260 Dues
<PAGE>
7270 Subscriptions
7280 Contributions
7290 Miscellaneous
Total Insurance, Taxes & Other
Total General and Administrative
<PAGE>
EXHIBIT B
SALES AND MARKETING EXPENSE REIMBURSEMENT
Estimated Sales and Marketing Expense Reimbursement shall be paid to the Manager
in an amount equal to seven percent (7%) of Sales Revenue for Lots, Residences,
Improvements/Upgrades/Options. The estimated amount of Sales and Marketing
Expense Reimbursement shall be paid for each Lot and each Residence. The amount
shall be paid to the Manager on a monthly basis and upon the close of escrow for
each Lot and Residence. The Sales and Marketing Expense Reimbursement shall be
paid from available cash and revenues. If cash and revenues are not available,
then the Sales and Marketing Expense Reimbursement, as estimated and referred to
hereinabove, shall accrue and be payable when proceeds and revenues are
available for payment of the same.
The Sales and Marketing Expense Reimbursement shall be adjusted on an annual
basis as set forth more specifically in paragraph 13.2 of the Operating
Agreement.
<PAGE>
Sales and Marketing Expenses to be reimbursed and shall include the
following items:
CC # Personnel
6000 Salaries & Wages (Sales & Marketing Dept. Personnel Only)
6010 Temporary Wages
6020 Bonuses
6030 Payroll Taxes
6040 Group Insurance
6050 Workers Comp Ins
6060 Retirement/401(k)
6065 Human Resources Outsourcing
6070 Auto Allowance
6077 Other Employee Benefits
6080 Training and Education
6085 Recruiting and Relocation
Total Personnel
Office
6100 Rent - Office
6120 Rent - Model Homes
6140 Rent - Storage Facility
6150 Utilities - Office
6170 Utilities - Model Homes
6200 Repairs and Maintenance (Model and Sales Trailer)
6210 Telephone/ Communications
6220 Equipment Rental
6230 Computer Expense
6240 Office Supplies
6250 Postage & Delivery
6260 Printing & Duplicating
6290 Miscellaneous Office Cost (Sales Office Only)
64XX Depreciation
Total Office
Site
6660 Site Clean-Up
6670 Security
6675 Plans and Blueprints
6680 Portable Toilets
6690 Losses and Replacements
Total Site
Professional
7000 Legal
7020 Consulting
7030 Architecture
7090 Other Professional
Total Professional
<PAGE>
Insurance, Taxes & Other
7200 Insurance - Property & Liability
7210 Insurance - Builders Risk
7220 Homeowner Association Fees
7240 Licenses
7250 Taxes
7260 Dues
7270 Subscriptions
7280 Contributions
7290 Miscellaneous
Total Insurance, Taxes & Other
Advertising & Marketing
7400 Advertising-Television
7410 Advertising-Radio
7420 Advertising-Print
7430 Advertising-Billboards
7440 Advertising-Internet
7450 Award Entry
7460 Brochures
7470 Agency Fees
7480 Direct Mail
7490 Miscellaneous Advertising
7600 Signs
7610 Market Research
7620 Realtor Marketing
7630 Sales Promotions and Concessions
7700 Model Operating Maintenance
7750 Spec Maintenance
Total Advertising & Marketing
<PAGE>
EXHIBIT C
INDIRECT EXPENSE AND WARRANTY FEE
Indirect Expense and Warranty Fee shall be paid to the Manager in an amount
equal to eight percent (8%) of all Sales Revenues. The amount paid to the
Manager for the Indirect Expense and Warranty Fee includes consideration for the
Manager's obligation to honor construction warranties on the constructed
residences. In consideration for payment of the Indirect Expense and Warranty
Fee the Manager agrees to indemnify and hold the Company, the Stuhmer Member and
the Brentwood Member harmless from and against any and all claims and actions
with respect to construction warranties on the constructed residences. The
foregoing obligation shall survive the termination of the Limited Liability
Company.
The Indirect Expense and Warranty Fee Amount shall be calculated based upon all
Sales Revenues including Lots, Residences, Improvements/Options/Upgrades and
shall be paid upon the commencement of each residence. The Indirect Expense and
Warranty Fee shall be paid on a monthly basis from available revenues and cash.
If there is insufficient revenues and cash to pay the Indirect Expense and
Warranty Fee when due, then the amount shall accrue and shall be paid when Cash
and Revenues are available,
In the event a Lot is sold to a third party purchaser, the Indirect Expense and
Warranty Fee shall be reduced to two percent (2%) of the Lot Sales Revenue.
<PAGE>
The Indirect Expense and Warranty Fee shall include and cover the expense of the
following items:
CC # Personnel
6000 Salaries & Wages (Field Personnel Only)
6010 Temporary Wages
6020 Bonuses
6030 Payroll Taxes
6040 Group Insurance
6050 Workers Comp Ins
6060 Retirement/401(k)
6065 Human Resources Outsourcing
6070 Auto Allowance
6077 Other Employee Benefits
6080 Training and Education
6085 Recruiting and Relocation
Total Personnel
Office
6100 Rent - Office (Construction Trailer)
6140 Rent - Storage Facility
6150 Utilities - Office
6180 Utilities - Homes Under Construction
6200 Repairs and Maintenance
6210 Telephone/ Communications
6230 Computer Expense
6240 Office Supplies
6250 Postage & Delivery
6260 Printing & Duplicating
6290 Miscellaneous Office Cost
64XX Depreciation
Total Office
Site
6675 Plans and Blueprints (for Model Home only)
6680 Portable Toilets
Total Site
Professional
7000 Legal
7020 Consulting
7090 Other Professional
Total Professional
Insurance, Taxes & Other
7200 Insurance - Property & Liability
7210 Insurance - Builders Risk
7230 Homeowners Warranty
7240 Licenses
<PAGE>
7250 Taxes
7260 Dues
7270 Subscriptions
7280 Contributions
7290 Miscellaneous
Total Insurance, Taxes & Other
Total Field Overhead
Note: Construction Ovehead shall include allocated costs from the following
departments: Purchasing, Warranty, and Design Center.
<PAGE>
EXHIBIT D
SCHEDULE OF CAPITAL CONTRIBUTIONS
Brentwood Members, L.L.C. $5,000,000.00
J. Christopher Stuhmer -0-
Capital Distributions shall be made for each Lot in accordance with the Schedule
attached to Exhibit D, on a monthly basis following the close of escrow for each
Lot and Residence for the prior month.
<PAGE>
EXHIBIT E
DISTRIBUTION SCHEDULE
- --------------------------------------------------------------------------------
Park Lots Price % Capital
Distribution
- --------------------------------------------------------------------------------
Lot 1 $ 226,000.00 0.0140 $ 70,224.22
Lot 2 $ 215,000.00 0.0134 $ 66,806.23
Lot 3 $ 210,000.00 0.0131 $ 65,252.60
Lot 4 $ 200,000.00 0.0124 $ 62,145.33
Lot 5 $ 185,000.00 0.0115 $ 57,484.43
Lot 6 $ 180,000.00 0.0112 $ 55,930.80
Lot 7 $ 190,000.00 0.0118 $ 59,038.06
Lot 8 $ 195,000.00 0.0121 $ 60,591.70
Lot 9 $ 190,000.00 0.0118 $ 59,038.06
Lot 10 $ 210,000.00 0.0131 $ 65,252.60
Lot 11 $ 217,000.00 0.0135 $ 67,427.68
Lot 12 $ 198,000.00 0.0123 $ 61,523.88
Lot 13 $ 232,000.00 0.0144 $ 72,088.58
Lot 15 $ 208,000.00 0.0129 $ 64,631.14
Lot 16 $ 227,000.00 0.0141 $ 70,534.95
Lot 17 $ 206,000.00 0.0128 $ 64,009.69
Lot 18 $ 212,000.00 0.0132 $ 65,874.05
Lot 19 $ 217,000.00 0.0135 $ 67,427.68
Lot 20 $ 219,000.00 0.0136 $ 68,049.14
Lot 21 $ 227,000.00 0.0141 $ 70,534.95
Lot 22 $ 230,000.00 0.0143 $ 71,467.13
Lot 23 $ 232,000.00 0.0144 $ 72,088.58
Lot 24 $ 229,000.00 0.0142 $ 71,156.40
Lot 25 $ 237,000.00 0.0147 $ 73,642.21
- --------------------------------------------------------------------------------
TOTAL $ 5,092,000.00 0.3164 $ 1,582,220.07
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Park Lots Price % Capital
Distribution
- --------------------------------------------------------------------------------
Lot 1 $ 220,000.00 0.0137 $ 68,359.86
Lot 2 $ 210,000.00 0.0131 $ 65,252.60
Lot 3 $ 198,000.00 0.0123 $ 61,523.88
Lot 4 $ 210,499.00 0.0131 $ 65,407.65
Lot 5 $ 200,000.00 0.0124 $ 62,145.33
Lot 6 $ 200,000.00 0.0124 $ 62,145.33
Lot 7 $ 267,000.00 0.0166 $ 82,964.01
- --------------------------------------------------------------------------------
TOTAL $ 1,505,499.00 0.0936 $ 467,798.65
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Golf Lots Price % Capital
Distribution
- --------------------------------------------------------------------------------
Lot 8 $ 315,000.00 0.0196 $ 97,878.89
Lot 9 $ 490,000.00 0.0305 $ 152,256.06
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Lot 10 $ 470,000.00 0.0292 $ 146,041.52
Lot 11 $ 445,000.00 0.0277 $ 138,273.36
Lot 12 $ 450,000.00 0.0280 $ 139,826.99
Lot 13 $ 410,000.00 0.0255 $ 127,397.92
Lot 14 $ 420,000.00 0.0261 $ 130,505.19
Lot 15 $ 440,000.00 0.0273 $ 136,719.72
Lot 16 $ 460,000.00 0.0286 $ 142,934.26
Lot 17 $ 480,000.00 0.0298 $ 149,148.79
Lot 18 $ 500,000.00 0.0311 $ 155,363.32
Lot 20 $ 402,000.00 0.0250 $ 124,912.11
Lot 21 $ 395,000.00 0.0245 $ 122,737.02
Lot 22 $ 380,000.00 0.0236 $ 118,076.12
Lot 23 $ 343,000.00 0.0213 $ 106,579.24
Lot 24 $ 353,000.00 0.0219 $ 109,686.51
Lot 25 $ 386,000.00 0.0240 $ 119,940.48
Lot 27 $ 350,000.00 0.0218 $ 108,754.33
Lot 28 $ 327,000.00 0.0203 $ 101,607.61
Lot 29 $ 305,000.00 0.0190 $ 94,771.63
Lot 30 $ 320,000.00 0.0199 $ 99,432.53
Lot 31 $ 348,000.00 0.0216 $ 108,132.87
Lot 32 $ 210,000.00 0.0131 $ 65,252.60
- --------------------------------------------------------------------------------
TOTAL $ 8,999,999.00 0.5592 $ 2,796,229.07
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Non- Price % Capital
Amenity Distribution
Lots
- --------------------------------------------------------------------------------
Lot 33 $ 171,850.00 0.0107 $ 53,398.37
Lot 34 $ 160,000.00 0.0099 $ 49,716.26
Lot 35 $ 162,965.00 0.0101 $ 50,637.57
- --------------------------------------------------------------------------------
TOTAL $ 494,815.00 0.0308 $ 153,752.20
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GRAND $ 16,091,314.00 $ 5,000,000.00
TOTAL
- --------------------------------------------------------------------------------
Exhibit 10.19
AGREEMENT
Agreement entered into as of the 6th day of January, 2000, between
Christopher Homes Custom Home Division, Inc., a Nevada corporation ("Christopher
Homes") and J. Christopher Stuhmer, a resident of Nevada ("Stuhmer").
RECITALS
A. Christopher Homes is the Manager under a First Amended Operating
Agreement, dated February 26, 1999, entitled "First Amended
Operating Agreement of Star Canyon/Summerlin, L.L.C., a Nevada
Limited Liability Company" (the "Operating Agreement").
B. Pursuant to Article 5.9 of the First Amended Operating Agreement
of Star Canyon Summerlin/L.L.C., the Articles of Organization were
amended to change the name of the Limited Liability Company to
Bellacere, L.L.C., a Nevada Limited Liability Company, by
appropriate filing of a Certificate of Amendment in the office of
the Secretary of State of the State of Nevada on May 24, 1999.
C. Christopher Homes has specifically enumerated duties under the
Operating Agreement dealing with the development of a residential
community, and Consultant has experience in providing the type of
services contemplated.
D. Christopher Homes desires to retain a Consultant to assist it in
performing its duties under the Operating Agreement, and
Consultant desires to be retained for this purpose.
E. Unless otherwise stated, capitalized words and phrases used herein
have the same meaning as set forth in the Operating Agreement.
NOW, THEREFORE, in consideration of the bargaining of the parties and
other valuable consideration, the parties AGREE as follows:
1. Division of Net Profits. In return for the right to receive a
consulting fee as provided in this Agreement, Consultant promises to pay to
Christopher Homes eighty percent (80%) of all Net Profits to which he is
entitled under the Operating Agreement. On each occasion that Consultant
receives a distribution of quarterly Net Profits under Section 8.3 of the
Operating Agreement, Consultant will pay to Christopher Homes eighty (80%) of
the distribution, and Consultant shall retain twenty percent (20%) of said
distribution.
1
<PAGE>
2. Fees and Other Consideration. In return for the right to receive
from Consultant a share of the Net Profits, and in reliance on Consultant's
promise to provide the consulting services described in this Agreement in
Section 3, Christopher Homes promises to pay to Consultant as a consulting fee
during the term of this Agreement two percent (2%) of all Sales Revenues.
Consulting fees will be paid to Consultant concurrently with, and on a pro rata
basis with fees paid to Christopher Homes pursuant to Section 8.3 of the
Operating Agreement. For purposes of this Agreement, "Sales Revenues" shall have
the following meaning:
"Sales Revenue" means the gross revenues from the sale or other
disposition of Lots and Residences as recorded by Southern
Highlands/Christopher Homes I, LLC (the "LLC") in accordance with
generally accepted accounting principles, including any payments for
upgrades, options and improvements and excluding any (i) transfer and
similar taxes reimbursed by a buyer, (ii) any third party home warranty
previously paid by buyer, (iii) any title insurance prorations,
premiums, dues or assignments paid by buyer and owed to third parties,
(iv) sales concessions afforded to the buyer, and (v) closing costs or
direct costs incurred in the transaction that are not recognized as a
reduction of revenue.
In addition to the foregoing, and as additional consideration for this
Agreement, the parties agree and acknowledge that Consultant shall be paid his
current salary and all benefits by and under the Employment Agreement by and
between Mr. J. Christopher Stuhmer and the Fortress Group through the
termination date of said Employment Agreement.
3. Appointment of Consultant. Upon the terms and conditions set forth
herein, Christopher Homes hereby retains and engages Consultant and Consultant
hereby accepts such retention and engagement.
4. Duties. Consultant shall assist Christopher Homes in fulfilling its
responsibilities under the Operating Agreement with respect to the following
matters and in accordance with the following covenants and provisions:
(a) Plans, Documents, Specifications, and Planning Phase
1) The Consultant shall be responsible for the management and
supervision of the schematic conceptual and design
development drawings for base house plans and elevations.
The Consultant and Christopher Homes shall agree on the
number of plan variations to be offered. The Consultant
shall not be responsible for the development of any custom
plans designed outside the base plans; however, the
Consultant shall have the right to approve any custom plans
regarding conformance to community standards and Design
Development Covenants.
2
<PAGE>
2) Christopher Homes shall assist the Consultant in the
finalization of design development drawings and in
establishing construction specifications, finish
specifications, development and construction budgets, and
project schedules.
3) Christopher Homes shall be responsible for converting the
design development drawings into completed working drawings
suitable for obtaining a building permit. The final working
drawings are subject to the reasonable approval of
Consultant.
4) Christopher Homes shall provide an annual marketing plan and
strategy, and associated sales and marketing budget. All
collateral material, advertisements, brochures, and other
marketing materials shall be presented to the Consultant for
approval.
5) All plans, designs, specifications, and budgets are subject
to the approval of the Consultant.
(b) Sales and Marketing Administration
1) In accordance with the approved budget and plan, Christopher
Homes shall provide all sales administration including
maintaining an on-site presence and coverage during hours
that are currently employed at other Christopher Homes
communities (e.g., Palisades, San Michelle).
2) Christopher Homes shall administer and maintain the model
homes, as approved in the plan and budget, in a professional
manner and in accordance with the standards practiced at
other Christopher Homes communities.
3) Christopher Homes shall use its best efforts to attain the
targeted sales objectives as set forth in the approved plan
and budget.
(c) Construction Administration
1) Christopher Homes shall provide administrative, management,
and related services as required to coordinate the work of
contractors, subcontractors, and vendors in the completion
of all home construction in accordance with the approved
plans and specifications. Christopher Homes shall supervise
and direct the work using its skill and attention and shall
be responsible for all construction means, methods,
techniques, sequences, and procedures and for coordinating
the work under the contract.
3
<PAGE>
2) Quality of work shall be consistent with the quality of
workmanship and materials in other Christopher Homes'
Models.
3) Christopher Homes will keep the premises free from excessive
accumulation of waste materials and rubbish caused by its
operations.
(d) Reporting
1) Christopher Homes shall maintain cost accounting records on
all authorized work, and shall submit for the Company's
approval on a periodic basis as required, requisitions for
payment to subcontractors and vendors in a timely fashion,
and in accordance with current Christopher Homes' payment
policies and practices. Christopher Homes shall submit the
Company-approved draw schedules directly to bank on behalf
of the Company; coordinate receipt and distribution of funds
received from bank; and administer release of liens and
other accounting matters on behalf of the Company.
2) Christopher Homes shall have no repayment obligation or
liability whatsoever to any bank or other lending sources.
The Company shall be solely responsible for providing
appropriate financing for the development and construction
of the project.
3) In order to facilitate communications between Christopher
Homes and the Company, Christopher Homes shall designate a
representative to act as a point of contact for the Company.
Christopher Homes' representative shall meet with Consultant
two times a month and at such other times, with reasonable
advance notice by Consultant, as circumstances dictate.
Consultant shall not interfere with the management of any
Christopher Homes employee, subcontractor or vendor without
prior approval of Christopher Homes.
4) On a monthly basis, Christopher Homes shall provide a
written M.D. & A. highlight report to the Company and a
P & L budget to actual report, and L.L.C. balance sheet, and
an "actual" to projected pro forma analysis.
5) Other reports shall be provided to the Company including
sales and closing reports, construction schedules, house
margin reports, and results of customer satisfaction surveys
conducted with customers of the project. On a quarterly
basis, Christopher Homes will submit revised forecasts for
the remaining duration of the project.
4
<PAGE>
With respect to the foregoing responsibilities, each of the parties
hereto agrees that Consultant shall have sole and absolute control and
discretion with respect to all aspects of product control for the design and
product development of the Project, as delineated in Section 4(a), above.
The parties hereto expressly acknowledge and agree that the foregoing
description of duties and responsibilities is not intended to change, modify or
otherwise abrogate the duties and responsibilities of Christopher Homes under
the Operating Agreement. In the event that any provision hereof conflicts with
any provision of the Operating Agreement, the terms and provisions of the
Operating Agreement shall control.
It is recognized that although Consultant, as of the date of this
Agreement, is the President of Christopher Homes and has executive
responsibility for the entity, the parties contemplate a change in the
management responsibilities with respect to Christopher Homes. Effective January
6, 2000, Consultant's duties will be limited to those identified above. In
carrying out his duties under this Agreement, Consultant shall be subject to the
same standard of care to which the Manager is subject as set forth in Section
6.6 of the Operating Agreement. Notwithstanding the foregoing, at all times
during the term of this Agreement, and all extended terms hereof, Consultant
shall retain the title of "Chairman" of Christopher Homes. Upon termination of
this Agreement for any reason, the title of "Chairman" shall be deemed
automatically revoked and terminated as of the effective date of termination
hereof.
5. Term.
(a) Notwithstanding anything to the contrary set forth in Section 6.8
of the Operating Agreement, this Agreement will have an initial term of twelve
(12) months from the date this Agreement is signed by both parties (the "Initial
Term"). Further, and notwithstanding anything to the contrary set forth in
Section 6.8 of the Operating Agreement, Consultant shall have the right to elect
to extend the term of this Agreement for successive periods of twelve (12)
months each at the sole and absolute discretion of Consultant, referred to
herein as an "Extended Term." Should Consultant elect not to extend the term
hereof for additional term(s) of twelve (12) months, Consultant shall provide
not less than ninety (90) days advance written notice to Christopher Homes
before the expiration of the applicable term of its election not to extend the
term hereof. Should Consultant elect not to extend the term of this Agreement
for additional term(s), then Consultant agrees to exercise its right under
Section 6.8 of the Operating Agreement and remove Christopher Homes as Manager,
and replace Christopher Homes with a Manager in accordance with the terms of
said Operating Agreement.
(b) Notwithstanding a decision by Consultant to extend the term of this
Agreement, Christopher Homes may elect to resign its duties as Manager under the
Operating Agreement and not to go forward under this Agreement by providing to
Consultant written notice of its election at least ninety (90) days before the
expiration of the applicable term, thereby terminating this Agreement. In such
event, Consultant agrees to indemnify and hold Christopher Homes harmless
against the Members of the Operating Agreement for a claim
5
<PAGE>
under the Operating Agreement alleging that Christopher Homes wrongfully
resigned or terminated its duties under the Operating Agreement.
6. Payment of Operating Expenses. During the term of this Consulting
Agreement, Christopher Homes shall pay the costs for, as tenant, providing Suite
120A, 9500 Hillwood Drive, Las Vegas 89134, as and for business offices from
which Consultant shall perform services to Christopher Homes under the terms of
this Agreement and any other Agreement entered into between the parties. If
requested to do so by Landlord or Consultant, Christopher Homes shall execute
the Landlord's Standard Lease Agreement in connection with providing the
foregoing Suite for the use of Consultant.
7. Covenants.
(a) Right of First Refusal. If during the term of this
Agreement, Consultant has an opportunity to participate in a project similar in
structure to the Bellacere Project which calls for a manager on behalf of whom
Consultant will provide design and marketing services, Consultant shall give
written notice to Christopher Homes (the "Notice"). The Notice shall set forth a
description of the project and a summary of the terms and proposed conditions of
the manager's role in the project and the relationship Consultant would have
with the manager, including fees and profit opportunities. Christopher Homes
will have thirty (30) days from the date of service of such notice as defined
hereinbelow to notify Consultant in writing of its acceptance of terms of the
offer. The parties shall thereafter proceed to finalize the negotiation and
execution of a definitive agreement implementing the terms of the offer. If
Christopher Homes does not accept the offer within the thirty (30) day period,
Consultant may associate as a consultant to another party that will act as the
manager of the project, provided the terms and conditions of the transaction are
identical to or worse than those contained in the Notice from Consultant as they
relate to the manager.
This right of First Refusal shall not apply to and shall not require
Consultant to provide notice to Christopher Homes in the event that Consultant
is an Owner of any entity which is contemplated to be the proposed manager of
the Project which may be deemed to be similar in structure to the Bellacere
Project. Further, except as specifically limited hereinabove, there are no
rights of First Refusal conveyed or granted to Christopher Homes herein.
(b) Removal of Christopher Homes as Manager.
(i) Subject to the conditions subsequent set forth in
subsection 7(b)(ii) below, Consultant covenants that during
the term of the Project, he will not exercise his right under
Section 6.8 of the Operating Agreement to remove Christopher
Homes as Manager or in any other fashion take action to remove
Christopher Homes as Manager or omit to take action that has
the effect of removing Christopher Homes as Manager.
6
<PAGE>
(ii) Consultant shall be entitled to exercise his
right under Section 6.8 of the Operating Agreement to remove
Christopher Homes as Manager if, during the effective term of
this Consulting Agreement, either one of the following occurs:
(A) Christopher Homes is dissolved;
(B) Christopher Homes or the Fortress Group, Inc.
commences voluntary proceeding under either Federal Bankruptcy
Laws or under any other applicable Federal or State Law
relating to insolvency;
(C) This Agreement is terminated by Consultant
pursuant to Section 8(b) hereinbelow;
(D) Christopher Homes mis-manages or falls to perform
one or more of its duties under the Operating Agreement or as
set forth herein, which remains uncured within the time set
forth in Section 8(b)(ii) herein.
(E) A change in the ownership of voting stock of the
Fortress Group to any person or entity owning more than fifty
percent (50%) of the outstanding voting shares of stock of the
Fortress Group, Inc.
8. Termination.
(a) This Agreement shall terminate at the end of the Initial Term, or
any successive Extended Term as defined in Section 5 hereinabove. Upon
termination in accordance with the provisions of Section 5, Christopher Homes
shall be entitled to payment of any unpaid fees and profits, if any, under
Section 1 hereof due from closed escrows of sales of Lots and residences to
third-party home buyers. With respect to Lots and residences under construction
as of the date of termination in accordance with the provisions of Section 5,
and with respect to residences which are sold but upon which construction has
not yet commenced, Christopher Homes shall have the right, duty and
responsibility to complete the construction of homes on said Lots and residences
in accordance with the terms of this Agreement and the Operating Agreement, and
Christopher Homes shall be paid its fee and profits, if any, under Section 1
hereof based upon the Sales Revenue of such residences on the date of close of
escrow for such Lots and residences, notwithstanding the fact that the
termination of this Agreement may precede the completion of construction and
close of escrows.
(b) This Agreement may also be earlier terminated in accordance with
the following provisions:
7
<PAGE>
(i) By Consultant removing Christopher Homes as
Manager in accordance with the provisions of paragraph
7(b)(ii); or
(ii) Upon written notice by the non-defaulting party
hereto to the other party of a material breach of one or more
of the obligations of this Agreement which notice gives the
defaulting party reasonable opportunity to cure of a period of
time not less than thirty (30) days, and which breach is not
cured within the period defined herein and in the notice given
by the non-defaulting party. Notwithstanding the foregoing or
any other term or provision set forth in this Consulting
Agreement, Christopher Homes shall not be entitled to
terminate this Agreement under any circumstances unless the
termination is coupled with the contemporaneous resignation of
Christopher Homes as Manager under the First Amended Operating
Agreement of Star Canyon/Summerlin, L.L.C., as amended for
Bellacere, L.L.C.
(c) In the event of termination of this Agreement in
accordance with the terms of Section 7(b) (A),(B),(C) and (D) hereinabove,
Christopher Homes shall be entitled to receive payment of any unpaid fees and
profits under Section 1 hereof, if any, due from closed escrows of sales of Lots
to third-party home buyers, and with respect to Lots and residences under
construction based upon an amount equal to the product of the percentage of
construction completed on homes under construction multiplied by the estimated
Sales Revenue of such homes as of the date of termination, plus an amount of
profit under Section 1 hereof, if any, based upon an amount equal to the product
of the percentage of construction completed on homes under construction
multiplied by the amount of profit for each home calculated as of the date of
close of escrow. Christopher Homes shall not be entitled to any fee for homes
upon which construction has not been commenced as of the date of termination.
9. Miscellaneous.
(a) Notices, Covenants, Etc. Any notices, consents or other
communication required to be sent or given hereunder by any of the parties shall
in every case be in writing and shall be deemed properly served if (i) delivered
personally, (ii) sent by registered or certified mail, in all such cases with
first class postage prepaid, return receipt requested, or (iii) delivered by a
recognized overnight courier services, to the parties at the addresses as set
forth below or at such other addresses as may be furnished in writing.
(1) If to Consultant:
J. Christopher Stuhmer
9500 Hillwood Drive, Suite 120A
Las Vegas, Nevada 89134
8
<PAGE>
(2) If to Christopher Homes:
Christopher Homes, Custom Home Division
Attention: J. Christopher Stuhmer
9500 Hillwood Drive, Suite 200
Las Vegas, Nevada 89134
(3) The Fortress Group, Inc.
1650 Tysons Boulevard, Suite 600
McLean, VA 22102
Attention: George Yeonas
Chief Executive Officer
Date of service of such notice shall be either: (1) the date such notice is
personally delivered; or (2) three (3) days after the date of mailing if sent by
certified or registered mail; or (3) one (1) day after date of delivery to the
overnight courier if sent by overnight courier.
(b) Severability. The unenforceability or invalidity of any
provision of this Agreement shall not affect the enforceability or validity of
any other provision.
(c) Documents. Each party will execute all documents and take
such other actions as the other party may reasonably request in order to
consummate the transactions provided for herein and to accomplish the purposes
of this Agreement.
(d) Counterparts. This Agreement may be executed
simultaneously 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.
(e) Governing Law. This Agreement shall be construed and
governed in accordance with the law of the State of Nevada, without giving
effect to conflicts and choice of law principles.
(f) Headings. The subject headings of Articles and Sections of
this Agreement are included for purposes of convenience only and shall not
effect the construction or interpretation of any of its provisions.
(g) Assignment. This Assignment will be binding upon and inure
to the benefit of the parties hereto and their respective successors and
permitted assigns but Consultant may not assign or delegate his duties hereunder
without the prior written consent of Christopher Homes.
9
<PAGE>
(h) Entire Agreement. This Agreement and the Operating
Agreement incorporated by reference to the Agreement set forth the entire
understanding of the parties and supersedes all prior or contemporaneous
agreements or negotiations (whether in writing or oral) and may be modified only
by instruments signed by both of the parties hereto. Oral modifications are
absolutely prohibited.
(i) Third Parties. Nothing herein expressed or implied is
intended or shall be construed to confer upon or give to any person or entity,
other than the parties to this Agreement, any rights ore remedies under or by
reason of this Agreement.
(j) Interpretive Matters. Unless the context otherwise
requires, (i) all references to Articles, Sections, Schedules or Exhibits in
this Agreement, and (ii) words in the singular or plural include the singular
and plural and pronouns stated in either the masculine, feminine or neuter
gender shall include the masculine, feminine and neuter.
(k) Waiver. The rights and remedies of the parties to this
Agreement are cumulative and not alternative. Neither the failure nor any delay
in any party in exercising a right, power, or privilege under this Agreement or
the documents referred to in this Agreement will operate as a waiver of the
right, power , or privilege, and no single or partial exercise of a right,
power, or privilege will preclude any other or further exercise of any other
right, power, or privilege. To the maximum extent permitted by applicable law,
(a) no claim or right arising out of this Agreement or the documents referred to
in it can be discharged by one party, in whole or in part, by a waiver or
renunciation of the claim or right unless in writing signed by the other party;
(b) no waiver that may be given by a party will be applicable except in the
specific instance for which it is given.
(l) ALL CLAIMS (PURSUANT TO FEDERAL OR STATE STATUTE(S) OR BY
COMMON LAW), CONTROVERSIES, DIFFERENCES OR DISPUTES BETWEEN CHRISTOPHER HOMES
AND CONSULTANT ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE BREACH
THEREOF, SHALL BE SETTLED BY ARBITRATION IN ACCORDANCE WITH THE RULES THEN IN
EFFECT OF THE AMERICAN ARBITRATION ASSOCIATION AT THE TIME OF THE DISPUTE. AFTER
AN AWARD IS RENDERED BY THE ARBITRATOR(S), A JUDGMENT MAY BE ENTERED IN ANY
COURT OF COMPETENT JURISDICTION. THE ARBITRATION SHALL OCCUR IN LAS VEGAS,
NEVADA TO THE EXCLUSION OF ALL OTHER LOCATIONS. THE ARBITRATOR(S) CANNOT ADD OR
SUBTRACT TO THE CONTENTS OF THIS AGREEMENT. THE PARTIES AGREE THAT THE
ARBITRATOR(S) MAY INCLUDE PROVISION FOR THE PAYMENT OF COSTS AND EXPENSES,
INCLUDING REASONABLE ATTORNEY'S FEES AS PART OF ANY RULING OR AWARD MADE
THEREUNDER. THE PARTIES ACKNOWLEDGE THAT ARBITRATION SHALL BE THE SOLE, FINAL,
BINDING AND EXCLUSIVE REMEDY OF THE PARTIES WITH RESPECT TO ANY SUCH MATTER FOR
WHICH ARBITRATION IS REQUIRED HEREUNDER. IN PREPARATION FOR THE
10
<PAGE>
ARBITRATION HEREIN, EACH PARTY MAY UTILIZE ALL METHODS OF DISCOVERY AUTHORIZED
BY THE PROCEDURAL RULES AND STATUTES OF NEVADA AND MAY ENFORCE THE RIGHT TO
OBTAIN SUCH DISCOVERY IN THE MANNER PROVIDED BY SAID RULES AND STATUTES AND/OR
BY THE ARBITRATION LAW OF THE STATE OF NEVADA.
(m) Limitation of Damages. Consultant and Christopher Homes
agree and acknowledge that any and all damages sustained or incurred by
Christopher Homes, if any, resulting from a material breach of the obligations
set forth in this Agreement shall be expressly limited to Christopher Homes'
claim of right to receive from the Consultant an amount equal to Consultant's
Net Profit under paragraph 1 hereinabove and Consultant's fee limited to two
percent (2%) of all Sales Revenue as defined in paragraph 2 hereof. Christopher
Homes expressly waives, relinquishes and releases Consultant from any other
claim or any other damages except as expressly set forth herein.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the day and year first above written.
CHRISTOPHER HOMES CUSTOM HOME
DIVISION, INC.
By: /s/ Illegible
----------------------
Consultant:
/s/
--------------------------
J. Christopher Stuhmer
11
Exhibit 10.20
OPERATING AGREEMENT
OF
SOUTHERN HIGHLANDS/CHRISTOPHER HOMES I, L.L.C.,
a Nevada Limited Liability Company
September 10, 1999
<PAGE>
9/10//99
TABLE OF CONTENTS
Page
----
ARTICLE 1 FORMATION; REPRESENTATIONS ........................................ 2
1.1 Organization ...................................................... 2
1.2 Formation ......................................................... 2
1.3 Name .............................................................. 2
1.4 Effective Date .................................................... 2
1.5 Term .............................................................. 2
1.6 Resident Agent and Registered Office .............................. 2
1.7 Representations and Warranties of the Manager ..................... 2
1.8 Representations and Warranties of Stuhmer ......................... 5
1.9 Representations and Warranties of Southern Highlands .............. 7
ARTICLE 2 NATURE OF BUSINESS ................................................ 9
ARTICLE 3 ACCOUNTING AND RECORDS; AFFILIATE TRANSACTIONS .................... 9
3.1 Records to be Maintained .......................................... 9
3.2 Reports to Members; Verification and Inspection ...................10
3.3 Affiliate Transactions ............................................11
3.4 Insolvency ........................................................11
3.5 Assurance of Performance; Undertakings ............................13
3.6 Replacement of the Manager ........................................14
3.7 Special Indemnity and Limitation on Stuhmer Personal Liability ....15
ARTICLE 4 TRANSFER OF INTERESTS .............................................15
4.1 Transfer Restrictions .............................................15
4.2 Admission of Additional Members ...................................16
4.3 Intentionally Deleted .............................................16
4.4 Securities Law Restrictions .......................................16
4.5 Breach or Default by Manager or Stuhmer ...........................16
4.6 Breach or Default by Southern Highlands ...........................17
4.7 Arbitration .......................................................18
-i-
<PAGE>
9/10/99
ARTICLE 5 RIGHTS AND DUTIES OF MEMBERS ......................................18
5.1 Meetings ..........................................................18
5.2 Notice of Meeting .................................................18
5.3 Quorum ............................................................19
5.4 Order of Business .................................................19
5.5 Proxies ...........................................................19
5.6 Voting by Certain Members .........................................19
5.7 Manner of Acting ..................................................20
5.8 Telephonic Meetings ...............................................20
5.9 Action by Consent .................................................20
5.10 Voting Rights of Members ..........................................20
5.11 Other Rights of Members ...........................................22
5.12 Conflicts of Interest .............................................22
5.13 Restrictions on Withdrawal ........................................23
5.14 Rejection .........................................................24
ARTICLE 6 MANAGER ...........................................................24
6.1 Appointment and Authority .........................................24
6.2 Term of Office ....................................................25
6.3 Authority of Manager to Bind the Company ..........................25
6.4 Actions of the Manager ............................................26
6.5 Compensation of Manager ...........................................26
6.6 Manager's Standard of Care ........................................26
6.7 Officers ..........................................................26
ARTICLE 7 CONTRIBUTIONS, INTERESTS, AND CAPITAL ACCOUNTS.....................27
7.1 Initial Contributions .............................................27
7.2 Enforcement of Commitments ........................................30
7.3 Maintenance of Capital Accounts ...................................30
7.4 Distribution of Assets ............................................31
7.5 Sale or Exchange of Interest ......................................31
7.6 Compliance with Section 704(b) of the Code ........................31
7.7 Compliance with Section 704(c) of the Code ........................31
ARTICLE 8 ALLOCATIONS AND DISTRIBUTIONS .....................................31
8.1 Allocations of Net Profits and Losses from Operations .............31
8.2 Special Items .....................................................32
8.3 Distributions .....................................................32
-ii
<PAGE>
9/10//99
8.4 Tax Distribution ..................................................34
8.5 Limitations on Distributions ......................................34
ARTICLE 9 TAXES .............................................................35
9.1 Elections .........................................................35
9.2 Taxes of Taxing Jurisdictions .....................................35
9.3 Tax Matters Member ................................................35
9.4 Method of Accounting ..............................................35
ARTICLE 10 DISSOCIATION OF A MEMBER ..........................................35
10.1 Dissociation ......................................................35
10.2 Rights of Dissociating Member .....................................36
ARTICLE 11 ADMISSION OF ASSIGNEES AND ADDITIONAL MEMBERS .....................37
11.1 Rights of Assignees ...............................................37
11.2 Admission of Substitute Members ...................................37
ARTICLE 12 DISSOLUTION AND WINDING UP ........................................37
12.1 Dissolution .......................................................37
12.2 Effect of Dissolution .............................................38
12.3 Distribution of Assets on Dissolution .............................38
12.4 Winding Up and Certificate of Dissolution .........................38
ARTICLE 13 DEVELOPMENT, CONSTRUCTION AND MARKETING OF THE PROJECT ............39
13.1 Development and Construction of the Project .......................39
13.2 Marketing and Advertising .........................................39
13.3 Sales of Residences ...............................................40
13.4 Southern Highlands Tradename ......................................40
13.5 Special Fees ......................................................40
13.6 Commission ........................................................40
ARTICLE 14 AMENDMENT .........................................................40
-iii-
<PAGE>
9/10//99
ARTICLE 15 MISCELLANEOUS PROVISIONS ..........................................40
15.1 Entire Agreement ..................................................40
15.2 No Partnership Intended for Nontax Purposes .......................41
15.3 Rights of Creditors and Third Parties under Agreement .............41
15.4 Indemnification by Members and Manager ............................41
15.5 Indemnification by Company ........................................42
15.6 Gender and Number .................................................42
15.7 Articles and Other Headings .......................................42
15.8 Counterparts ......................................................42
15.9 Successors ........................................................43
15.10 Governing Law .....................................................43
15.11 Separate Representation ...........................................43
15.12 Notices ...........................................................43
ARTICLE 16 DEFINITIONS .......................................................44
-iv-
<PAGE>
9/10//99
OPERATING AGREEMENT
OF
SOUTHERN HIGHLANDS/CHRISTOPHER HOMES I, L.L.C.,
a Nevada Limited Liability Company
This Operating Agreement of Southern Highlands/Christopher Homes I,
L.L.C., Nevada limited liability company (the "Company"), organized pursuant to
the Nevada Limited Liability Company Act, is entered into as of September 10th,
1999 (the "Effective Date"), by and among Southern Highlands Development
Corporation, a Nevada corporation (the "Southern Highlands"), J. Christopher
Stuhmer ("Stuhmer") and Christopher Homes Custom Home Division, Inc., a Nevada
corporation ("Chris Homes" or the "Manager"). Unless otherwise defined herein,
all capitalized terms shall have the meanings which are set forth for such terms
in Article 16.
R E C I T A L S:
This Operating Agreement ("Agreement") is entered into based upon the
following facts and stated purposes:
A. Southern Highlands is the owner of approximately 42.965 acres of
land ("Parcel 305") located within real property commonly known as the Southern
Highlands Master Planned Community, located in Clark County, Nevada. The legal
description of Parcel 305 is set forth on Exhibit "A" attached hereto and
incorporated by this reference;
B. Stuhmer, Southern Highlands and the Manager have formed the Company
as a limited liability company pursuant to the provisions of the Nevada Limited
Liability Act, NRS 86.010, et seg. (the "Act"), as the same may be amended from
time to time;
C. Stuhmer, Southern Highlands and the Manager deem this Agreement to
be necessary, appropriate and advisable in order to specify the terms of their
undertakings and obligations with respect to the conduct of the business and
affairs of the Company; and
D. After the formation of the Company, Southern Highlands, Stuhmer and
the Manager contemplate forming a second limited liability company named
Southern Highlands/Christopher Homes II, L.L.C. ("SH/CH II") to own, develop and
separately finance approximately 40 additional acres of land currently owned by
Southern Highlands ( "Parcels 306 and 307") in the immediate vicinity of Parcel
305.
NOW, THEREFORE, the forgoing parties hereby agree as follows:
<PAGE>
9/10//99
ARTICLE 1
FORMATION; REPRESENTATIONS
1.1 Organization. The Company has been organized as a Nevada Limited
Liability Company pursuant to the provisions of the Act. Stuhmer and Southern
Highlands are the sole Members and their membership interests in the Company are
referred to as "Interests."
1.2 Formation. The Company shall be formed and operated as a limited
liability company under the Nevada Limited Liability Company Act, subject to the
provisions set forth in this Agreement. The Members intended that the Company
shall not be a partnership or joint venture except for federal income tax
purposes.
1.3 Name. The name of the Company is Southern Highlands/Christopher
Homes I, L.L.C., and all of the Company's business shall be conducted solely
under such name or under any other name which is approved by the Members, but in
any case, only to the extent permitted by applicable law.
1.4 Effective Date. This Agreement is effective as of the Effective
Date.
1.5 Term. The Company shall have perpetual life and shall only be
dissolved and its affairs wound up in accordance with this Agreement.
1.6 Resident Agent and Registered Office. The resident agent and the
registered office shall be that person and location reflected in the Articles.
(The initial resident agent is John Sacco, 808 South Seventh Street, Las Vegas,
Nevada 89101.) The Manager may, from time to time, with the written consent of
both Members, change the resident agent and registered office through
appropriate filings with the Nevada Secretary of State. In the event the
resident agent ceases to act as such for any reason or the registered office
shall change, the Manager shall promptly designate a replacement agent or file a
notice of change of address as the case may be, with the written consent of both
Members. The resident agent shall promptly furnish to each Member and to the
Manager any notice received by the resident agent of any lawsuit or governmental
proceeding commenced against the Company.
1.7 Representations and Warranties of the Manager. The Manager
represents and warrants to Southern Highlands and the Company that upon
formation of the Company and upon the subsequent closing of the financing for
the Project, in all cases:
1.7.1 The Company and the Manager each have the full power,
authority and legal right to engage in all the transactions
contemplated by this Agreement;
1.7.2 There is no suit, action or proceeding pending or,
threatened against or affecting the Project or the Manager before or by
any court, administrative agency
-2-
<PAGE>
9/10/99
or other governmental authority which could affect the validity of the
transactions contemplated hereby or could interfere with the ability of
the Manager to comply with the terms hereof;
1.7.3 Neither the execution nor delivery of this Agreement nor
the distributions to be made to Southern Highlands, including any
distribution to Southern Highlands of any portion of any Deposit made
by the prospective purchaser of a Lot or Residence, will conflict with
or result in a breach of any of the provisions of any law, ordinance,
judgment, order, writ, injunction or decree of any court,
administrative agency or other governmental authority, or of any
agreement or other instrument to which the Company, the Manager or any
of its Affiliates is a party or by which any of them is bound, or
constitute a default under any thereof, or conflict with or result in a
breach of any applicable law, rule or regulation of any such
governmental authority, or result in the creation or imposition of any
lien, charge or encumbrance upon any property of the Manager or any of
its Affiliates;
1.7.4 No consent, approval or other authorization of or by any
court, administrative agency or other governmental authority or any
other entity, including any shareholder of Manager, is required in
connection with the execution, delivery or compliance with the
provisions of this Agreement or the consummation of the transactions
contemplated by this Agreement.
1.7.5 There is no existing action, suit or proceeding before
or by any court or governmental agency or body, domestic or foreign or,
pending or threatened against or affecting the Manager which could
result in any material and adverse change in its condition (financial
or otherwise), earnings, business affairs or business prospects, or
which could materially and adversely affect the legality, validity or
enforceability of this Agreement or which could have a material and
adverse effect upon the Company or upon the Manager's ability to
consummate the transactions and agreements contemplated by this
Agreement, or to fulfill its obligations hereunder. The aggregate of
all pending legal or governmental proceedings to which the Manager is a
party or which affect any of their properties, including ordinary
routine litigation incidental to their business, if any, would not have
a material and adverse effect on the Company's condition (financial or
otherwise), earnings, affairs, business or business prospects;
1.7.6 The Project and all Residences constructed as part of
the Project:
1.7.6.1 will conform to all applicable governmental
laws, ordinances, codes, regulations and administrative orders
so as to permit the intended development of the Project and
the intended sale of Lots and Residences; and
-3-
<PAGE>
9/10//99
1.7.6.2 will conform to and will not violate any
private restrictions, agreements, easements, covenants,
conditions or servitudes, or any declaration of any of the
foregoing, affecting the Project or the Manager.
1.7.7 All water, sewer, electric, gas, telephone and other
utilities and services required to operate the Project and all
necessary consents, licenses, permits, approvals or variances for the
development of the Project (including, without limitation, all
necessary building, zoning and other permits) have been obtained by
the Company or can be obtained by the Company on reasonable terms and
within a time period after the formation of the Company that will not
impede the development of the Project, and there is no legal
impediment to the development of the Project;
1.7.8 The Manager has not assigned, pledged, granted a
security interest in, or otherwise encumbered its right in or to any
portion of this Agreement;
1.7.9 The Manager is a duly organized Nevada corporation and
all approvals and consents (including any "internal" or shareholder
consents) required to be obtained by the Manager to become a party to
this Agreement and to consummate the transactions contemplated by this
Agreement have been obtained and are in effect;
1.7.10 No representation or warranty by the Manager in this
Agreement and no exhibit, document, statement, certificate or schedule
furnished or to be furnished to Southern Highlands pursuant hereto, or
in connection with the transactions contemplated hereby, contains any
untrue statement of a material fact, or omits to state a material fact
necessary to make the statements contained herein or therein not
misleading;
1.7.11 The Manager has inspected Parcel 305, has satisfied
itself through its own due diligence efforts that Parcel 305 is
suitable for development, and before the Contribution Date will have
determined that the Parcel can be developed in accordance with the
Development Budget;
1.7.12 The Manager will prepare and submit to Southern
Highlands for its approval the Project Projections, the Development
Budget, the Marketing Budget, the Marketing Material, and the Standard
Sales Contact, before the Contribution Date;
1.7.13 The Project will be completed in a manner that is
consistent with the Southern Highlands Master Planned Community
standards, including
-4-
<PAGE>
9/10//99
landscaping standards, improvement standards and design standards, as
incorporated in the Development Declaration;
1.7.14 The Manager shall at all times maintain all licenses,
permits, insurance and bonds required for the Project, including any
bonding necessary to enable the Company to distribute the Deposits to
the Members; and
1.7.15 Manager will have reviewed and approved each of the
Master Planned Criteria Documents before the Contribution Date.
All of the representations and warranties of the Manager shall survive
the termination of the Company.
1.8 Representations and Warranties of Stuhmer. Stuhmer represents and
warrants to Southern Highlands and the Company that upon formation of the
Company and upon closing of the financing of the Project, in all cases:
1.8.1 The Company and the Manager each have the full power,
authority and legal right to engage in all the transactions
contemplated by this Agreement;
1.8.2 There is no suit, action or proceeding pending or,
threatened against or affecting the Project, the Manager or Stuhmer
before or by any court, administrative agency or other governmental
authority which could affect the validity of the transactions
contemplated hereby or could interfere with the ability of Stuhmer or
the Manager to comply with the terms hereof;
1.8.3 Neither the execution nor delivery of this Agreement nor
the distributions to be made to Southern Highlands will conflict with
or result in a breach of any of the provisions of any judgment, order,
writ, injunction or decree of any court, administrative agency or other
governmental authority, or of any agreement or other instrument to
which the Manager or Stuhmer or any of its Affiliates is a party or by
which any of them is bound, or constitute a default under any thereof,
or, conflict with or result in a breach of any applicable law, rule or
regulation of any such governmental authority, or result in the
creation or imposition of any lien, charge or encumbrance upon any
property of Manager, Stuhmer or any of their respective Affiliates;
1.8.4 No consent, approval or other authorization of or by any
court, administrative agency or other governmental authority or any
other entity, including any shareholder of Manager, is required in
connection with the execution, delivery or compliance with the
provisions of this Agreement or the consummation of the transactions
contemplated by this Agreement.
-5-
<PAGE>
9/10//99
1.8.5 There is no existing action, suit or proceeding before
or by any court or governmental agency or body, domestic or foreign or,
pending or threatened against or affecting Stuhmer which could result
in any material and adverse change in their condition (financial or
otherwise), earnings, business affairs or business prospects, or which
could materially and adversely affect the legality, validity or
enforceability of this Agreement or which could have a material and
adverse effect upon the Company, Stuhmer or upon the Manager's ability
to consummate the transactions and agreements contemplated by this
Agreement, or to fulfill its obligations hereunder. The aggregate of
all pending legal or governmental proceedings to which the Manager is a
party or which affect any of their properties, including ordinary
routine litigation incidental to their business, if any, would not have
a material and adverse effect on the Company's condition (financial or
otherwise), earnings, affairs, business or business prospects;
1.8.6 The Project:
1.8.6.1 will conform to all applicable governmental
laws, ordinances, codes, regulations and administrative orders
so as to permit the intended development of the Project and
the intended sale of Lots and Residences; and
1.8.6.2 will conform to and will not violate any
private restrictions, agreements, easements, covenants,
conditions or servitudes, or any declaration of any of the
foregoing, affecting the Project, the Manager or Stuhmer.
1.8.7 Intentionally deleted.
1.8.8 Stuhmer has not assigned, pledged, granted a security
interest in, or otherwise encumbered all or any portion of his
Interest.
1.8.9 All approvals and consents (including any "internal"
corporate or shareholder consents) required to be obtained by the
Manager to become a party to this Agreement and to consummate the
transactions contemplated by this Agreement have been obtained are in
effect;
1.8.10 No representation or warranty by Stuhmer in this
Agreement and no exhibit, document, statement, certificate or schedule
furnished or to be furnished to Southern Highlands pursuant hereto, or
in connection with the transactions contemplated hereby, contains any
untrue statement of a material fact, or omits to state a material fact
necessary to make the statements contained herein or therein not
misleading; and
-6-
<PAGE>
9/10//99
All of the representations and warranties of Stuhmer shall survive the
termination of the Company.
1.9 Representations and Warranties of Southern Highlands. Southern
Highlands represents and warrants to Stuhmer and to the Company that on the date
hereof:
1.9.1 Southern Highlands has the full power, authority and
legal right to engage in all the transactions contemplated by this
Agreement including the conveyance of Parcel 305 to the Company and has
full power, authority and legal right to execute and deliver, and to
comply with its obligations under this Agreement;
1.9.2 Neither the execution nor delivery of this Agreement
will conflict with or result in a breach of any of the provisions of
any judgment, order, writ, injunction or decree of any court,
administrative agency or other governmental authority, or of any
agreement or other instrument to which Southern Highlands or any of its
Affiliates is a party or by which any of them is bound, or constitute a
default under any thereof, or conflict with or result in a breach of
any applicable law, rule or regulation of any such governmental
authority, or result in the creation or imposition of any lien, charge
or encumbrance upon any property of Southern Highlands;
1.9.3 No consent, approval or other authorization of or by
any court, administrative agency or other governmental authority or any
other entity is required in connection with the execution, delivery or
compliance with the provisions, of this Agreement by Southern
Highlands;
1.9.4 There is no suit, action or proceeding pending or
threatened against or affecting Southern Highlands before or by any
court, administrative agency or other governmental authority which
would affect the validity of the transactions contemplated thereby or
could interfere with the ability of Southern Highlands to comply with
the terms hereof.
1.9.5 There is no existing action, suit or proceeding before
or by any court or governmental agency or body, domestic or foreign or,
pending or threatened against or affecting Southern Highlands which
could result in any material and adverse change in its condition
(financial or otherwise), earnings, business affairs or business
prospects, or which could materially and adversely affect the legality,
validity or enforceability of this Agreement or which could have a
material and adverse effect upon Southern Highlands' ability to
consummate the transactions and agreements contemplated by this
Agreement, or to fulfill Southern Highlands' obligations hereunder.
-7-
<PAGE>
9/10//99
1.9.6 The final routing plan setting forth the layout of the
Southern Highlands golf course has been approved by Southern Highlands;
the operational guidelines, the membership structure and the membership
guidelines for the golf course have been established by Southern
Highlands (which structure and guidelines are subject to modification
without notice to or the approval of the Company, Stuhmer or the
Manager); the clubhouse for the golf course has been designed and the
clubhouse is under construction; the layout plans for the general
locations of the arterial Southern Highlands Master Planned Community
roadways and wet utilities accessing Parcel 305 have been prepared and
delivered to Stuhmer; and Southern Highlands has developed a
construction schedule (a copy of which has been delivered to Stuhmer
and which is subject to change) that estimates the time to complete
certain components of the Southern Highlands Master Planned Community
that would directly affect the development of Parcel 305 (provided;
however, that none of the foregoing representations or warranties
regarding the golf course or the other elements of the Southern
Highlands Master Planned Community shall grant or convey to the
Company, Stuhmer, the Manager or any purchaser of a Lot or Residence
from the Company any interest in the golf course, any membership
rights, privileges or priorities or any interest in any real property
owned by Southern Highlands (other than Parcel 305)). Southern
Highlands also shall not wilfully or intentionally impede, or impede
through Southern Highlands' gross negligence, in its capacity as the
owner or developer of real property located within the Southern
Highlands Master Planned Community, the development of the Project by
the Company in accordance with the Development Budget.
1.9.7 Southern Highlands shall provide to the Company for the
purpose of developing Parcel 305 not later than the Contribution Date:
(i) temporary construction electrical services access (to be metered to
and paid by the Company) for a period of time sufficient to permit the
development of the Project and in a capacity sufficient to allow the
Company to commence the construction by the Company of basic
infrastructure for the Project, (ii) within ninety (90) days after the
Contribution Date, access at the boundary of Parcel 305 to water
service infrastructure and sewer service infrastructure sufficient in
capacity to support the development of the Project (with such water and
sewer services to be metered to and paid by the Company), and (iii)
temporary construction access to Parcel 305 across the other real
property owned by Southern Highlands. Southern Highlands also shall not
wilfully or intentionally impede, or impede through Southern Highlands'
gross negligence, in its capacity as the owner or developer of real
property located within the Southern Highlands Master Planned
Community, the development of the Project by the Company in accordance
with the Development Budget. Southern Highlands shall cause the
"parent" final map creating legal Parcel 305 to be recorded prior to
the Contribution Date, to the extent any Lender
-8-
<PAGE>
9/10//99
to the Company requires such recording as a condition precedent to
funding any Loan to the Company.
1.9.8 No representation or warranty by Southern Highlands in
this Agreement and no exhibit, document, statement, certificate or
schedule furnished or to be furnished by Southern Highlands pursuant
hereto, or in connection with the transactions contemplated hereby,
contains any untrue statement of a material fact, or omits to state a
material fact necessary to make the statements contained herein or
therein not misleading.
All of the representations and warranties of Southern Highlands shall
survive the termination of the Company.
ARTICLE 2
NATURE OF BUSINESS
The Company is formed for the sole purpose of owning, developing,
constructing, marketing, and selling Residences on Parcel 305 (the "Project") at
a profit in accordance with the Development Budget. The Company shall be
authorized to do any lawful act now and hereafter permitted by the laws of the
State of Nevada in furtherance of, or convenient to, accomplishing its stated
purpose. The Company shall not engage in any other business activities without
the express written consent of both Members.
The Company is a single purpose entity. The Manager shall not permit
the funds of the Company to be commingled with the funds of any other Person,
including the funds of SH/CH II. The Company will maintain its own bank
accounts. The Manager will cause the Company to maintain and utilize separate
stationery, invoices and checks, and shall cause the business of the Company to
be conducted in its own name and shall promptly correct any third party
misunderstanding known to the Manager regarding the ownership of the business of
the Company.
ARTICLE 3
ACCOUNTING AND RECORDS; AFFILIATE TRANSACTIONS
3.1 Records to be Maintained. The Company shall maintain the following
records at the offices of the Manager:
3.1.1 A current list of the full name and last known business
address of each Member and the Manager;
3.1.2 A copy of the filed Articles and all amendments thereto,
together with executed copies of any powers of attorney pursuant to
which any Articles have been executed;
-9-
<PAGE>
9/1//99
3.1.3 A copy of this Agreement, including all amendments
thereto;
3.1.4 A copy of each Affiliate Agreement; and
3.1.5 A copy of each financial statement, record, budget or
report contemplated by this Agreement.
All of the financial statements and business records of the Company shall be
available for inspection and copying during normal business hours by any Member
and its representatives and agents upon not less than 48 hours written notice to
the Manager.
3.2 Reports to Members; Verification and Inspection.
3.2.1 The Manager shall provide monthly and annual written
reports to the Members that shall include a balance sheet, an income
statement, a statement of cash receipts and disbursements, a schedule
of all Fees and other amounts paid or accrued to be paid to the Manager
or any Affiliate of the Manager, a schedule of all Lots and Residences
sold within the reporting period, a schedule of all draws under the
Loan, a statement that discloses how actual expenditures vary from
budgeted items, a schedule that shows how actual construction and sale
activity at the Project varies from budgeted items, a statement
disclosing the proceeds of each sale, a copy of the final escrow
settlements for such sale, a schedule of any distributions made to the
Members, and a report of the accrued Preferred Return and the amount of
Unpaid Prorata Land Basis. Each report shall be prepared and
distributed within thirty (30) days after the end of each reporting
period.
3.2.2 The Manager shall provide each Member with information
returns required by the Code or the Act.
3.2.3 The Manager shall maintain a record of the Capital
Account for each Member in accordance with Article 7.
3.2.4 The Manager shall promptly notify each Member in writing
of the occurrence of any circumstance or event that may materially
affect the Project, including any claim or demand by a purchaser of a
Lot or Residence in excess of $30,000 in amount, the occurrence of any
material or uninsured casualty to any property of the Company, any
governmental claim where the dollar amount at issue may exceed $30,000.
3.2.5 At any time during normal business hours and upon not
less than 48 hours advance notice to the Manager, any Member and its
authorized agents and employees may review and copy (at such Member's
expense) any records or reports relating to the Project.
3.2.6 At the request of any Member, the financial statements
and reports for the Company for any period shall be audited by an
independent firm of certified public accountants
-10-
<PAGE>
9/10//99
chosen by the Member requesting the audit. If the results of such audit disclose
a material discrepancy (more than five percent (5%) in the amount distributable
to a Member requesting such audit (i.e., if the amount for any calendar month or
greater period of time actually distributed to a Member by the Company is 95% or
less than the amount that should have been distributed to such Member for the
same period, if distributions had been made in accordance with this Agreement),
such discrepancy in distributions shall be promptly remedied by the Manager, and
the full cost and expense of such audit shall be borne by the Manager. In all
other circumstances, the full cost and expense of such audit shall be borne by
the Member requesting the audit, and any non-material discrepancy in
distributions to be paid to any Member shall be promptly remedied by the
Manager.
3.3 Affiliate Transactions. The Manager is authorized to cause the
Company to enter into agreements on behalf of the Company with Affiliates of
Stuhmer or the Manager relating to the Project or Parcel 305, provided (i) that
Southern Highlands is given prior written notice of each Affiliate Agreement and
a reasonable opportunity to review such agreement, (ii) any such agreement is
made on terms which the Manager hereby represents are reasonable and in the best
interests of the Company and consistent with the Development Budget and
Marketing Budget approved by the Members, and (iii) the terms of each agreement
are no less favorable than those which the Company would have obtained in an
arm's length transaction with an unrelated third party. No provision of this
Agreement, including this Section 3.3, shall be construed to authorize Southern
Highlands to review or approve any employment, directorship agreement,
consulting agreement, shareholder agreement, or ownership agreement between
Stuhmer and Chris Home and/or Fortress.
3.4 Insolvency.
(a) If the Manager commences a voluntary case under the
federal bankruptcy laws or under any other applicable federal or state
law relating to insolvency, if an order for relief or similar
determination is entered in an involuntary case under the federal
bankruptcy laws or any other federal or state law relating to
insolvency, or if a receiver, liquidator, assignee, trustee, custodian
or other similar person is appointed, voluntarily or involuntarily, for
the assets of the Manager, then the Manager, (the "Insolvent Party"),
automatically shall cease to have the right to direct the management of
the Company and the Company shall be solely managed by a successor
Manager appointed in accordance with Section 3.6. Such suspension of
the Insolvent Party's management rights shall not affect the Insolvent
Party's interest in Fees earned before the commencement of such
insolvency proceeding, if any. The Manager acknowledges that if it
becomes an Insolvent Party, the Manager would have a conflict of
interest in representing the best interests of the Company and its
Members and simultaneously protecting the interests of creditors of the
Manager under the federal bankruptcy laws, if the Manager retained such
management rights. The Insolvent Party shall regain its voting and any
rights to manage the Company upon the effective date of a plan of
reorganization under federal bankruptcy laws, provided the Insolvent
Party is not
-11-
<PAGE>
9/10//99
otherwise in breach of this Agreement and has assumed all of its
obligations hereunder and not assigned any of such obligations.
(b) If Stuhmer commences a voluntary case under the federal
bankruptcy laws or under any other applicable federal or state law
relating to insolvency, if an order for relief or similar determination
is entered in an involuntary case under the federal bankruptcy laws or
any other federal or state law relating to insolvency, or if a
receiver, liquidator, assignee, trustee, custodian or other similar
person is appointed, voluntarily or involuntarily, for the assets of
Stuhmer, then Stuhmer (the "Insolvent Party"), automatically shall
cease to have any right to participate in the management of the
Company. Such suspension of the Insolvent Party's management rights
shall not affect the Insolvent Party's interest in the Profits, Losses,
or capital of the Company. Stuhmer acknowledges that if he becomes an
Insolvent Party, he would have a conflict of interest in representing
the best interests of the Company and its Members and simultaneously
protecting the interests of his creditors under the federal bankruptcy
laws, if he retained such management rights. The Insolvent Party shall
regain its voting and any rights to participate in the management of
the Company upon the effective date of a plan of reorganization under
federal bankruptcy laws, provided the Insolvent Party is not otherwise
in breach of this Agreement and has assumed all of its obligations
hereunder and not assigned any of such obligations.
(c) If Southern Highlands commences a voluntary case under the
federal bankruptcy laws or under any other applicable federal or state
law relating to insolvency, if an order for relief or similar
determination is entered in an involuntary case under the federal
bankruptcy laws or any other federal or state law relating to
insolvency, or if a receiver, liquidator, assignee, trustee, custodian
or other similar person is appointed, voluntarily or involuntarily, for
the assets of Southern Highlands (the "Insolvent Party"), Southern
Highlands automatically shall cease to have the right to participate in
the management of the Company. Such suspension of the Insolvent Party's
management rights shall not affect the Insolvent Party's interest in
the Profits, Losses, or capital of the Company. Southern Highlands
acknowledges that if it becomes an Insolvent Party, Southern Highlands
would have a conflict of interest in representing the best interests of
the Company and its Members and simultaneously protecting the interests
of its creditors under the federal bankruptcy laws. The Insolvent Party
shall regain its voting and any rights to manage the Company upon the
effective date of a plan of reorganization under federal bankruptcy
laws, provided the Insolvent Party is not otherwise in breach of this
Agreement and has assumed all of its obligations hereunder and not
assigned any of such obligations.
-12-
<PAGE>
9/10//99
3.5 Assurance of Performance: Undertakings.
3.5.1 The Manager represents and warrants to the Company and
to each Member that all of the work and services performed by the Manager and/or
its Affiliates in connection with the development of Parcel 305, the sale of
Lots and Residences, and the construction and marketing of Residences shall be
performed promptly, within the parameters of the Development Budget and
Marketing Budget, in full compliance with all applicable laws and contractual
limitations including any restrictions imposed by any lender to the Company, and
the Manager shall indemnify the Company for any claims brought by purchasers of
Lots or Residences from the Company.
3.5.2 The Manager hereby represents and warrants for the
benefit of Southern Highlands that it and each of the Affiliates will perform
their respective duties hereunder and under any Affiliate Agreement in
accordance with such agreements.
3.5.3 The Manager shall use its best efforts to cause the
Company (i) to comply with the requirements of any Loan financing secured for
the Project, (ii) to comply with all governmental requirements and restrictions
affecting the Project and sale of Lots and Residences, and (iii) to comply with
any request made by Southern Highlands for information on the status of the
Project, including Lot and Residence sales.
3.5.4 The Manager represents and warrants for the benefit of
Southern Highlands that it will use its best efforts in the development,
profitable operation and management of the Project.
3.5.5 The Manager represents and warrants for the benefit of
Southern Highlands that Marketing Material for the Project shall not suggest in
any way that any purchaser of a Lot or Residence has any rights or privileges
with respect of the Southern Highlands golf course or any of the other amenities
in the Southern Highlands Master Planned Community.
3.5.6 Southern Highlands represents and warrants for the
benefit of the Company that it will timely satisfy its obligations under this
Agreement, including Sections 1.9.6 and 1.9.7, in a manner so as to not wilfully
or intentionally impede, or impede through the gross negligence of Southern
Highlands, the development of the Project.
3.5.7 Southern Highlands further agrees that in the event
Southern Highlands does not provide construction grade water and sewer access
for the Project within the first 90-days after the Contribution Date, Southern
Highlands shall promptly reimburse the Company for any interest expense incurred
under any Loan then outstanding to the Company for the Project from and after
such ninetieth day until such access is made available by Southern Highlands.
-13-
<PAGE>
9/10//99
3.6 Replacement of the Manager.
3.6.1 Upon the occurrence of a Manager Default, Southern
Highlands shall have the unilateral right to remove Chris Homes and any
successor Stuhmer-Controlled Manager by notice to Stuhmer and the Manager. Such
removal shall be effective on the date specified in such notice, not to be
earlier than forty-five (45) days following the date of such notice and not
before the time has expired to cure such Manager Default, as specified by this
Agreement. Upon receipt of such notice of removal by Southern Highlands, Stuhmer
shall have fifteen (15) days within which to irrevocably elect to appoint a new
Stuhmer-Controlled Manager, which Stuhmer-Controlled Manager shall be required
to assume the obligations of successor Manager not later than the expiration of
the foregoing 45 day period. If Stuhmer fails or refuses for any reason to
appoint a successor Stuhmer-Controlled Manager within the time allowed, Southern
Highlands shall be authorized to unilaterally appoint a successor Manager. The
only qualification for any successor Manager appointed by Southern Highlands is
that such successor Manager must be approved by the Lender.
3.6.2 At any time and upon not less than 45 days advance
notice to Chris Homes, Stuhmer may require that Chris Homes be removed as
Manager, with or without cause, and replaced with a Stuhmer-Controlled Manager.
3.6.3 Stuhmer shall have the right to appoint a
Stuhmer-Controlled Manager only once under this Agreement.
3.6.4 Any successor Manager must agree to assume all of the
obligations and duties of the original Manager and to promptly cure any Manager
Default of the removed Manager. Any removed Manager shall not be entitled to
earn any more Fees after such removal. Upon removal, the removed Manager shall
cooperate with the Company and successor Manager, shall promptly provide all of
the books and records of the Company to the successor Manager, and shall make
available to the Company all of the plans, designs and specifications required
to complete the construction of Residences that were under construction at the
time of the removal.
3.6.5 All parties, acting reasonably, promptly and in good
faith, shall execute and deliver an amendment to this Agreement and the Articles
which implements the changes described in this Section.
3.6.6 In addition to having the right to remove the Manager
upon the occurrence of a Manager Default, Southern Highlands shall have all
other rights and remedies available to it at law, in equity or otherwise as a
result of a Manager Default under this Agreement, including, without limitation,
the right to bring suit against the Manager and Stuhmer for damages.
-14-
<PAGE>
9/10//99
3.6.7 In the event Chris Homes is removed as Manager, the
Company shall be permitted to continue to use the tradename "Christopher Homes"
in connection with the sale of any Residence the construction of which had began
before such removal.
3.7 Special Indemnity and Limitation on Stuhmer Personal Liability.
Stuhmer represents and warrants that during any period that he is acting as, or
has the title of, president or chief executive or operating officer of Chris
Homes, and Chris Homes is the Manager, Stuhmer will use his best efforts to
cause Chris Homes to promptly and fully satisfy each of its contractual
obligations under this Agreement. In the event Stuhmer exercises his right to
replace Chris Homes, as the initial Manager, with any Stuhmer-Controlled
Manager, Stuhmer will use his best efforts to cause any such Stuhmer-Controlled
Manager to promptly and fully satisfy each of its contractual obligations under
this Agreement. Stuhmer also shall indemnify and hold Southern Highlands
harmless from any loss or expense (including any delay in the Project)
attributable to any claim by Chris Homes or its shareholder that: (i) its
removal as Manager is not authorized or (ii) this Agreement or the transactions
contemplated by this Agreement did not receive all required corporate or
shareholder approvals (a "Chris Homes Claim"). The foregoing representations and
warranties of Stuhmer are a personal obligation of Stuhmer that shall survive
the termination of the Company. The foregoing representations and warranties of
Stuhmer do not constitute a guarantee of the accuracy of any Project Projections
or a guarantee that the Project will be profitable. Stuhmer shall not be liable
under this Section 3.7 for any act or omission of Chris Homes or a
Stuhmer-Controlled Manager that represents only negligence or a reasonable
mistake in business judgment; however, Stuhmer shall be personally liable under
this Section 3.7 for any Chris Homes Claim and any act or omission of Chris
Homes or a Stuhmer-Controlled Manager that constitutes gross negligence or a
wilful or intentional act or omission.
ARTICLE 4
TRANSFER OF INTERESTS
4.1 Transfer Restrictions.
(a) The Interests are not transferrable in whole or in part
during the Project. The Members have formed the Company for the express
purpose of completing the Project over the course of approximately
sixty (60) months commencing on the Contribution Date. The full and
complete commitment of both Members and the Manager to the Company and
the Project is required. Both Members agree that the restrictions on
transfers of Interests are fair and reasonable given the limited
purpose and short duration of the Project. In the event of the death of
Stuhmer, his Interest shall be held by the personal representative of
his estate, as an Assignee, provided his estate or other transferee may
be admitted as a Member with the written consent of Southern Highlands,
which will not be unreasonably withheld. With the advance written
consent of Southern Highlands, which will not be unreasonably withheld,
Stuhmer may transfer all or part of his
-15-
<PAGE>
9/10//99
Interest to a family trust or family limited partnership, provided such
transfer is approved by each Lender and provided, further, that
Stuhmer shall retain all voting and approval rights with respect of
such Interest and shall remain obligated personally under this
Agreement for all of his undertakings, contribution obligations,
representations, warranties and indemnification obligations.
(b) In the event of the death of Stuhmer or dissolution of his
marriage of Stuhmer, and if his spouse acquires an Interest in the
Company, she agrees that she will engage (at her expense) an
experienced residential real estate developer to advise her on all
matters arising hereunder that would have required the approval of
Stuhmer.
4.2 Admission of Additional Members. With the written consent of both
Members, Additional Members may be admitted to the Company subject to the
contribution of such consideration to the Company as may be determined by the
Members and the execution of an agreement that such Additional Member agrees to
be bound by the terms of this Agreement.
4.3 Intentionally Deleted.
4.4 Securities Law Restrictions. In addition to any restrictions an the
transferability of any Interest, each of the Members expressly acknowledges that
the Interests have not been registered under the Securities Act of 1933 (the
"1933 Act"), or applicable state securities laws. Each Member understands that
the Interests have been issued in reliance on an applicable exemption from
registration under the 1933 Act. Each Member represents and warrants that (i)
its Interest is being acquired solely for its own account, for investment
purposes only, and is not for distribution, subdivision, or fractionalization
thereof: and (ii) other than as disclosed herein, it has no agreement or other
arrangement, formal or informal, with any person to sell, transfer or pledge any
part of the Interest, or which would guarantee to it any profit, or protect it
against any loss, with respect to the Interest and it has no plans to enter into
any such agreement or arrangement. Each Member further understands that it must
bear the economic risk of the investment in the Interest for an indefinite
period of time.
4.5 Breach or Default by Manager or Stuhmer.
4.5.1 Notwithstanding anything to the contrary contained in
this Agreement:
(a) so long as a Manager Default shall be outstanding
hereunder; or
(b) Stuhmer, the Manager or any of their respective
Affiliates shall be in default under this Agreement or any
Affiliate Agreement; or
-16-
<PAGE>
9/10//99
(c) there shall be a Monetary Default (as defined
below) under any Loan related to the Project;
all distributions or payments of Fees which, but for this Section 4.5 would be
payable to Stuhmer or the Manager shall be deposited with a title insurance
company or another escrow agent located in Clark County, Nevada selected by
Southern Highlands ("Escrow Agent") pursuant to an escrow agreement approved by
Southern Highlands ("Escrow Agreement") (but credited as distributed to Stuhmer
or paid to the Manager for record keeping purposes) and shall be retained by the
Escrow Agent in an interest bearing account pending a prompt determination, in
accordance with this Agreement, of any damages incurred by the Company or
Southern Highlands, whereupon such escrowed distributions shall be applied to
satisfy and pay such damages and the balance, if any, shall be paid promptly to
Stuhmer or the Manager. Stuhmer, the Manager and Southern Highlands shall
cooperate to promptly determine the amount of the damages recoverable by
Southern Highlands or the Company, if any, pursuant to an arbitration proceeding
conducted in accordance with Section 4.7 hereof.
4.5.2 Notwithstanding anything to the contrary contained in
this Agreement, Southern Highlands shall not exercise any of its rights or
remedies under this Agreement in connection with any breach by Stuhmer, the
Manager or the Affiliates of either of them, unless and until Southern Highlands
shall have given Stuhmer or the Manager written notice of said breach or default
and Stuhmer, the Manager or its Affiliates, as the case may be, shall have
received the notice and have had an opportunity to cure such breach or default
to the extent specified in the definition of Manager Default set forth in this
Agreement.
4.5.3 As used herein, "Monetary Default" shall mean a failure
to pay any sum or funds due and payable under any agreement or obligation,
including any Loan agreement to which the Company is a party, after the
expiration of any cure period provided in such agreement.
4.6 Breach or Default by Southern Highlands.
4.6.1 Notwithstanding anything to the contrary contained in
this Agreement:
(a) if there is a breach or default by Southern
Highlands under this Agreement, and
(b) Southern Highlands fails to cure such breach or
default within thirty (30) days after written notice of such
breach or default from Stuhmer or the Manager, or to begin to
cure such breach or default under circumstances where more
than thirty (30) days are reasonably required to cure such
breach or default;
-17-
<PAGE>
9/10//99
all distributions which, but for this Section 4.6 would be payable to Southern
Highlands shall be deposited with a title insurance company or another escrow
agent located in Clark County, Nevada selected by Stuhmer ("Escrow Agent")
pursuant to an escrow agreement approved by Stuhmer ("Escrow Agreement") (but
credited as distributed to Southern Highlands for record keeping purposes) and
shall be retained by the Escrow Agent in an interest bearing account pending a
prompt determination, in accordance with this Agreement, of any damages incurred
by the Company, whereupon such escrowed distributions shall be applied to
satisfy and pay such damages and the balance, if any, shall be paid promptly to
Southern Highlands. Stuhmer, the Manager and Southern Highlands shall cooperate
to promptly determine the amount of the damages recoverable by the Company, if
any, pursuant to an arbitration proceeding conducted in accordance with Section
4.7 hereof.
4.6.2 Notwithstanding anything to the contrary contained in
this Agreement, neither Stuhmer nor the Manager shall exercise any of its rights
or remedies under this Agreement in connection with any breach by Southern
Highlands, unless and until Southern Highlands has received written notice of
said breach or default and Southern Highlands shall have received the notice and
have had an opportunity to cure such breach or default to the extent specified
above.
4.7 Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or the breach thereof, shall be settled by arbitration
administered by the American Arbitration Association under its Commercial
Arbitration Rules, in Las Vegas, Nevada, by a single arbitrator who shall not be
authorized to vary the terms of this Agreement, and judgment on the award
rendered by the arbitrator may be entered in any court in Nevada. The arbitrator
shall award reasonable fees and expenses to the successful party in such
arbitration. The Members and the Manager shall cooperate in an effort to
promptly and efficiently resolve any disputed matter. The Members and the
Manager expressly authorize and agree to adopt the so-called "expedited
procedures" of the American Arbitration Association, and the Members and the
Manager direct that any such arbitration be resolved within the 90 day period
after either Member files an application to arbitrate any controversy or claim
arising out of or relating to this Agreement.
ARTICLE 5
RIGHTS AND DUTIES OF MEMBERS
5.1 Meetings. Meetings of the Members, for any purpose or purposes, may
be called by a Manager or by any Member. So long as the same is required by the
Act, the Members shall meet at least annually.
5.2 Notice of Meeting. Written notice, by mail or by telecopy, stating
the place, day and hour of the meeting, and the purposes for which the meeting
is called, shall be delivered not less than fifteen (15) days before the date of
the meeting, either personally or by mail, by or at the direction of the
Manager, to each Member of record entitled to vote at such meeting on the
certificate roster as of the date the notice is prepared for delivery. It
mailed, such notice shall be deemed to be
-18-
<PAGE>
9/10//99
delivered when deposited in the United States mail, addressed to the Member at
its address as it appears on the certificate roster, with postage thereon
prepaid. When all the Members of the Company are present at any meeting, or if
those not present sign a written waiver of notice of such meeting, or
subsequently ratify all of the proceedings thereof, the transactions of such
meeting are as valid as if the meeting were formally called and notice had been
given.
5.3 Quorum. At any meeting of the Members, the presence of all Members,
represented in person or by proxy, shall constitute a quorum for the transaction
of business. All Members shall make themselves available for each meeting of the
Company.
5.4 Order of Business. The order of business at all meetings of the
Members shall be as follows:
(a) Roll call.
(b) Proof of notice of meeting or waiver of notice.
(c) Reading of minutes of preceding meeting.
(d) Report of the Manager.
(e) Report of Committees.
(f) Unfinished Business.
(g) New Business.
5.5 Proxies. At all meetings of Members, a Member may vote by proxy
executed in writing by the Member or by its duly authorized attorney-in-fact.
Such proxy shall be filed with a Manager of the Company before or at the time of
the meeting. No proxy shall be valid after six (6) months from the date of
execution, unless otherwise provided in the proxy.
5.6 Voting by Certain Members. Interests standing in the name of a
corporation, partnership, limited liability company or other entity may be voted
by such officer, partner, manager, member, agent or proxy as the bylaws or other
governing document of such entity may prescribe or, in the absence of such
provision, as the Board of Directors or other authorized representative of such
entity may determine. Any voting or approval rights attributable to any Interest
held by a trustee, personal representative, administrator, executor, guardian or
conservator may be voted by such Person, either in person or by proxy; provided,
however that any voting or approval rights attributable to Interests held by any
family limited partnership or family trust established by or for Stuhmer or
members of his family shall always be exercised exclusively by Stuhmer,
personally. Interests held by an Assignee do not have any voting or approval
rights.
-19-
<PAGE>
9/10//99
5.7 Manner of Acting.
5.7.1 For any action by the Members, the unanimous approval of
all Members shall be required except for (i) unilateral Member actions expressly
allowed by Section 3.6, (ii) unilateral Member actions allowed under Section
3.4 because a Member is an Insolvent Member, (iii) unilateral Member actions
allowed under Sections 4.5 and 4.6 because of a breach of this Agreement, (iv)
unilateral Member action to commence an arbitration proceeding, and (v) various
rights granted to Southern Highlands under this Agreement to approve or
disapprove certain matters, including Southern Highland's right to determine
certain matters under Section 7.2 where the Manager or Stuhmer would have a
conflict of interest.
5.7.2 The Manager of the Company shall preside at meetings of
the Members. A record shall be maintained of the meetings of the Members. The
Members may adopt their own rules of procedure which shall not be inconsistent
with the laws of the State of Nevada or this Agreement.
5.7.3 A Member who is present at a meeting of the Members at
which action on any matter is taken shall be presumed to have assented to the
action taken, unless the Member's dissent shall be entered in the minutes of the
meeting or unless the Member shall file a written dissent to such action with
the person acting as the secretary of the meeting before the adjournment thereof
or shall forward such dissent by certified mail to the secretary of the meeting
within five (5) days following the adjournment of the meeting. Such right to
dissent shall not apply to a member who voted in favor of such action.
5.8 Telephonic Meetings. Members may participate in any meeting of the
Members by means of conference telephone or similar communication if all persons
participating in such meeting can hear one another for the entire discussion of
the matter(s) to be voted upon. Participating in a meeting pursuant to this
Section shall constitute presence in person at such meeting.
5.9 Action by Consent. Unless otherwise provided by the laws of the
State of Nevada, any action required or permitted to be taken at a meeting of
the Members, may be taken without a meeting if a consent in writing, setting
forth the action so taken, shall be signed by all the Members.
5.10 Voting Rights of Members. The following matters require the
unanimous consent of both Members:
5.10.1 Approval of the Parcel 305 Development Budget and the
Project Projections, as well as any substantial changes thereto. For
purposes of this subsection 5.10.1, a "substantial change" shall be
deemed to mean, without limitation, any change except a change of
$25,000 or less in any item in the Development Budget or Project
Projections which, when aggregated with all other
-20-
<PAGE>
9/10//99
previous changes not specifically approved, is less than $200,000.00 in
the aggregate.
5.10.2 Approval of the terms and provisions of all Loans and
other financing arrangements obtained by the Company or secured by
Company assets, including the terms of all loan agreements, notes,
deeds of trust and other security agreements, and any changes to such
loan or financing arrangements;
5.10.3 Approval of the Marketing Budget as well as any
substantial changes thereto. For purposes of this subsection, a
"substantial change" shall be deemed to mean, without limitation, any
change which would increase the aggregate Marketing Budget to an amount
in excess of seven percent of the budgeted Sales Revenues for the
Project and any change that would authorize or permit the payment of
sale commissions or incentives of more than 1% to Manager or Company
employees or Affiliates or the payment of sales commission or
incentives at a rate of more than 3% to independent "outside" brokers
on the "base price" of a Lot and Residence, if it is a "to be built
home," and 3% of the entire price of a Lot and Residence that is a
"spec" home.
5.10.4 Any change in the stated purpose of the Company,
including the acquisition of additional real property;
5.10.5 Except as specifically allowed and authorized as set
forth herein, any cash or other monetary distribution by the Company;
5.10.6 Removal of Manager, except as otherwise provided in
Sections 3.6;
5.10.7 Election of an accounting year other than a calendar
year and any tax election by the Company, the approval (in advance of
filing) of any federal income tax return for the Company;
5.10.8 Amendment to the Articles of Organization;
5.10.9 Dissolution of the Company (except to the extent
authorized in Section 10.1);
5.10.10 Admission of Additional or Substitute Members;
5.10.11 Any Affiliate Agreement or amendment to an Affiliate
Agreement;
5.10.12 The selection of the accountants and legal counsel to
the Company;
-21-
<PAGE>
9/1//99
5.10.13 Any matter or item that this Agreement states must be
approved by both Members;
5.10.14 Any filing for bankruptcy or similar relief;
5.10.15 The commencement of any lawsuit; or
5.10.16 Any change in the zoning of Parcel 305 or any portion
thereof.
Until otherwise modified or repealed by the unanimous consent of the Members,
the authority to act, except for the matters set forth above or otherwise
reserved to the Members pursuant to the Act or as otherwise set forth herein, on
all matters on behalf of the Company shall be vested in the Manager,
5.11 Other Rights of Members. By way of illustration, and not
limitation, Members may:
5.11.1 Object to transfers of Interests;
5.11.2 Review the books and records of the Company;
5.11.3 Receive notice of resignation of Manager and officers;
and
5.11.4 Receive distributions pursuant to Article 8.
5.11.5 Within five (5) days after any written request,
Southern Highlands shall receive copies of Purchase Contracts,
Agreements, Amendments thereto, Marketing Reports, Closing Statements
for the sale of the Lots and Residences and each of the documents
referred to in Section 3.2.1.
5.12 Conflicts of Interest.
5.12.1 A Member shall be entitled to enter into transactions
that may be considered to be competitive with, or a business opportunity that
may be beneficial to, the Company, it being expressly understood that a Member
may individually enter into transactions that are similar to the transactions
into which the Company may enter with respect of real property other than Parcel
305. Each Member shall account to the Company and hold as trustee for it any
property, profit, or benefit derived by the Member, without the written consent
of the other Member, in the conduct and winding up of the Company business or
from a use or appropriation by the Member of Company property employed in the
development of Parcel 305, including information developed exclusively for the
Company and opportunities offered by third parties in writing to the Company and
within the scope of the Company's stated purpose of the development of Parcel
305. No Member shall have any obligation to account to the Company or any Member
for any profits realized in connection with
-22-
<PAGE>
9/10//99
any non-Parcel 305 real property. The designs, plans and specifications for
Residences to be constructed on Parcel 305 shall not be treated as property of
the Company upon the termination of the Company, but such designs, plans and
specifications shall continue to be available to the Company during the course
of the Project notwithstanding the removal of any Manager.
5.12.2 A Member, including a Manager, does not violate a duty
or obligation to the Company merely because the Member's conduct furthers the
member's own interest. Subject to Section 7.1.3 hereof, a Member may lend money
to and transact other business with the Company; provided that the opportunity
to make any loan to the Company first has been offered to both Members. The
rights and obligations of a Member who lends money to or transacts business with
the Company are the same as those of a person who is not a Member, subject to
other applicable law. No transaction with the Company shall be voidable solely
because a Member has a direct or indirect interest in the transaction it either
the transaction is fair to the Company or the disinterested Manager or
disinterested Member(s), in either case knowing the material facts of the
transaction and the Member's interest, authorize, approve or ratify the
transaction.
5.12.3 In the event Stuhmer or the Manager make any Loan to
the Company permitted under this Agreement, in order to prevent the occurrence
of a conflict of interest, Southern Highlands shall have the sole authority to
direct the Company with respect to any election or other decision under such
Loan, including any prepayments or any Loan collection or enforcement matters.
5.13 Restrictions on Withdrawal. Neither Southern Highlands nor Stuhmer
shall have any right to retire or withdraw voluntarily from the Company or to
sell, transfer, pledge or assign all or any part of their Interest in the
Company or to voluntarily commit an act that constitutes an event of withdrawal
under the Act (except a limited transfer permitted by Section 4.1 hereof). Any
voluntary act that constitutes an event of withdrawal from the Company shall
constitute a material breach of this Agreement and the Company shall be entitled
to collect damages for such breach. Such damages shall include (without
limitation) any loss or expense suffered by the Company as a consequence of such
event of withdrawal. Such damages shall offset any cash or other property
otherwise distributable to the wrongfully withdrawing Member. A withdrawal from
the Company by a Member, whether voluntary or involuntary, shall not accelerate
the time within which the Company shall be required to make any distribution to
such Member or pay any Fees to the Manager. If a Member exercises any power to
withdraw from the Company in breach of this Agreement, they expressly waive any
right to require under the Act or other applicable law a distribution from the
Company before the Company's completion of the sale of all of the Lots and
Residences in the Project at the end of the stated term of the Company and such
Member further waives any right to require that such deferred distribution be
secured by a bond or be payable with interest. These express waivers are given
in recognition of the Company's need to retain its capital for its stated term
and in further recognition that the Company was formed by Southern Highlands in
reliance upon the expertise, experience and financial standing of Stuhmer and
the Manager. In
-23-
<PAGE>
9/10//99
the absence of such waivers, Southern Highlands and Stuhmer would not have
entered into this Agreement.
5.14 Rejection.
(a) In the event Stuhmer files for bankruptcy or has a
bankruptcy proceeding commenced against him and this Agreement is
rejected pursuant to Bankruptcy Code, such rejection shall be a
material breach of this Agreement and shall constitute a Manager
Default. In such event, Southern Highlands shall be entitled to all of
its remedies under this Agreement (including without limitation under
Section 4.5 hereof), the Act and as otherwise provided under applicable
law, subject to the applicable provisions of the Bankruptcy Code. If
this Agreement is assumed by Stuhmer in a bankruptcy proceeding, it is
not assignable.
(b) In the event the Manager files for bankruptcy or has a
bankruptcy proceeding commenced against it and this Agreement is
rejected pursuant to Bankruptcy Code, such rejection shall be a
material breach of this Agreement and shall constitute a Manager
Default. In such event, Southern Highlands shall be entitled to all of
its remedies under this Agreement (including without limitation under
Section 4.5 hereof), the Act and as otherwise provided under applicable
law, subject to the applicable provisions of the Bankruptcy Code. If
this Agreement is assumed by the manager in a bankruptcy proceeding, it
is not assignable.
(c) In the event Southern Highlands files for bankruptcy or
has a bankruptcy proceeding commenced against it and this Agreement is
rejected pursuant to Bankruptcy Code, such rejection shall be a
material breach of this Agreement. In such event, Stuhmer shall be
entitled to all of its remedies under this Agreement (including without
limitation under Section 4.5 hereof), the Act and as otherwise provided
under applicable law, subject to the applicable provisions of the
Bankruptcy Code. If this Agreement is assumed by Southern Highlands in
a bankruptcy proceeding, it is not assignable.
ARTICLE 6
MANAGER
6.1 Appointment and Authority. Until its removal, Chris Homes shall be
the Manager of the Company. Chris Homes shall have no right to resign or
delegate its duties under this Agreement to any third party without the written
consent of both Members. Southern Highlands entered into this Agreement in
reliance upon the reputation, experience and financial standing of Chris Homes
and Stuhmer. Chris Homes is not a Member, and any successor Manager need not be
a Member of the Company.
-24-
<PAGE>
9/10//99
6.2 Term of Office. The Manager shall serve until the removal of such
Manager pursuant to Section 3.6.
6.3 Authority of Manager to Bind the Company. Subject to the
limitations of Section 5.10 hereof, the Manager shall only have such rights and
authority as are expressly stated in this Agreement. The Members may with the
unanimous approval of both Members at any time limit or reduce the authority of
the Manager (but the requirement of unanimity shall not apply to any removal of
a Manager authorized by Section 3.6). Only the Manager and its authorized
officers, and authorized officers of the Company shall have authority to bind
the Company, except as to matters reserved to the Members. Authorized officers
of the Manager and authorized officers of the Company shall include sales agents
employed by the Manager. No Member shall take any action as a Member to bind the
Company, except as expressly authorized herein, and shall indemnify the Company
for any costs or damages incurred by the Company as a result of the unauthorized
action of such Member. The Manager shall have the power, on behalf of the
Company, to do all things necessary or convenient to carry out the business and
affairs of the Company (except as otherwise may be specifically limited pursuant
to this Agreement, or as otherwise reserved to the Members pursuant to the Act),
including without limitation, the following:
6.3.1 The institution, prosecution and defense of any
proceeding in the Company's name;
6.3.2 The purchase, receipt, lease or other acquisition,
ownership, holding, improvement, use and other dealing with, Company
property, in accordance with the Development Budget;
6.3.3 The marketing and sale of Lots, and any improvements
constructed thereon in accordance with the Marketing Budget and with
approved Marketing Materials;
6.3.4 Subject to Section 5.10.2 the procurement of financing
for the Company, and the mortgage, pledge, lease, exchange,
hypothecation and other disposition of the Company assets in connection
with all financing procured for the Company;
6.3.5 The entering into of contracts and obligations of the
Company; and subject to Section 5.10.2 incurring of liability;
borrowing money; issuance of notes, bonds and other obligations; and
securing of any of its obligations by mortgage, pledge or hypothecation
of any Company Property, income or account receivables;
6.3.6 The conduct of the Company's business, the establishment
of Company offices, and the exercise of the powers of the Company
within Nevada;
-25-
<PAGE>
9/10//99
6.3.7 The appointment of employees and agents of the Company,
the defining of their duties, the establishment of their compensation;
6.3.8 Any other act that furthers the business and affairs of
the Company; and
6.3.9 The approval of changes to the Development Budget which,
under Section 5.10.1, do not constitute a "substantial change."
6.3.10 Day-to-day matters with respect to the development,
operation and management of the Project.
6.4 Actions of the Manager. The Manager has the power to bind
the Company as provided in this Article 6. The act of the Manager for the
purpose of carrying on in the usual way the business or affairs of the Company,
including the exercise of the authority indicated in this Article 6, shall bind
the Company and no Person dealing with the Company shall have any obligation to
inquire into the power or authority of such Manager acting on behalf of the
Company; provided, however, if the act of the Manager violates this Agreement,
the Manager shall be fully liable for such act.
6.5 Compensation of Manager. The sole compensation payable to
the Manager (including compensation to the Manager as general contractor for the
Project) shall be the Fees described in Section 8.3. The Manager and its
Affiliates shall receive no other compensation or reimbursement from the Company
with respect of the Project, except to the extent such additional consideration
or compensation has been approved in writing by both Members in a written
Affiliate Agreement.
6.6 Manager's Standard of Care. A Manager's duty of care in
the discharge of the Manager's duties to the Company and other Members is
limited to refraining from engaging in grossly negligent or reckless conduct,
intentional misconduct, a breach of this Agreement or any Affiliate Agreement,
or a knowing violation of the law. In discharging its duties, the Manager shall
be fully protected in relying in good faith upon the records required to be
maintained under Article 3 and upon such information, opinions, reports or
statements by any of the Members, or agents, or by any other Person, as to
matters the Manager reasonably believes are within such other Person's
professional or expert competence and who has been selected with reasonable care
by or on behalf of the Company, including information, opinions, reports or
statements as to the value and amount of the assets, liabilities, profits or
losses of the Company or any other facts pertinent to the existence and amount
of assets from which distributions to Members might properly be paid.
6.7 Officers. The Manager shall act as the General Manager and
President of the Company and shall function as the chief operating officer of
the Company. The Members may also elect from time to time additional officers
including, without limitation, one or more Vice Managers
-26-
<PAGE>
9/10//99
or Vice Presidents, a secretary and one or more assistant secretaries, and a
Treasurer and one or more Assistant Treasurers, which officers may be elected by
the unanimous approval of the Members. If the members do not elect such
additional officers, the Manager may appoint such additional Officers from time
to time. An officer need not be selected from among the Members. One Person may
hold two or more offices. Any officer appointed by the Manager may be removed at
any time by the Manager or with the Members' unanimous consent, with or without
cause.
The Manager waives any right to resign from the Company in view of the
expected duration of the Company and the reliance of the Members on the skill
and reputation of the Manager. Southern Highlands would not have agreed to form
the Company in the absence of the commitment of the Manager to remain as Manager
for the entire term of the Company.
ARTICLE 7
CONTRIBUTIONS, INTERESTS, AND CAPITAL ACCOUNTS
7.1 Initial Contributions.
7.1.1 Land Contribution. For its initial capital contribution
to the Company, Southern Highlands shall execute and deliver to the Company a
Grant, Bargain, Sale Deed conveying to the Company Parcel 305, as described on
Exhibit "A" attached hereto and incorporated herein, free and clear of all
liens, encumbrances and title exceptions except Permitted Exceptions, as defined
below. The agreed upon value of the initial capital contribution of Southern
Highlands is $6,444,750, which represents $150,000 per acre. (If the actual
acreage of Parcel 305 is adjusted with the written consent of both Members, the
initial Capital Account credit of Southern Highlands shall be changed to an
amount equal to $150,000 multiplied by the adjusted acreage of Parcel 305.) The
capital contribution of Southern Highlands shall be reflected on Exhibit "E,"
attached hereto and incorporated in full by this reference. The date Southern
Highlands makes its initial capital contribution is the Contribution Date.
Unless and until Southern Highlands contributes Parcel 305 to the Company, the
Company shall have no right, title or interest in Parcel 305. This Agreement is
not an option agreement or an executory contract to sell Parcel 305 to the
Company.
7.1.1.1 "Permitted Exceptions" means (i) those
matters reflected on and approved as permitted exceptions in a
Preliminary Title Report or Title Commitment to be issued by
Fidelity National Title Insurance Company, (ii) the
Development Agreement between the County of Clark and Southern
Highlands, et al, which was recorded on March 2, 1999 in book
990302, as instrument No. 01676, (iii) conditions,
restrictions and reservations imposed by the County of Clark
or other governmental authorities or public utilities arising
from the approval of any parcel or subdivision maps, (iv) the
Master CC&R's, including supplemental declarations thereto
which shall be mutually agreed to by Southern Highlands and
Stuhmer before the Contribution Date and otherwise shall be
consistent with supplemental declarations established for
-27-
<PAGE>
9/10//99
other "Estate" areas of the Southern Highlands Master Planned
Community, (v) all restrictions and encumbrances arising from
the SID No. 121 for the Southern Highlands Master Planned
Community, of which Parcel 305 is a part, (vi) the terms and
conditions of the Clark County Code Chapter 28.46 relating to
desert tortoise habitat, (vii) any other covenant, condition,
restriction, reservation, rights, rights of way, easements,
dedications, offers of dedication and other matters apparent
from a visual inspection of Parcel 305 and the other real
property in the Southern Highlands Master Planned Community,
and (viii) the effect of any and all applicable laws,
ordinances, rules, regulations or guidelines of any
governmental entity, agency or department having jurisdiction
over the Project or Parcel 305.
7.1.1.2 After the Contribution Date, the Manager is
authorized and directed for and on behalf of the Company to
cause the Company to execute and deliver such instruments and
contracts as may be requested by Southern Highlands to (i)
incorporate Parcel 305 in SID No. 121 (at an assessed cost not
to exceed $35,000 per acre); (ii) adopt and endorse the final
Master CC&R's for Parcel 305; and (iii) adopt and endorse the
Declaration of Developments.
7.1.2 Additional Capital Contributions by Southern Highlands.
Southern Highlands shall not under any circumstances be required to make any
additional contributions to the capital of the Company or to make any loans to
the Company.
7.1.3 Stuhmer Contribution. Stuhmer shall not be required to
make an initial capital contribution on the Contribution Date, and his Capital
Account shall initially be zero. Stuhmer shall contribute services to the
Company in connection with the Company's development, ownership, construction,
marketing and sale of the Lots and Residences, and will procure financing for
the Company to farther the foregoing purposes. Stuhmer also shall make any
capital contribution required by Section 7.1.7 hereof.
7.1.4 Conditions Precedent. Southern Highlands shall have no
obligation to make its initial capital contribution of Parcel 305 unless and
until each of the following conditions precedent have been fully satisfied (or
waived, in the reasonable discretion of Southern Highlands) on or before the
Contribution Date, which shall be November 15, 1999 except to the extent a later
date is applicable pursuant to Section 12.1.3:
(a) Stuhmer has secured a written binding and
unconditional commitment from a Lender to finance the Project
on terms and conditions reasonably acceptable to Southern
Highlands (which financing shall be (i) nonrecourse to
Southern Highlands and its principals and shall not be
required to be guaranteed by any of them and (ii) shall
expressly authorize distributions to be made by the Company to
Southern Highlands on a release price or similar
-28-
<PAGE>
9/10//99
basis sufficient to return to Southern Highlands $3,222,375
upon the initial contribution of Parcel 305 and not less than
an additional $3,222,375 (plus the Preferred Return accrued
thereon) in ratable amounts as Lots are sold out of the
Project) and (iii) expressly allow Southern Highlands and
Stuhmer to exercise their respective rights and remedies
hereunder, including the removal and replacement of the
Manager without creating a default under any Loan, and (iv)
shall expressly authorize the disbursement to the Manager of
its Fees in accordance with a written schedule reflecting the
timing and amount of work performed by the Manager;
(b) Stuhmer and the Manager each have fully satisfied
each of their obligations or undertakings that are required to
be satisfied before the Contribution Date;
(c) Southern Highlands has approved in writing the
terms and conditions of any construction contracts and other
agreements between the Company and the Manager or any of its
Affiliates;
(d) The Company is prepared to close on the Member
approved financing and to make an immediate distribution to
Southern Highlands of $3,222,375 in cash simultaneous with the
initial capital contribution of Parcel 305 to be made by
Southern Highlands;
(e) Southern Highlands and Stuhmer have mutually
approved the Development Budget, the Project Projections, the
Marketing Budget, the Marketing Materials, the Standard Sales
Contract and the Lot Premiums for all Lots.
(f) Stuhmer and the Manager shall have delivered to
Southern Highlands certificates certifying the continuing
accuracy of their respective representations and warranties as
of the Contribution Date;
(g) Deleted intentionally.
(h) Simultaneous with the contribution of Parcel 305,
the Company shall have executed and delivered to Southern
Highlands a Performance Deed of Trust in a form satisfactory
to Southern Highlands securing the obligation of the Company
to make the distributions required by Section 8.3 hereof; and
(i) Southern Highlands and Stuhmer shall have agreed
in writing on the commission to be paid pursuant to Section
13.6 hereof.
-29-
<PAGE>
9/10//99
7.1.5 Preferred Return. Southern Highlands shall be entitled
to a "Preferred Return" on its unreturned initial capital contribution in an
amount equal to twelve percent (12%) per annum from the date such initial
capital contribution is made until the Unpaid Prorated Land Basis is paid in
full.
7.1.6 Operating Capital. The operating capital of the Company
shall consist of the capital contribution of Southern Highlands as set forth an
Exhibit "E" attached hereto, Deposits for purchase of the Lots and Residences
and the improvements thereon, Loan proceeds obtained by the Company, any funds
contributed by Stuhmer and undistributed proceeds from the close of sale
escrows.
7.1.7 Additional Capital Contributions by Stuhmer. In addition
to the initial capital contribution to be made by Southern Highlands, any
additional capital needed by the Company to complete the Project shall be
promptly contributed by Stuhmer as an equity contribution. Neither Stuhmer nor
the Manager be authorized to loan funds to the Company without the express
written authorization of Southern Highlands.
7.2 Enforcement of Commitments. In the event Stuhmer fails to
contribute any amounts required to be contributed under Section 7.1.7 (a
"Commitment") after the initial capital contribution of Parcel 305 by Southern
Highlands, Stuhmer shall become a Delinquent Member and the Manager (or Southern
Highlands, if the Manager fails or refuses to act) shall give the Delinquent
Member a Notice of the failure to meet the obligations hereunder. If the
Delinquent Member fails to perform the commitment, including any costs
associated with the failure to comply with the Commitment and interest on such
obligation at the Default Interest Rate within ten (10) business days of the
giving of Notice, the Manager (or Southern Highlands, if the Manager fails or
refuses to act) may take such action as necessary to enforce the Commitment,
including but not limited to enforcing the Commitment in the court. Such
personal obligation of Stuhmer is not subject to the limitation of Section 3.7.
Each Member expressly agrees to the jurisdiction of such courts. Notwithstanding
the foregoing, no Commitment or other obligation to make an additional
contribution may be enforced by a creditor of the Company unless the Member
expressly consents to such enforcement or to the assignment of the obligation to
such creditor.
7.3 Maintenance of Capital Accounts. The Company shall establish and
maintain Capital Accounts for each Member and any permitted Assignee. Each
Member's Capital Account shall be initially credited with the amount reflected
on Exhibit "E," and increased by (1) the amount of any money actually
contributed by the Member to the capital of the Company, (2) the fair market
value of any Property contributed, as determined by the Company and the
contributing Member at arm's length at the time of contribution (net of
liabilities assumed by the Company or subject to which the company takes such
Property, within the meaning of Section 752 of the Code), and (3) the Member's
share of Net Profits and of any separately allocated items of income or gain
(including any gain and income from unrealized income with respect to accounts
receivable allocated to the Member to reflect the difference between the book
value and tax basis of assets contributed by the Member).
-30-
<PAGE>
9/10//99
Each Member's Capital Account shall be decreased by (1) the amount of any money
actually distributed to the Member from the capital of the Company, (2) the fair
market value of any Property distributed to the Member, as determined by the
Company and the contributing Member at arm's length at the time of distribution
(net of liabilities of the Company assumed by the Member or subject to which the
Member takes such property within the meaning of Section 752 of the Code), and
(3) the Member's share of Net Losses and of any separately allocated items of
deduction or loss (including any loss or deduction allocated to the Member to
reflect the difference between the book value and tax basis of assets
contributed by the Member).
7.4 Distribution of Assets. The Company shall not at any time
distribute any of its assets in kind to any Member without the written consent
of both Members. If the Company at any time distributes any of its assets
in-kind to any Member, the Capital Account of each Member shall be adjusted to
account for that Member's allocable share (as determined under Article 8 below)
of the Net Profits or Net Losses that would have been realized by the Company
had it sold the assets that were distributed at their respective fair market
values immediately prior to their distribution.
7.5 Sale or Exchange of Interest. In the event of a permitted sale or
exchange of some or all of an Interest in the Company, the Capital Account of
the transferring Member shall become the Capital Account of the transferee, to
the extent it relates to the portion of the interest transferred.
7.6 Compliance with Section 704(b) of the Code. The provisions of this
Article 7 as they relate to the maintenance of Capital Accounts are intended,
and shall be construed, and, if necessary, modified to cause the allocations of
profits, losses, income, gain and credit pursuant to Article 8 to have
substantial economic effect under the Regulations promulgated under Section
704(b) of the Code, in light of the distributions made pursuant to Articles 8
and 12 and the Capital Contributions made pursuant to this Article 7.
Notwithstanding anything herein to the contrary, this Agreement shall not be
construed as creating a deficit restoration obligation or otherwise personally
obligate any Member to make a Capital Contribution in excess of the
contributions required under this Article 7.
7.7. Compliance with Section 704(c) of the Code. The Company shall use
the traditional method to account for the excess of the fair market value of
Parcel 305 over its adjusted basis.
ARTICLE 8
ALLOCATIONS AND DISTRIBUTIONS
8.1 Allocations of Net Profits and Losses from Operations. Except as
may be required by Section 704(c) of the Code, Net Profits, Net Losses, and
other items of income, gain, loss, deduction and credit shall be allocated among
the Members and the Manager in accordance with the following provisions:
8.1.1 Net Profits. Net Profits for any Fiscal Year or other
period (an "Accounting Period") for which separate accounting is appropriate
(after adjustment for items of income, gain,
-31-
<PAGE>
9/10/99
loss or deduction required to be specially allocated under Section 704(b) of the
Code) shall be allocated among the Members so as to reduce, proportionately, the
differences between their respective Target Capital Account balances and
adjusted Capital Account balances. No portion of the Net Profits for any
Accounting Period (after such adjustments) shall be allocated to a Member whose
adjusted Capital Account balance is greater than or equal to its Target Capital
Account Balance for such Fiscal Year.
8.1.2 Net Losses. Net Losses for any Accounting Period (after
adjustment for items of income, gain, loss or deduction required to be specially
allocated under Section 704(b) of the Code) shall be allocated among the Members
so as to reduce, proportionately, the differences between their respective
adjusted Capital Account balances and Target Capital Account Balances. No
portion of the Net Losses for any Accounting Period shall be allocated to a
Member whose Target Capital Account Balance is greater than or equal to its
Adjusted Capital Account Balance.
8.1.3 Definitions. The term "Target Capital Account Balance"
means the amount which the Member would then be entitled to receive if,
immediately following such Accounting Period: (i) all of the assets of the
Company (other than claims of the Company for contributions) were sold for cash
equal to their respective book values (or, in the case of assets subject to
liabilities for which the creditor's right is limited to assets of the Company,
the amounts of such liabilities, if greater than the aggregate book values of
such assets); and (ii) the proceeds of such sale were applied to pay all debts
of the Company with the balance distributed as provided in Section 8.3. The term
"book value" shall mean the value at which property of the Company is properly
reflected in the Capital Accounts of the Company pursuant to Regulation Section
1.704-1(b)(2)(iv) and this Agreement.
8.2 Special Items. There shall be a Company Minimum Gain Chargeback,
Member Minimum Gain Chargeback and Qualified Income Offset, if and to the extent
required by the Code or the Regulations.
8.3 Distributions. The Available Cash of the Company, as determined by
the Members, shall be distributed not less frequently than quarterly to the
Members in accordance with the following priorities:
(a) First, to Southern Highlands on the Contribution Date in
the amount of $3,222,375, at the same time Southern Highlands conveys
its initial capital contribution of Parcel 305 to the Company;
(b) Second, on a Lot by Lot basis at the closing of the sale
of each Lot and/or Residence to a third party home buyer, to Southern
Highlands in an amount equal to the sum of (i) the Prorated Land Basis
for each such Lot, plus (ii) the accrued and unpaid Preferred Return on
the amount of Prorated Land Basis for the Lot
-32-
<PAGE>
9/10//99
being sold, plus (iii) an amount equal to fifty (50%) percent of any
Lot Premium attributable to such Lot;
(c) Third, from time to time to Southern Highlands and Stuhmer
equally in an amount equal to the Deposits received by the Company for
the sale of Lots and Residences; subject to the following:
(i) Any distribution of Deposits to Southern
Highlands first shall be applied to satisfy any unpaid
Preferred Return accrued on the Unpaid Prorated Land Basis;
and
(ii) If the Fees scheduled to be paid to the Manager
(as reflected in the Project Projections) exceed the Fees
actually paid to the Manager at any time, Stuhmer's one-half
share of the Deposits shall be paid to the Manager at
Stuhmer's sole election to the extent required to pay the
Manager its earned and unpaid scheduled Fees, as reflected on
the Project Projections.
(iii) For purposes of this subsection (c) and
subsection (d), scheduled Fees shall not be treated as earned
by the Manager except to the extent the work required to be
performed by the Manager or the work required to be performed
under its supervision (e.g., construction of Residences) has
in fact been performed and the payment of such Fees is
expressly authorized by the Loan documents.
(iv) Any Fees paid in advance shall be credited
against Fees otherwise due upon the sale of a Lot or Residence
under this subsection (c) or subsection (d).
(d) Fourth, to the Manager on a Lot by Lot basis at the
closing of the sale of each Lot to a third party home buyer in the
amount of: (i) the General and Administration Fee for general
management and administration of the Company, as set forth in Exhibit
"B," (ii) the Sales and Marketing Expense Fee as set forth in Exhibit
"C," and (iii) the Construction Overhead Fee for indirect expenses in
accordance with the formula set forth on Exhibit "D." No payment shall
be made to Manager under this subsection (d) until all distributions
under subsections (a) through (c) have been fully made; provided,
however, that to the extent any Loan agreement permits the Fees to be
paid in advance of the closing of a particular sale of a Lot or
Residence pursuant to the terms of such Loan, such Fees may be paid in
advance to the extent such advance Fee payments satisfy each of the
following requirements: (i) such advance Fees do not exceed the earned
and scheduled Fees payable at any time under the Project Projections,
(ii) the advance Fee payments do not impair or impede Southern
Highland's distributions under subsections (a)
-33-
<PAGE>
9/10//99
through (c), and (iii) such advance Fee payments do not violate the
terms and conditions of any Loan.
(e) Fifth, to Southern Highlands not less frequently than the
last day of each calendar quarter (i.e., March 31, June 30, September
30 and December 31), from any available source of Available Cash, an
amount equal to the accrued and unpaid Preferred Return on the entire
Unpaid Prorated Land Basis;
(f) Sixth, not less frequently than the last day of each
calendar quarter with reference to the previous calendar quarter to the
extent the Company earned a Net Profit for such quarter, any remaining
Available Cash (not including reasonable reserves required to satisfy
the anticipated expenses and other obligations of the Company,
including the anticipated Preferred Return distribution required by
subsection (e) for the next calendar quarter) shall be distributed to
the Members as follows:
(i) The sum of (i) such Available Cash plus (ii) the
amount of any Preferred Return previously received by Southern
Highlands shall be calculated.
(ii) Available Cash equal to one-half of the sum
determined in subsection (i) above shall be distributed to
Stuhmer and the remaining Available Cash shall be distributed
to Southern Highlands.
Provided, however, no distribution shall be made to Stuhmer hereunder
until all of the accrued to date Preferred Return has been fully paid
to Southern Highlands.
(g) Any remaining Available Cash upon the winding up and
termination of the Company shall be distributed in accordance with
subsection (f) above.
8.4 Tax Distribution. Each Member shall be responsible for
payment of all taxes with respect to its interest in the Company's income. The
Company has no independent or additional obligation to make distributions to
each of the Members on account of any such tax liability.
8.5 Limitations on Distributions. Notwithstanding the
provisions of Section 8.3, no distribution shall be declared and paid unless,
after the distribution is made, the assets of the Company are in excess of all
liabilities of the Company, except liabilities to Members on account of their
Capital Accounts.
-34-
<PAGE>
9/10//99
ARTICLE 9
TAXES
9.1 Elections. With the written consent of both Members, the Manager
may make any tax elections for the Company allowed under the Code or the tax
laws of any state or other jurisdiction having taxing jurisdiction over the
Company.
9.2 Taxes of Taxing Jurisdictions. To the extent that the laws of any
Taxing Jurisdiction require, each Member requested to do so by the Manager will
submit an agreement indicating that the Member will make timely income tax
payments to the Taxing Jurisdiction and that the Member accepts personal
jurisdiction of the Taxing Jurisdiction with regard to the collection of income
taxes attributable to the Member's income, and interest, and penalties assessed
on such income. If the Member fails to provide such agreement, the Company may
withhold and pay over to such Taxing Jurisdiction the amount of tax, penalty and
interest determined under the laws of the Taxing Jurisdiction with respect to
such income. Any such payments with respect to the income of a Member shall be
treated as a distribution for purposes of Article 8. The Manager may, where
permitted by the rules of any Taxing Jurisdiction, file a composite, combined or
aggregate tax return reflecting the income of the Company and pay the tax,
interest and penalties of some or all of the Members of such income to the
Taxing Jurisdiction, in which case the Company shall inform the Members of the
amount of such tax interest and penalties so paid.
9.3 Tax Matters Member. Southern Highlands shall be the tax matters
partner of the Company pursuant to Section 6231(a)(7) of the Code. Southern
Highlands may not take any action contemplated by Sections 6222 through 6232 of
the Code without the consent of both Members.
9.4 Method of Accounting. The records of the Company shall be
maintained in accordance with the accounting method elected to be followed by
the Company for federal income tax purposes under the Code. The accounting
method elected to be followed by the Company for financial reporting purposes
shall be in accordance with generally accepted accounting principles (GAAP).
ARTICLE 10
DISSOCIATION OF A MEMBER
10. 1 Dissociation. A Member shall cease to be a Member upon the
happening of any of the following events:
10.1.1 The retirement or resignation from the Company of a
Member with the consent of all the remaining Members;
10.1.2 A Member becoming a bankrupt Member;
-35-
<PAGE>
9/10//99
10.1.3 In the case of a Member that is an entity other than a
corporation, the dissolution and commencement of winding up such
Member;
10.1.4 In the case of a Member that is a corporation, the
filing of a certificate of dissolution, or its equivalent, or the
revocation of the charter of such Member;
10.1.5 In the case of a Member who is a Member by virtue of
being a trustee of a trust, the termination of the trust (but not
merely the substitution of a new trustee); or
10.1.6 In the case of an estate, the distribution of the
estate's entire Interest in the Company.
The dissociation of a Member shall not cause the dissolution of the Company. The
Manager is not a Member and its removal shall not cause the dissolution of the
Company.
10.2 Rights of Dissociating Member. In the event of a dissociation of
any Member prior to the expiration of the term of the Company:
10.2.1 If the dissociation causes a dissolution and winding up
of the Company under Article 12, the Member shall be entitled to
participate in the winding up of the Company to the same extent as any
other Member except that any distributions to which the Member would
have been entitled shall be reduced by the damages sustained by the
Company as a result of the dissolution and winding up;
10.2.2 If the dissociation does not cause a dissolution and
winding up of the Company under Article 12, the remaining Member shall
have the option but not the obligation to purchase the entire Interest
of the Dissociating Member for an agreed upon amount, or if no amount
can be agreed upon, the fair market value of such Interest as
determined by an independent qualified appraiser appointed by the
Members, including the Dissociating Member, reduced by any damages
incurred by the Company if such dissociation is in breach of this
Agreement. If they cannot agree on an appraiser, the remaining Members
and the Dissociating Member shall each choose an appraiser and the two
appraisers shall choose one additional appraiser. The three appraisers
shall thereupon determine the fair market value of such Interest. The
Dissociating Member shall thereupon be entitled to an amount equal to
such value of the Member's Interest in the Company, to be paid within
six months of the date of dissociation. Notwithstanding the foregoing,
if the dissociation is other than as a result of the death or
incompetence of the Member, the Members may pay the value of the
Member's Interest in the Company over a
-36-
<PAGE>
9/10//99
period not to exceed five (5) years, provided that the Dissociating
Member shall be entitled to participate as an Assignee in the Company
until the value of such Interest plus interest at a rate equal to the
Reference Rate plus one and one-half percent (1.5%) is paid in full.
The value of the member's Interest shall include the amount of any
distributions to which the Member is entitled under this Agreement as
of the date of dissociation based upon the Member's, right to share in
distributions from the Company reduced by any damages sustained by the
Company as a result of the Member's dissociation.
ARTICLE 11
ADMISSION OF ASSIGNEES AND ADDITIONAL MEMBERS
11.1 Rights of Assignees. The Assignee of a Interest has no right to
participate in the management or the business and affairs of the Company or to
become a Member. A permitted Assignee is only entitled to receive the
distributions and return of capital, and to be allocated the Net Profits and Net
Losses attributable to the assigned Interest, or portion thereof. The Company
has no obligation to recognize the assignment of an Interest in breach of this
Agreement.
11.2 Admission of Substitute Members. An Assignee of a Interest shall
be admitted as a Substitute Member and admitted to all the rights of the Member
who initially assigned the Interest only with the unanimous approval of the
Members. The Members may grant or withhold the approval of such admission in
their sole and absolute discretion. If so admitted, the Substitute Member has
all the rights and powers and is subject to all the restrictions and liabilities
of the Member originally assigning the Interest. The admission of a Substitute
Member, without more, shall not release the Member assigning the Interest from
any liability to the Company that existed prior to the approval.
ARTICLE 12
DISSOLUTION AND WINDING UP
12.1 Dissolution. The Company shall be dissolved and its affairs wound
up only upon the first to occur of the following events (which shall constitute
Dissolution Events):
12.1.1 The completion of the Project, which shall require the
sale or other disposition of all of the Lots and Residences, and the collection
of all amounts due the Company and the payment or other satisfaction of its
debts and other obligations;
12.1.2 The unanimous written consent of all of the Members
(other than a Member in default under this Agreement); and
-37-
<PAGE>
9/10//99
12.1.3 Subject to extension in accordance with the following
sentences, November 15, 1999 (or such later date as Southern Highlands
shall unilaterally establish), if all of the conditions precedent to
the contribution of Parcel 305 and have not occurred to the sole
satisfaction of Southern Highlands by November 15, 1999 or such later
date as Southern Highlands unilaterally establishes.
The deadline date of November 15, 1999 shall be extended automatically solely
for the period of time required to permit Southern Highlands to cure any failure
of Southern Highlands, to satisfy its obligations under Section 1.9.6 and 1.9.7
that have materially impeded the ability of Stuhmer to secure the Loan required
by Section 7.1.4 hereof. Notwithstanding the provisions of Section 12.1.3,
above, and Section 7.1.4, above, the deadline date of November 15, 1999 may be
extended to November 30, 1999 provided that each of the following conditions
have been satisfied: (i) the proposed Lender to the Company has identified in
writing all of the conditions precedent required by the Lender for the close of
the Loan, (ii) the Lender has scheduled the Loan to close on or before November
30, 1999, and (iii) Stuhmer certifies in a writing delivered to Southern
Highlands that he can satisfy or cause the Company to satisfy the conditions
precedent for the Loan to close on or before November 30, 1999.
12.2 Effect of Dissolution. Upon dissolution the Company shall cease
carrying on its business as distinguished from the winding up of the Company
business. The Company will not be terminated, but will continue until the
winding up of the affairs of the Company is completed and the Articles of
Dissolution have been filed with the Nevada Secretary of State.
12.3 Distribution of Assets on Dissolution. Upon the winding up of the
Company, all Property of the Company shall be sold and the proceeds distributed
as follows:
12.3.1 To creditors, including Members who are creditors, to
the extent permitted by law, in satisfaction of Company Liabilities;
12.3.2 To Members in accordance with Section 8.3.
Liquidation proceeds shall be paid within sixty (60) days of the end of the
Company's taxable year or, if later, within ninety (90) days after the date of
liquidation. Such distributions shall be in cash or property (which need not be
distributed proportionately) or partly in both, as determined by the Member.
12.4 Winding Up and Certificate of Dissolution. The winding up of the
Company shall be completed when all debts, liabilities, and obligations of the
Company have been paid and discharged or reasonably adequate provision therefor
has been made, and all of the remaining property and assets of the Company have
been distributed to the Members. Upon the completion of winding up the Company,
Articles of Dissolution shall be delivered to the Nevada Secretary of State for
filing. The Articles of Dissolution shall set forth the information required by
the Act.
-38-
<PAGE>
9/10/99
ARTICLE 13
DEVELOPMENT, CONSTRUCTION AND MARKETING OF THE PROJECT
13.1 Development and Construction of the Project. Subject to the
provisions of Section 5.10 hereof, the Manager shall have full authority and
responsibility to complete the construction and to oversee the development of
the Project in accordance with the Development Budget, including hiring
necessary engineers to complete the plans and specifications for the preparation
of Parcel 305 and improvements thereon, developing Parcel 305 into finished
Lots, constructing, improvements and residences on the finished Lots, preparing
final subdivision maps, if necessary, affecting product development for the Lots
and Residences, constructing and installing the streets, curbs, gutters,
lighting and all other subdivision improvements on Parcel 305.
Following the execution of this Agreement, the Manager shall update the
Development Budget no less frequently than annually.
13.1.1 A & D Loan. Stuhmer and the Manager shall be
responsible for securing initial acquisition and development financing for the
Company in the approximate amount of $13,178,000. Upon securing such financing,
the Southern Highlands shall be entitled to the payment under Section 8.3(a) of
$3,222,375 upon the contribution of Parcel 305 to the Company. Thereafter,
subject to the obligation of Stuhmer to make capital contributions to the
Company under Section 7.1.3 hereof each Member may itself, either on its own or
through an Affiliate, advance such construction loan funds to the Company, upon
commercially reasonable terms, and in such amounts required by the Development
Budget; provided, further, that the terms and conditions of any such loan by the
Manager, Stuhmer or an Affiliate of Stuhmer shall have been expressly approved
by Southern Highlands, as required by Section 5.10.2 hereof. Southern Highlands
shall not under any circumstances be required to provide any guarantees or other
collateral to support such financing of the Project. The Manager shall promptly
notify both Members if either Member or the Manager is loaning funds or
extending credit to the Company. The terms and conditions of all Loans to the
Company require the approval of both Members.
13.1.2 Construction Financing. Stuhmer and the Manager shall
be responsible for securing construction financing for the Company, for the
purpose of constructing the Residences and improvements on the Lots. Southern
Highlands and its principals shall not be required to provide guarantees or
other collateral to support any construction financing.
13.2 Marketing and Advertising. The Manager shall have full
responsibility and authority to perform the marketing and advertising for the
sale of the Lots and Residences. All of the Lots and Residences shall be
advertised and marketed in a manner and under such trade names as have been
agreed upon by both Members. For such services, the Manager shall be paid the
Sales and Marketing Reimbursement in accordance with the provisions of Exhibit
"C." If the Company does not have funds to pay the Sales and Marketing
Reimbursement when due, then the Sales and
-39-
<PAGE>
9/10//99
Marketing Reimbursement shall be paid as soon as funds are available to the
Company, from time to time, in accordance with Section 8.3 hereof.
13.3 Sales of Residences. Sales of Lots and Residences will be made
pursuant to the sales documents as may be approved by the Manager and as
modified from time to time (collectively, the "Standard Sales Contracts"). Each
Lot and Residence closing shall occur through an escrow (an "escrow") to be
established with Fidelity National Title Agency of Nevada, Inc., 500 North
Rainbow Boulevard, Suite 100, Las Vegas, Nevada 89107, Attention: Ron Bloecker
("Escrow Agent"). All closings shall occur at the office of the escrow agent or
at such other location as is mutually acceptable to the Company and the
Purchaser. At the request of Southern Highlands, such escrow agent shall be
directed to make the disbursements to the Members required by Section 8.3(b).
13.4 Southern Highlands Tradename. Southern Highlands shall license the
Company to use the tradename "Southern Highlands" in connection with the Project
on terms and conditions mutually satisfactory to Southern Highlands and the
Company and set forth in a separate licensing agreement, which shall be
effective as of the Contribution Date. The Manager shall license the Company to
use the tradename "Christopher Homes" in connection with the Project on terms
and conditions mutually satisfactory to both Members but always in accordance
with Southern Highland's graphics design manual/guidelines.
13.5 Special Fees. No guarantee, finder or other fee shall be paid by
the Company to Stuhmer, the Manager or an Affiliate of either of them in
connection with any loan made to the Company by any lender.
13.6 Commission. The Company shall pay a real estate broker's
commission to the real estate broker retained by Southern Highlands, as an
expense of the Company. The amount and the timing of the payment of such
commission shall be determined by Southern Highlands and Stuhmer before the
Contribution Date.
ARTICLE 14
AMENDMENT
This Agreement may be amended or modified from time to time only by a
written instrument adopted by all of the Members.
ARTICLE 15
MISCELLANEOUS PROVISIONS
15.1 Entire AgreeMent. This Agreement represents the entire agreement
among the Members and the Manager relating to the operation of the Company, but
the rights and obligations of the Members may be varied between them in a
writing executed by both Members.
-40-
<PAGE>
9/10//99
15.2 No Partnership Intended for Nontax Purposes. The Members have
formed the Company under the Act, and expressly do not intend hereby to form a
Partnership under either the Nevada Uniform Partnership Act nor the Nevada
Uniform Limited Partnership Act. The Members do not intend to be partners one to
another, or partners as to any third party. To the extent any Member or the
Manager, by word or action, represents to another Person that any other Member
is a partner or that the Company is a partnership, the Member making such
wrongful representation shall be liable to any other Member who incurs personal
liability by reason of such wrongful representation.
15.3 Rights of Creditors and Third Parties under Agreement. This
Agreement is entered into among the Members for the exclusive benefit of the
Company, its Members, and their successors and assignees. This Agreement is
expressly not intended for the benefit of any creditor of the Company or any
other Person. Except and only to the extent provided by applicable statute, no
such creditor or third party shall have any rights under this Agreement or any
agreement between the Company and any Member with respect to any Capital
Contribution or otherwise.
15.4 Indemnification by Members and Manager.
15.4.1 The Manager shall indemnify and hold the Company and
each Member harmless from any loss or damage incurred by any breach by the
Manager of its obligations under this Agreement or any breach by its Affiliates
of any obligation to the Company under any Affiliate Agreement.
15.4.2 The Manager hereby assumes full responsibility for, and
shall indemnify and hold the Company and each Member harmless from any claim,
demand or complaint from any purchaser or owner of a Lot or Residence
constructed or improved by the Company or an Affiliate of Manager.
15.4.3 Each Member shall indemnify and hold the Company and
the other Member harmless from any loss or damage incurred by reason of any
breach by the indemnifying Member of this Agreement or the representations of
such indemnifying Member set forth in this Agreement.
15.4.4 No indemnification payment made by a Manager or Member
to the Company or a Member shall be treated as a Capital Contribution to the
Company.
15.4.5 The indemnification obligation of Southern Highlands
and Stuhmer under this Section 15.4 shall be limited to the recovery (or
restoration) by the Company of any Net Profits distributed or distributable to
such Member by the Company.
-41-
<PAGE>
9/10//99
15.5 Indemnification by Company.
15.5.1 The Company shall indemnify any Person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, (except (i) an action by or (ii) in the name of the Company or in
any matter where the Manager or Member has an obligation to indemnify the
Company or another Member), by reason of the fact that the person is or was a
Manager, Member, employee or agent of the Company, or is or was serving at the
request of the Company as a manager, member, officer, employee or agent of
another limited liability company, partnership, joint venture, trust or other
enterprise, against expenses, including attorney's fees, judgments, fines and
amounts paid in settlement actually and reasonably incurred by the person in
connection with the action, suit, or proceeding if the person acted in good
faith and in a manner which the person reasonably believed to be in, or not
opposed to the best interests of the Company, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe the person's conduct
was unlawful. The termination of any action, suit or proceeding by judgment,
order, settlement or conviction, or upon a plea of nolo contendere or its
equivalent, does not, of itself, create a presumption that the person did not
act in good faith and in a manner which the person reasonably believed to be in
or not opposed to the best interest of the Company and that, with respect to any
criminal action or proceeding, the person had reasonable cause to believe that
the person's conduct was unlawful.
15.5.2 Indemnification shall not be made to or an behalf of
any Person (as defined in Nevada Revised Statutes) if a final adjudication
establishes that the Person's acts or omissions involved intentional misconduct,
fraud or a knowing violation of the law and was material to the cause of action.
15.5.3 The expenses of Members and the Manager incurred in
defending a civil or criminal action, suit or proceeding for which such Manager
or Member would be entitled to indemnification hereunder shall be paid by the
Company as they are incurred and in advance of the final disposition of the
action, suit or proceeding, upon receipt of an undertaking by or on behalf of
the Manager or Member to repay the amount if it is ultimately determined by a
court of competent jurisdiction that he is not entitled to be indemnified by the
Company.
15.6 Gender and Number. Whenever the context requires, the gender of
all words used herein shall include the masculine, feminine and neuter, and the
number of all words shall include the singular and plural thereof.
15.7 Articles and Other Headings. The Articles and other headings
contained in this Agreement are for reference purposes only and shall not affect
the meaning or interpretation.
15.8 Counterparts. This Agreement may be executed in several
counterparts and all so executed shall constitute one Agreement, binding on all
of the members, notwithstanding that all of the Members are not signatory to the
original or the same counterpart.
-42-
<PAGE>
9/10//99
15.9 Successors. This Agreement shall be binding upon the successors
and assigns of the Members and shall inure to the benefit of the permitted
successors and assigns of the Members.
15.10 Governing Law. This Agreement shall be construed under the laws
of the State of Nevada as if this Agreement were executed in and to be performed
entirely within Nevada and all Members are resident in Nevada. Any suit or
action of a Manager or a Member as plaintiff to which the Company is named a
party shall be instituted in a court of competent jurisdiction in Clark County,
Nevada.
15.11 Separate Representation. Each of the Members and the Manager have
been represented by their own legal counsel. Each Member and the Manager shall
pay the fees and expenses their own legal counsel without reimbursement as a
Company expense.
15.12 Notices. Whenever any notice, demand or other communication (a
"notice") is required to be or may be given under this Agreement to a Member or
the Manager, such notice shall be deemed to have been received (i) immediately
upon delivery in a written form to the individual Member in person or to a
senior corporate officer of any corporate Member or corporate Manager, (ii)
three business days after such written notice was deposited in the U.S. mail,
postage prepaid addressed to the Member or Manager at the address stated below,
or (iii) the next business day after the written notice is delivered to a
nationally recognized courier service (e.g., Federal Express) for next day
delivery addressed to the Member or Manager at the address stated below:
Southern Highland Development Company
Attn. Garry Goett
3140 S. Rainbow Blvd., Suite 400
Las Vegas, Nevada 89146
Christopher Homes Custom Homes Division, Inc.
Attn: J. Christopher Stuhmer
9500 Hillwood Drive, Suite 200
Las Vegas, Nevada 89134
J. Christopher Stuhmer and
any Transferee of his Interest
9500 Hillwood Drive, Suite 200
Las Vegas, Nevada 89134
The foregoing addresses may be changed at any time by a Member or
Manager by delivery of written notice to each other party to this Agreement.
-43-
<PAGE>
9/10//99
ARTICLE 16
DEFINITIONS
For purposes of this Agreement (as defined below) unless the context
clearly indicates otherwise, the following terms shall have the following
meanings:
"Act" means the Nevada Limited Liability Company Act (Chapter 86 of the
Nevada Revised Statutes) and all amendments thereto.
"Additional Member" means a Member other than an Initial Member or a
Substitute Member who has acquired an Interest from the Company in accordance
with this Agreement.
"Affiliate" means, when used with reference to a specified Person, (i)
any Person that, directly or indirectly, through one or more intermediaries,
controls or is controlled by, or is under common control with, the specified
Person, (ii) any Person that is an officer of, Manager in, or trustee of, or
serves in a similar capacity with respect to the specified Person of or in which
the specified Person is an officer, general partner or trustee, or with respect
to which the specified Person serves in a similar capacity, (iii) any Person
that, directly or indirectly, is the beneficial owner of ten percent (10%) or
more of any class of equity securities of the specified Person or is the
beneficial owner of a ten percent (10%) or more interest in the capital and
profits of the specified Person, (iv) any Person of which the specified Person
is directly or indirectly the beneficial owner of ten percent (10%) or more of
any class of equity securities or any Person of which the specified Person is
the beneficial owner of a ten percent (10%) or more interest in the capital and
profits, and (v) any member of the immediate family of the specified Person. For
purposes hereof, a Person's immediate family shall include such Person's spouse,
parents and children. For purposes of this Agreement, Chris Homes and Stuhmer
shall be treated as Affiliates during any period of time while Stuhmer is
serving as a senior executive of Chris Homes, but such affiliation shall not
give Southern Highlands any right to review or inspect any employment,
directorship agreement, consulting agreement, shareholder agreement or ownership
between Chris Homes and/or Fortress and Stuhmer.
"Affiliate Agreement" means any contract between the Company and
Stuhmer, between the Company and Chris Homes or between the Company and any
Affiliate of either of them, including any consulting agreement, construction
services agreement, design or engineering agreement, marketing agreement,
reimbursement agreement or other contract or arrangement.
"Articles" means the Articles of Organization of the Company as filed
with the Nevada Secretary of State together with all amendments thereto, and
restatements thereof, properly adopted in accordance with this Agreement and
filed with the Nevada Secretary of State.
"Assignee" means a permitted transferee of a Interest who has not been
admitted as a Substitute Member.
-44-
<PAGE>
9/10//99
"Available Cash" shall mean the excess of all cash receipts over the
sum of cash expenditures payable in connection with the generation thereof and
after the provision for any reserves for expenses, contingencies, or liabilities
deemed appropriate by the Members. "Available Cash" also includes all amounts
constituting Company reserves that are determined by the Members to be no longer
necessary as reserves. Available Cash shall be determined without reduction for
the distributions to be made to Members under Section 8.3 Any reserves
established for the Company shall be approved by both Members.
"Bankrupt Member" means a Member who: (1) has become the subject of an
order for relief under the United States Bankruptcy Code, or (2) has initiated,
either in an original proceeding or by way of answer in any state insolvency or
receivership proceeding, an action for liquidation arrangement, composition,
readjustment, dissolution, or similar relief.
"Capital Account" means the account maintained for a Member or Assignee
determined in accordance with Article 7.
"Capital Contribution" means any contribution to the Company of cash or
the land made by a Member.
"Christopher Homes" or "Chris Homes" means Christopher Homes Custom
Home Division, Inc., as Manager.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Commitment" means the Capital Contributions that a Member is obligated
to make.
"Company" means Southern Highlands/Christopher Homes I, LLC, a Nevada
limited liability company formed under the laws of Nevada and the terms of this
Agreement, and any successor limited liability company.
"Company Liability" means any enforceable debt or obligation for which
the Company is liable or which is secured by any Company property.
"Company Nonrecourse Liability" means a Company Liability to the extent
that no Member or Related Person bears the economic risk of loss with respect to
the liability.
"Company Property" means Parcel 305 and any other property owned by the
company.
"Contributing Members" means those Members making additional
contributions to the Company or contributions as a result of the failure of a
Delinquent Member to make the contributions required by the Commitment as
described in Article 7.
-45-
<PAGE>
9/10//99
"Contribution Date" means the date Southern Highlands contributes
Parcel 305 to the Company.
"Default Interest Rate" means the Reference Rate plus four percent (4%)
per annum.
"Delinquent Member" means a Member who has failed to meet the
Commitment required to be contributed by that Member as described in Article 7.
"Deposit" means any advance payment received by the Company from a
prospective purchaser of a Lot or Residence, including advance payments for
upgrades, options or premium features.
"Development Agreement" means the Development Agreement referred to in
Section 7.1.1.1 hereof.
"Development Budget" means the initial Member approved Development
Budget and each interim budget of the Company's total projected costs for
construction and development through completion of the Project.
"Development Declaration" means that certain Declaration of Development
Covenants and Restrictions for the Southern Highlands Master Planned Community
to be recorded against Parcel 305, which shall be substantially similar to the
Declaration of Development Covenants and Restrictions for the Southern Highlands
Master Planned Community, draft dated July 23, 1999, attached hereto as Exhibit
"F".
"Disposition (Dispose)" means any sale, assignment, transfer, exchange,
mortgage, pledge, grant, hypothecation, or other transfer, absolute or as
security or encumbrance (including dispositions by operation of law).
"Dissociation" means any action which causes a Member to cease to be a
Member as described in Article 10 hereof.
"Dissolution Event" means an event, the occurrence of which will result
in the dissolution of the Company under Article 12 unless the Members agree to
the contrary.
"Effective Date" means the date on which the Members executed this
Agreement, but not earlier than the date the Articles are filed.
"Fees" means the General and Administrative Fee, the Sales and
Marketing Expense Reimbursement, and the Construction Overhead Fee, as described
in detail in Exhibits "B," "C" and "D" hereof..
-46-
<PAGE>
9/10//99
"Fortress" means The Fortress Group, Inc., a Delaware corporation, and
the sole shareholder of Chris Homes.
"Interest" means the rights of a Member or, in the case of an Assignee,
the rights of the assigning Member in Distributions (liquidating or otherwise)
and allocations of the profits, looses, gains, deductions, and credits of the
Company.
"J. Christopher Stuhmer" or "Stuhmer" means J. Christopher Stuhmer, an
individual.
"Lender" means each third party who has extended credit to the Company
under any Loan.
"Loan" means any of the loans and financings secured by the Company for
the Project, including any land acquisition or infrastructure development loan,
construction loan or working capital loan.
"Lot" means one of the single family residential Lots within the
Project. A Lot does not include any portion of Parcel 305 not intended to be
sold, e.g., portions of Parcel 305 to be dedicated to homeowners associations,
for streets and medians and other public use.
"Lot Premiums" means the premium paid by a third party purchaser of a
Lot, as disclosed in the purchase contract for such Lot.
"Manager Default" means any of the foregoing:
(i) a material failure of the Manager or an Affiliate to duly perform
and observe, or a material violation or material breach of, any of the
covenants of the Manager or Stuhmer under this Agreement, and the
continuation thereof for a 30-day period after written notice shall
have been given to the Manager and Stuhmer by Southern Highlands
specifying such default and requiring such default be remedied; which
period may be extended to the extent required (but not longer than 90
days) if such default is not susceptible of cure within 30 days so long
as the Manager and/or Stuhmer has commenced to cure such default within
such 30-day period and is thereafter diligently prosecuting such cure
to completion; provided, however, any such default that can be cured by
the payment of money shall be promptly cured in not more than 5 days
after notice from Southern Highlands; and provided further that if the
Manager or Stuhmer files for bankruptcy or causes the Company to file
for bankruptcy without the advance approval of Southern Highlands,
Southern Highlands shall not be required to give the Manager or Stuhmer
any notice or an opportunity to cure and such filing shall constitute a
"Manager Default"; provided further, that this subparagraph (i) shall
not extend the time to cure any monetary default under any Loan beyond
the cure period provided in the applicable Loan documentation;
-47-
<PAGE>
9/10//99
(ii) a material breach by the Company of its obligations under any Loan
after all applicable cure rights under the documents evidencing or
securing such Loans have expired; or
(iii) any act of fraud, wilful misconduct or gross negligence by the
Manager or Stuhmer in the performance of their obligations under this
Agreement.
"Manager" means Christopher Homes ("Chris Homes") and any successor
Manager, and in the event that a successor Manager is appointed in accordance
with the terms of the Agreement.
"Marketing Budget" means the initial Marketing Budget (as approved by
both Members) and any Member-approved amendments thereto reflecting the total
projected costs to be incurred by the Manager in connection with its marketing
and advertising the Lots and Residences for the sale to the home buying public.
Changes to the Marketing Budget may be prepared by the Manager, and shall be
subject to approval by both Members. The Marketing Budget shall include all
marketing expense and sales commissions and sales incentives.
"Marketing Materials" means the brochures and advertising material used
to market the Lots and Residences in the Project, as approved by both Members.
"Master CC&R's" means the Master Declaration of Covenants, Conditions,
and Restrictions for Southern Highlands, recorded against Parcel 305, which
shall be substantially similar to the Master Declaration of Covenants,
Conditions and Restrictions for Southern Highlands, draft dated July 14, 1999,
which is attached hereto as Exhibit "G".
"Master Planner Criteria Documents" means (i) the Development
Declaration, (ii) the Development Agreement, and (iii) the Master CC&R's.
"Member" means any Person who is an Initial Member, a Substitute Member
or an Additional Member.
"Net Losses" means the losses and deductions of the Company determined
in accordance with accounting principles consistently applied from year to year
employed under the method of accounting adopted by the Company and as reported
separately or in the aggregate, as appropriate, on the tax return of the Company
filed for federal income tax purposes.
"Net Profit" means the income and gains of the Company determined in
accordance with accounting principles consistently applied from year to year
employed under the method of accounting adopted by the Company and as reported
separately or in the aggregate, as appropriate, on the tax return of the Company
filed for federal income tax purposes.
-48-
<PAGE>
9/10//99
"Nonrecourse Liabilities" include Company Nonrecourse Liabilities and
Member Nonrecourse Liabilities.
"Notice." Notices shall be in writing. Notices of the Company shall be
considered given when mailed by first class mail postage prepaid addressed by
any Member to the Company at the address of the Company's principal place of
business. Notices to a Member shall be considered given when mailed by first
class mail postage prepaid addressed to the Member at the address of the
principal place of business of the Member.
"Operating Agreement" or "Agreement" means this Operating Agreement,
including all amendments adopted hereafter in accordance with this Operating
Agreement and the Act.
"Parcel 305" means the real property described on Exhibit "A" attached
to and incorporated into this Agreement.
"Performance Deed of Trust" means the deed of trust executed by the
Company and delivered to Southern Highlands upon the contribution of Parcel 305.
The Performance Deed of Trust shall be subordinated to the Member approved
financing of the Company.
"Person" means any individual, partnership, limited liability company,
corporation, trust, or other entity.
"Preferred Return" means a cumulative amount equal to twelve percent
(12%) per annum of the Unpaid Prorated Land Basis computed from the Contribution
Date to the date such unpaid amount is distributed to Southern Highlands.
"Project Projections" means the written projections (which are not
guaranteed by Stuhmer or the Manager) prepared by the Manager and approved by
Southern Highlands before the Contribution Date.
"Prorated Land Basis" means $3,222,375 divided by the number of Lots in
the Project, as determined under the final approved and recorded plat for the
Project.
"Project" means the proposed development of Parcel 305 into a single
family residence community and the construction by the Manager, acting as a
general contractor, of Residences for such Project.
"Property" means any property real or personal, tangible or intangible,
including money and any legal or equitable interest in such property, but
excluding services and promises to perform services in the future.
-49-
<PAGE>
9/10//99
"Qualified Income Offset" means Qualified Income Offset shall have the
meaning set forth in Section 1.7041(b)(2) of the Regulations.
"Recourse Liability" means a Company Liability is a recourse liability
to the extent that any Member or related person bears the economic risk of loss
for that liability under Section 1.752-2 of the Regulations.
"Reference Rate" means the rate of interest publicly announced by the
Bank of America National Trust and Savings Association in San Francisco,
California as its "Reference Rate." Any change in the Reference Rate shall take
effect on the opening of business on the day specified in the public
announcement of a change in the Reference Rate. Interest shall be computed on
the basis of a 365 or 366 day year, as the case may be. If Bank of America shall
discontinue the announcement of its Reference Rate, the Reference Rate shall be
the highest "prime rate," set forth in the "Money Rates' section of The Wall
Street Journal.
"Regulations" means, except where the context Indicates otherwise, the
permanent, temporary, proposed, or proposed and temporary regulations of the
Department of the Treasury under the Code as such regulations may be lawfully
changed from time to time.
"Related Person" means a person having a relationship to a Member that
is described in Section 1.752-4(b) of the Regulations.
"Residence" means a single family home built on a Lot owned by the
Company.
"Sales Revenue" means the gross revenue from the sale or other
disposition of Lots and Residences, including any payments for upgrades, options
and improvements and excluding any (i) transfer or similar taxes reimbursed by a
buyer, (ii) any third party home warranty previously paid by the buyer, and
(iii) any title insurance prorations, premiums, dues or assignments paid by
buyer and owed to third parties. (Sales Revenue does not include any Deposit
previously received by the Company and distributed to the Members in accordance
with this Agreement.)
"SID No. 121" means the special improvement district for the Southern
Highlands Master Planned Community.
"Standard Sales Contract" means the standard form of contract for the
sale of a Lot and Residence, including the home purchaser warranty provisions.
"Stuhmer-Controlled Manager" means a licensed residential home
construction general contractor (approved by each Lender) that is owned and
controlled by Chris Stuhmer, as an individual.
-50-
<PAGE>
9/10//99
"Substitute Member" means an Assignee who has been admitted to all of
the rights of the member who assigned the Interest, including Management Rights,
by the unanimous consent of the Members, pursuant to this Agreement.
"Substantially Similar" means a document which is similar in all
material respects to the document originally presented by Southern Highlands to
the Company. A changed or modified document shall be Substantially Similar to
the document originally presented to the Company, provided any such subsequent
changes or modifications to such document do not place any additional material
financial or other burdens on the Company, add any additional material or
unforeseen costs to the Company or otherwise materially and adversely affect the
duties of the Company thereunder.
"Taxable Year" means the taxable year of the Company as determined
pursuant to the Code.
"Taxing Jurisdiction" means any state, local, or foreign government
that collects tax, interest or penalties, however designated, on any Member's
share of the income or gain attributable to the Company.
"Unpaid Prorated Land Basis" means the $3,222,375 less at any time the
cumulative sum of the Prorated Land Basis payments received by Southern
Highlands pursuant to Section 8.3(c) hereof.
-51-
<PAGE>
9/10//99
THE UNDERSIGNED, being all of the Members of the Company, hereby
evidence their adoption and ratification of the foregoing Agreement of the
Company as of the date indicated.
DATED as of this 10th day of September, 1999.
SOUTHERN HIGHLANDS DEVELOPMENT
CORPORATION, a Nevada corporation
By: /s/ Garry V. Goett
------------------------------
Garry V. Goett, President
DATED as of this 10th day of September, 1999.
/s/ J. CHRISTOPHER STUHMER
--------------------------------------------------
J. CHRISTOPHER STUHMER, as an individual
DATED as of this 10th day of September, 1999.
CHRISTOPHER HOMES CUSTOM HOME
DIVISION, INC., a Nevada corporation, as Manager
By: /s/ J. Christopher Stuhmer
------------------------------
J. Christopher Stuhmer
resident
-52-
<PAGE>
9/10//99
CONSENT OF SPOUSE
The undersigned spouse of Chris Stuhmer hereby declares that she has
read the Agreement for the Southern Highlands Christopher Homes I, L.L.C.,
including the provisions of Section 4.1, in its entirety, and being fully
convinced of the wisdom and equity of the terms of the Agreement, and in
consideration of the premises and of the provisions of the Agreement, she
expresses her acceptance of the same and does agree to its provisions.
The undersigned further agrees that she will at any time make, execute
and deliver such instruments and documents which may be necessary to carry out
the provisions of the Agreement.
This instrument is not a present transfer or release of any rights
which the undersigned may have in any of the community property of her
respective marriage.
DATED: September 10, 1999.
/s/ MICHELE DION STUHMER
--------------------------------
MICHELE DION STUHMER
-53-
<PAGE>
9/10//99
LIST OF EXHIBITS
(Southern Highlands/Christopher Homes I, LLC Operating Agreement)
Exhibit "A" Legal Description
Exhibit "B" General and Administration Expense Fee
Exhibit "C" Sales and Marketing Expense Reimbursement
Exhibit "D" Construction Overhead Fee
Exhibit "E" Capital Contributions
Exhibit "F" Declaration of Development Covenants and Restrictions, draft dated
July 23, 1999
Exhibit "G" Master Declaration of Covenants, Conditions, and Restrictions for
Southern Highlands, draft dated July 14, 1999
<PAGE>
9/10//99
EXHIBIT "B"
GENERAL AND ADMINISTRATION EXPENSE FEE
A fixed fee of three percent (3%) of all Sales Revenues determined by
calculating the total Sales Revenue from the sale of Lots and Residences. The
General and Administration Expense Fee shall be paid to the Manager as provided
in Section 8.3 hereof. If cash and revenues are not available, then the General
and Administration Expense Fee shall accrue and be payable (without interest)
when proceeds and revenues are available for payment of the same.
<PAGE>
9/10//99
EXHIBIT "C"
SALES AND MARKETING EXPENSE REIMBURSEMENT
A Sales and Marketing Expense Reimbursement shall be paid to the
Manager in an amount set forth in the Marketing Budget and not to exceed seven
percent (7%) of the Sales Revenue for Lots and Residences. The reimbursement
amount shall be paid to the Manager in accordance with the provisions of Section
8.3. If cash and revenues are not available to pay the reimbursement amount,
then any earned Sales and Marketing Expense Reimbursement amount shall be
deferred and paid (without interest) when available net cash flow is available,
as provided by Section 8.3.
<PAGE>
9/10//99
EXHIBIT "D"
CONSTRUCTION OVERHEAD FEE
A Construction Overhead Fee shall be earned by the Manager in an amount
equal to seven and one-half percent (7-1/2%) of all Sales Revenues. The
Construction Overhead Fee includes compensation to the Manager for the Manager's
obligation to honor construction warranties on the constructed residences. In
consideration for payment of the Construction Overhead Fee, the Manager agrees
to indemnify and hold the Company, Stuhmer and the Southern Highlands harmless
from and against any and all any claims and actions with respect to construction
warranties on the constructed Residences. The foregoing obligation shall survive
the termination of the Company and the removal of the Manager.
The Construction Overhead Fee shall be calculated based upon all Sales
Revenues, including Lots, Residences, Improvements/Options/Upgrades and shall be
paid in accordance with Section 8.3 hereof. The Construction Overhead Fee shall
be due and payable only after all priority amounts described in Section 8.3 have
been fully paid to Southern Highlands. If there is insufficient revenues and
cash to pay the Construction Overhead Fee when due, then the amount shall accrue
and shall be paid (without interest) when net cash flow is available, as
provided in Section 8.3.
<PAGE>
9/10//99
EXHIBIT "E"
CAPITAL CONTRIBUTIONS
Southern Highlands Land--described on Exhibit "A" with an agreed upon value
of $6,444,750.
Stuhmer Initially zero, subject to obligation in Section 7.1.7 to
contribute 100% of any additional funds required by the
Company
Exhibit 10.21
AGREEMENT
Agreement entered into as of the 6th day of January, 2000, between
Christopher Homes Custom Home Division, Inc., a Nevada corporation ("Christopher
Homes") and J. Christopher Stuhmer, a resident of Nevada ("Stuhmer").
RECITALS
A. Christopher Homes is the Manager under an Operating Agreement,
dated September 10, 1999, as amended, entitled "Operating
Agreement of Southern Highlands/Christopher Homes I, LLC,"
(the "Operating Agreement").
B. Christopher Homes has specifically enumerated duties under the
Operating Agreement dealing with the development of a
residential community, and Consultant has experience in
providing the type of services contemplated.
C. Christopher Homes desires to retain a Consultant to assist it
in performing its duties under the Operating Agreement, and
Consultant desires to be retained for this purpose.
D. Unless otherwise stated, capitalized words and phrases used
herein have the same meaning as set forth in the Operating
Agreement.
NOW, THEREFORE, in consideration of the bargaining of the parties and
other valuable consideration, the parties AGREE as follows:
1. Division of Net Profits. In return for the right to receive a
consulting fee as provided in this Agreement, Consultant promises to pay to
Christopher Homes sixty-five percent (65%) of all Net Profits to which he is
entitled under the Operating Agreement. On each occasion that Consultant
receives a distribution of quarterly Net Profits under Section 8.3(f)(ii) of
the Operating Agreement, Consultant will pay to Christopher Homes sixty-five
percent (65%) of the distribution, and Consultant shall retain thirty-five
percent (35%) of said distribution.
2. Fees and Other Consideration. In return for the right to receive
from Consultant a share of the Net Profits, and in reliance on Consultant's
promise to provide the consulting services described in this Agreement in
Section 3, Christopher Homes promises to pay to Consultant as a consulting fee
during the term of this Agreement one and one-half percent (1-1/2%) of all
Sales Revenues. Consulting fees will be paid to Consultant concurrently with,
and on a pro rata basis with fees paid to Christopher Homes pursuant to
<PAGE>
Section 8.3(d) of the Operating Agreement. For purposes of this Agreement
"Sales Revenues" shall have the following meaning:
"Sales Revenue" means the gross revenues from the sale or other
disposition of Lots and Residences as recorded by Southern Highlands/
Christopher Homes I, LLC (the "LLC") in accordance with generally
accepted accounting principles, including any payments for upgrades,
options and improvements and excluding any (i) transfer and similar
taxes reimbursed by a buyer, (ii) any third party home warranty
previously paid by buyer, (iii) any title insurance prorations,
premiums, dues or assignments paid by buyer and owed to third parties,
(iv) sales concessions afforded to the buyer, and (v) closing costs or
direct costs incurred in the transaction that are not recognized as a
reduction of revenue. (Sales Revenue shall not include any Deposit
previously received by the LLC and distributed to the Members in
accordance with the Operating Agreement, unless the Operating Agreement
is otherwise modified).
In addition to the foregoing, and as additional consideration for this
Agreement, the parties agree and acknowledge that Consultant shall be paid his
current salary and all benefits by and under the Employment Agreement by and
between Mr. J. Christopher Stuhmer and the Fortress Group through the
termination date of said Employment Agreement. Upon termination of the
Employment Agreement of J. Christopher Stuhmer with the Fortress Group,
Consultant shall be paid, in addition to the foregoing, a monthly fee of
$4,500.00 per month during the Initial Term.
3. Appointment of Consultant. Upon the terms and conditions set forth
herein, Christopher Homes hereby retains and engages Consultant and Consultant
hereby accepts such retention and engagement.
4. Duties. Consultant shall assist Christopher Homes in fulfilling its
responsibilities under the Operating Agreement with respect to the following
matters and in accordance with the following covenants and provisions.
(a) Plans, Documents, Specifications, and Planning Phase
1) The Consultant shall be responsible for the
management and supervision of the schematic
conceptual and design development drawings for base
house plans and elevations. The Consultant and
Christopher Homes shall agree on the number of plan
variations to be offered. The Consultant shall not be
responsible for the development of any custom plans
designed outside the base plans; however, the
Consultant shall have the right to approve any custom
plans regarding conformance to community standards
and Design Development Covenants.
2
<PAGE>
2) Christopher Homes shall assist the Consultant in the
finalization of design development drawings and in
establishing construction specifications, finish
specifications, development and construction budgets,
and project schedules.
3) Christopher Homes shall be responsible for converting
the design development drawings into completed
working drawings suitable for obtaining a building
permit. The final working drawings are subject to the
reasonable approval of Consultant.
4) Christopher Homes shall provide an annual marketing
plan and strategy, and associated sales and marketing
budget. All collateral material, advertisements,
brochures, and other marketing materials shall be
presented to the Consultant for approval.
5) All plans, designs, specifications, and budgets are
subject to the approval of the Consultant.
(b) Sales and Marketing Administration
1) In accordance with the approved budget and plan,
Christopher Homes shall provide all sales
administration including maintaining an on-site
presence and coverage during hours that are currently
employed at other Christopher Homes communities
(e.g., Palisades, San Michelle)
2) Christopher Homes shall administer and maintain the
model homes, as approved in the plan and budget, in a
professional manner and in accordance with the
standards practiced at other Christopher Homes
communities.
3) Christopher Homes shall use its best efforts to
attain the targeted sales objectives as set forth in
the approved plan and budget.
(c) Construction Administration
1) Christopher Homes shall provide administrative,
management, and related services as required to
coordinate the work of contractors, subcontractors,
and vendors in the completion of all home
construction in accordance with the approved plans
and specifications. Christopher Homes shall supervise
and direct the work using its skill and attention and
shall be responsible for all construction means,
methods, techniques, sequences, and procedures and
for coordinating the work under the contract.
3
<PAGE>
2) Quality of work shall be consistent with the quality
of workmanship and materials in other Christopher
Homes' Models.
3) Christopher Homes will keep the premises free from
excessive accumulation of waste materials and rubbish
caused by its operations.
(d) Reporting
1) Christopher Homes shall maintain cost accounting
records on all authorized work, and shall submit for
the Company's approval on a periodic basis as
required, requisitions for payment to subcontractors
and vendors in a timely fashion, and in accordance
with current Christopher Homes' payment policies and
practices. Christopher Homes shall submit the
Company-approved draw schedules directly to bank on
behalf of the Company; coordinate receipt and
distribution of funds received from bank; and
administer release of liens and other accounting
matters on behalf of the Company.
2) Christopher Homes shall have no repayment obligation
or liability whatsoever to any bank or other lending
sources. The Company shall be solely responsible for
providing appropriate financing for the development
and construction of the project.
3) In order to facilitate communications between
Christopher Homes and the Company, Christopher Homes
shall designate a representative to act as a point of
contact for the Company. Christopher Homes'
representative shall meet with Consultant two times a
month and at such other times, with reasonable
advance notice by Consultant, as circumstances
dictate. Consultant shall not interfere with the
management of any Christopher Homes employee,
subcontractor or vendor without prior approval of
Christopher Homes.
4) On a monthly basis, Christopher Homes shall provide a
written M.D. & A. highlight report to the Company and
a P & L budget to actual report, and L.L.C. balance
sheet, and an "actual" to projected pro forma
analysis.
5) Other reports shall be provided to the Company
including sales and closing reports, construction
schedules, house margin reports, and results of
customer satisfaction surveys conducted with
customers of the project. On a quarterly basis,
Christopher Homes will submit revised forecasts for
the remaining duration of the project.
4
<PAGE>
With respect to the foregoing responsibilities, each of the parties
hereto agrees that Consultant shall have sole and absolute control and
discretion with respect to all aspects of product control for the design and
product development of the Project, as delineated in Section 4(a), above.
The parties hereto expressly acknowledge and agree that the foregoing
description of duties and responsibilities is not intended to change, modify or
otherwise abrogate the duties and responsibilities of Christopher Homes under
the Operating Agreement. In the event that any provision hereof conflicts with
any provision of the Operating Agreement, the terms and provisions of the
Operating Agreement shall control.
It is recognized that although Consultant, as of the date of this
Agreement, is the President of Christopher Homes and has executive
responsibility for the entity, the parties contemplate a change in the
management responsibilities with respect to Christopher Homes. Effective January
6, 2000, Consultant's duties will be limited to those identified above. In
carrying out his duties under this Agreement, Consultant shall be subject to the
same standard of care to which the Manager is subject as set forth in Section
6.6 of the Operating Agreement. Notwithstanding the foregoing, at all times
during the term of this Agreement, and all extended terms hereof, Consultant
shall retain the title of "Chairman" of Christopher Homes. Upon termination of
this Agreement for any reason, the title of "Chairman" shall be deemed
automatically revoked and terminated as of the effective date of termination
hereof
5. Term.
(a) This Agreement will have an initial term of twelve (12) months from
the date this Agreement is signed by both parties (the "Initial Term").
Consultant shall have the right to elect to extend the term of this Agreement
for successive periods of twelve (12) months each at the sole and absolute
discretion of Consultant, referred to herein as an "Extended Term." Should
Consultant elect not to extend the term hereof for additional term(s) of twelve
(12) months, Consultant shall provide not less than ninety (90) days advance
written notice to Christopher Homes before the expiration of the applicable term
of its election not to extend the term hereof. Should Consultant elect not to
extend the term of this Agreement for additional term(s), then Consultant agrees
to exercise its right under Section 3.6.2 of the Operating Agreement and remove
Christopher Homes as Manager, and replace Christopher Homes with a Manager in
accordance with the terms of said Operating Agreement.
(b) Notwithstanding a decision by Consultant to extend the term of this
Agreement, Christopher Homes may elect to resign its duties as Manager under the
Operating Agreement and not to go forward under this Agreement by providing to
Consultant written notice or its election at least ninety (90) days before the
expiration of the applicable term, thereby terminating this Agreement. In such
event, Consultant agrees to indemnify and hold Christopher Homes harmless
against the Members of the Operating Agreement for a claim
5
<PAGE>
under the Operating Agreement alleging that Christopher Homes wrongfully
resigned or terminated its duties under the Operating Agreement.
6. Payment of Operating Expenses. During the term of this Consulting
Agreement, Christopher Homes shall pay the costs for, as tenant, providing Suite
120A, 9500 Hillwood Drive, Las Vegas 89134, as and for business offices from
which Consultant shall perform services to Christopher Homes under the terms of
this Agreement and any Other Agreement entered into between the parties. If
requested to do so by Landlord or Consultant, Christopher Homes shall execute
the Landlord's Standard Lease Agreement in connection with providing the
foregoing Suite for the use of Consultant.
7. Covenants.
(a) Right of First Refusal. If during the term of this
Agreement, Consultant has an opportunity to participate in a project similar in
structure to the Parcel 305 Project which calls for a manager on behalf of whom
Consultant will provide design and marketing services, Consultant shall give
written notice to Christopher Homes (the "Notice"). The Notice shall set forth a
description of the project and a summary of the terms and proposed conditions of
the manager's role in the project and the relationship Consultant would have
with the manager, including fees and profit opportunities. Christopher Homes
will have thirty (30) days from the date of service of such notice as defined
hereinbelow to notify Consultant in writing of its acceptance of terms of the
offer. The parties shall thereafter proceed to finalize the negotiation, and
execution of a definitive agreement implementing the terms of the offer. If
Christopher Homes does not accept the offer within the thirty (30) day period,
Consultant may associate as a consultant to another party that will act as the
manager of the project, provided the terms and conditions of the transaction are
identical to or worse than those contained in the Notice from Consultant as they
relate to the manager.
This right of First Refusal shall not apply to and shall not require
Consultant to provide notice to Christopher Homes in the event that Consultant
is an Owner of any entity which is contemplated to be the proposed manager of
the Project which may be deemed to be similar in structure to the Parcel 305
Project. Further, except as specifically limited hereinabove, there are no
rights of First Refusal conveyed or granted to Christopher Homes herein.
(b) Removal of Christopher Homes as Manager.
(i) Subject to the conditions subsequent set forth in
subsection 7(b)(ii) below, Consultant covenants that during
the term of the Project, he will not exercise his right under
Section 3.6.2 of the Operating Agreement to remove Christopher
Homes as Manager or in any other fashion take action to remove
Christopher Homes as Manager or omit to take action that has
the effect of removing Christopher Homes as Manager.
6
<PAGE>
(ii) Consultant shall be entitled to exercise his
right under Section 3.6.2 of the Operating Agreement to remove
Christopher Homes as Manager if, during the effective term of
this Consulting Agreement, either one of the following occurs:
(A) Christopher Homes is dissolved;
(B) Christopher Homes or the Fortress Group, Inc.
commences voluntary proceeding under either Federal Bankruptcy
Laws or under any other applicable Federal or State Law
relating to insolvency;
(C) This Agreement is terminated by Consultant
pursuant to Section 8(b) hereinbelow;
(D) Christopher Homes mis-manages or fails to perform
one or more of its duties under the Operating Agreement or as
set forth herein, which remains uncured within the time set
forth in Section 8(b)(ii) herein.
(E) A change in the ownership of voting stock of the
Fortress Group to any person or entity owning more than fifty
percent (50%) of the outstanding voting shares of stock of the
Fortress Group, Inc.
8. Termination.
(a) This Agreement shall terminate at the end of the Initial
Term, or any successive Extended Term as defined in Section 5 hereinabove. Upon
termination in accordance with the provisions of Section 5, Christopher Homes
shall be entitled to payment of any unpaid fees and profits, if any, under
Section 1 hereof due from closed escrows of sales of Lots and residences to
third-party home buyers. With respect to Lots and residences under construction
as of the date of termination in accordance with the provisions of Section 5,
and with respect to residences which are sold but upon which construction has
not yet commenced, Christopher Homes shall have the right, duty and
responsibility to complete the construction of homes on said Lots and residences
in accordance with the terms of this Agreement and the Operating Agreement, and
Christopher Homes shall be paid its fee and profits, if any, under Section 1
hereof based upon the Sales Revenue of such residences on the date of close of
escrow for such Lots and residences, notwithstanding the fact that the
termination of this Agreement may precede the completion of construction and
close of escrows.
(b) This Agreement may also be earlier terminated in
accordance with the following provisions:
7
<PAGE>
(i) By Consultant removing Christopher Homes as
Manager in accordance with the provisions of paragraph
7(b)(ii); or
(ii) Upon written notice by the non-defaulting party
hereto to the other party of a material breach of one or more
of the obligations of this Agreement which notice gives the
defaulting party reasonable opportunity to cure of a period of
time not less than thirty (30) days, and which breach is not
cured within the period defined herein and in the notice given
by the non-defaulting party. Notwithstanding the foregoing or
any other term or provision set forth in this Consulting
Agreement, Christopher Homes shall not be entitled to
terminate this Agreement under any circumstances unless the
termination is coupled with the contemporaneous resignation
of Christopher Homes as Manager under the Operating Agreement
of Southern Highlands/Christopher Homes I, L.L.C., a Nevada
Limited Liability Company.
(c) In the event of termination of this Agreement in
accordance with the terms of Section 7(b) (A),(B),(C and (D) hereinabove,
Christopher Homes shall be entitled to receive payment of any unpaid fees and
profits under Section 1 hereof, if any, due from closed escrows of sales of Lots
to third-party home buyers, and with respect to Lots and residences under
construction based upon an amount equal to the product of the percentage of
construction completed on homes under construction multiplied by the estimated
Sales Revenue of such homes as of the date of termination, plus an amount of
profit under Section 1 hereof, if any, based upon an amount equal to the product
of the percentage of construction completed on homes under construction
multiplied by the amount of profit for each home calculated as of the date of
close of escrow. Christopher Homes shall not be entitled to any fee for homes
upon which construction has not been commenced as of the date of termination.
9. Miscellaneous.
(a) Notices, Covenants, Etc. Any notices, consents or other
communication required to be sent or given hereunder by any of the parties shall
in every case be in writing and shall be deemed properly served if (i)
delivered personally, (ii) sent by registered or certified mail, in all such
cases with first class postage prepaid, return receipt requested, or (iii),
delivered by a recognized overnight courier services, to the parties at the
addresses as set forth below or at such other addresses as may be furnished in
writing.
(1) If to Consultant:
J. Christopher Stuhmer
9500 Hillwood Drive, Suite 120A
Las Vegas, Nevada 89134
8
<PAGE>
(2) If to Christopher Homes:
Christopher Homes, Custom Home Division
Attention: J. Christopher Stuhmer
9500 Hillwood Drive, Suite 200
Las Vegas, Nevada 89134
(3) The Fortress Group, Inc.
1650 Tysons Boulevard, Suite 600
McLean, VA 22102
Attention: George Yeonas
Chief Executive Officer
Date of service of such notice shall be either: (1) the date such notice is
personally delivered. or (2) three (3) days after the date of mailing if sent by
certified or registered mail; or (3) one (1) day after date of delivery to the
overnight courier if sent by overnight courier.
(b) Severability. The unenforceability or invalidity of any provision
of this Agreement shall not affect the enforceability or validity of any other
provision.
(c) Documents. Each party will execute all documents and take such
other actions as the other party may reasonably request in order to consummate
the transactions provided for herein and to accomplish the purposes of this
Agreement.
(d) Counterparts. This Agreement may be executed simultaneously 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.
(e) Governing Law. This Agreement shall be construed and governed in
accordance with the law of the State of Nevada, without giving effect to
conflicts and choice of law principles.
(f) Headings. The subject headings of Articles and Sections of this
Agreement are included for purposes of convenience only and shall not effect the
construction or interpretation of any of its provisions.
(g) Assignment. This Assignment will be binding upon and inure to the
benefit of the parties hereto and their respective successors and permitted
assigns but Consultant may not assign or delegate his duties hereunder without
the prior written consent of Christopher Homes.
9
<PAGE>
(h) Entire Agreement. This Agreement and the Operating Agreement
incorporated by reference to the Agreement set forth the entire understanding of
the parties and supersedes all prior or contemporaneous agreements or
negotiations (whether in writing or oral) and may be modified only by
instruments signed by both of the parties hereto. Oral modifications are
absolutely prohibited.
(i) Third Parties. Nothing herein expressed or implied is intended or
shall be construed to confer upon or give to any person or entity, other than
the parties to this Agreement, any rights ore remedies under or by reason of
this Agreement.
(j) Interpretive Matters. Unless the context otherwise requires, (i)
all references to Articles, Sections, Schedules or Exhibits in this Agreement,
and (ii) words in the singular or plural include the singular and plural and
pronouns stated in either the masculine, feminine or neuter gender shall include
the masculine, feminine and neuter.
(k) Waiver. The rights and remedies of the parties to this Agreement
are cumulative and not alternative. Neither the failure nor any delay in any
party in exercising a right, power, or privilege under this Agreement or the
documents referred to in this Agreement will operate as a waiver of the right,
power, or privilege, and no single or partial exercise of a right, power, or
privilege will preclude any other or further exercise of any other right, power,
or privilege. To the maximum extent permitted by applicable law, (a) no claim or
right arising out of this Agreement or the documents referred to in it can be
discharged by one party, in whole or in part, by a waiver or renunciation of the
claim or right unless in writing signed by the other party; by no waiver that
may be given by a party will be applicable except in the specific instance for
which it is given.
(l) ALL CLAIMS (PURSUANT TO FEDERAL OR STATE STATUTE(S) OR BY COMMON
LAW), CONTROVERSIES, DIFFERENCES OR DISPUTES BETWEEN CHRISTOPHER HOMES AND
CONSULTANT ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE BREACH THEREOF,
SHALL BE SETTLED BY ARBITRATION IN ACCORDANCE WITH THE RULES THEN IN EFFECT OF
THE AMERICAN ARBITRATION ASSOCIATION AT THE TIME OF THE DISPUTE. AFTER AN AWARD
IS RENDERED BY THE ARBITRATOR(S), A JUDGMENT MAY BE ENTERED IN ANY COURT OF
COMPETENT JURISDICTION. THE ARBITRATION SHALL OCCUR IN LAS VEGAS, NEVADA TO THE
EXCLUSION OF ALL OTHER LOCATIONS. THE ARBITRATOR(S) CANNOT ADD OR SUBTRACT TO
THE CONTENTS OF THIS AGREEMENT. THE PARTIES AGREE THAT THE ARBITRATOR(S) MAY
INCLUDE PROVISION FOR THE PAYMENT OF COSTS AND EXPENSES, INCLUDING REASONABLE
ATTORNEY'S FEES AS PART OF ANY RULING OR AWARD MADE THEREUNDER. THE PARTIES
ACKNOWLEDGE THAT ARBITRATION SHALL BE THE SOLE, FINAL, BINDING AND EXCLUSIVE
REMEDY OF THE PARTIES WITH RESPECT TO ANY SUCH MATTER FOR WHICH ARBITRATION IS
REQUIRED HEREUNDER. IN PREPARATION FOR THE
10
<PAGE>
ARBITRATION HEREIN, EACH PARTY MAY UTILIZE ALL METHODS OF DISCOVERY AUTHORIZED
BY THE PROCEDURAL RULES AND STATUTES OF NEVADA AND MAY ENFORCE THE RIGHT TO
OBTAIN SUCH DISCOVERY IN THE MANNER PROVIDED BY SAID RULES AND STATUTES AND/OR
BY THE ARBITRATION LAW OF THE STATE OF NEVADA.
(m) Limitation of Damages. Consultant and Christopher Homes agree and
acknowledge that any and all damages sustained or incurred by Christopher
Homes, if any, resulting from a material breach of the obligations set forth in
this Agreement shall be expressly limited to Christopher Homes' claim of right
to receive from the Consultant an amount equal to Consultant's Net Profit under
paragraph 1 hereinabove and Consultant's fee limited to one and one-half percent
(1-1/2%) of all Sales Revenue as defined in paragraph 2 hereof. Christopher
Homes expressly waives, relinquishes and releases Consultant from any other
claim or any other damages except as expressly set forth herein.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
CHRISTOPHER HOMES CUSTOM HOME
DIVISION, INC.
By: /s/ Illegible
-----------------------------
Consultant:
/s/ J. Christopher Stuhmer
---------------------------------
J. Christopher Stuhmer
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from The
Fortress Group, Inc. Consolidated Balance Sheet as of March 31, 2000 and The
Fortress Group, Inc. Consolidated Statement of Operations for the three months
ended March 31, 2000 and is qualified in its entire reference to such financial
statements.
</LEGEND>
<CIK> 1010607
<NAME> The Fortress Group, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1.00
<CASH> 10,817
<SECURITIES> 0
<RECEIVABLES> 13,551
<ALLOWANCES> 0
<INVENTORY> 342,163
<CURRENT-ASSETS> 0
<PP&E> 11,556
<DEPRECIATION> 0
<TOTAL-ASSETS> 454,683
<CURRENT-LIABILITIES> 0
<BONDS> 100,000
0
1
<COMMON> 125
<OTHER-SE> 78,121
<TOTAL-LIABILITY-AND-EQUITY> 454,683
<SALES> 143,147
<TOTAL-REVENUES> 143,147
<CGS> 121,498
<TOTAL-COSTS> 141,533
<OTHER-EXPENSES> (745)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,286
<INCOME-PRETAX> 1,073
<INCOME-TAX> 440
<INCOME-CONTINUING> 633
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 633
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
