<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to
----------------- -----------------
Commission file number 1-10959
STANDARD PACIFIC CORP.
(Exact name of registrant as specified in its charter)
Delaware 33-0475989
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1565 W. MacArthur Blvd., Costa Mesa, CA 92626
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (714) 668-4300
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 [_].
APPLICABLE ONLY TO CORPORATE ISSUERS
Registrant's shares of common stock outstanding at November 3, 1997: 29,568,281.
<PAGE>
STANDARD PACIFIC CORP. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
The consolidated condensed financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information normally
included in the financial statements prepared in accordance with generally
accepted accounting principles has been omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. The financial statements should
be read in conjunction with the financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the year ended December 31,
1996 and the Company's current report on Form 8-K dated June 11, 1997.
<PAGE>
STANDARD PACIFIC CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
Revenues $ 177,150 $ 105,417
Cost of sales 149,572 91,212
--------------- ---------------
Gross margin 27,578 14,205
--------------- ---------------
Selling, general and administrative expenses 16,158 9,287
Income from unconsolidated joint venture 1,148 871
Interest expense 1,109 1,841
Other income 201 210
--------------- ---------------
Income from continuing operations before income taxes 11,660 4,158
Provision for income taxes (4,786) (1,661)
--------------- ---------------
Income from continuing operations 6,874 2,497
Income (loss) from discontinued operations, net of income
taxes of $(255) and $344 for the three months ended
September 30, 1997 and 1996, respectively 367 (472)
--------------- ---------------
NET INCOME $ 7,241 $ 2,025
=============== ===============
NET INCOME PER SHARE:
Income from continuing operations $ 0.23 $ 0.08
Income (loss) from discontinued operations 0.01 (0.01)
--------------- ---------------
NET INCOME PER SHARE $ 0.24 $ 0.07
=============== ===============
Weighted average common and equivalent shares outstanding 29,835,195 30,063,811
=============== ===============
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed statements.
<PAGE>
STANDARD PACIFIC CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Revenues $ 429,030 $ 268,729
Cost of sales 364,775 234,736
------------ ------------
Gross margin 64,255 33,993
------------ ------------
Selling, general and administrative expenses 38,869 25,811
Income from unconsolidated joint ventures 2,665 3,900
Interest expense 3,956 5,046
Other income 664 738
------------ ------------
Income from continuing operations before income taxes 24,759 7,774
Provision for income taxes (10,163) (3,116)
------------ ------------
Income from continuing operations 14,596 4,658
Income from discontinued operations, net of income taxes of
$(578) and $(79) for the nine months ended September 30,
1997 and 1996, respectively 829 151
------------ ------------
NET INCOME $ 15,425 $ 4,809
============ ============
NET INCOME PER SHARE:
Income from continuing operations $ 0.49 $ 0.15
Income from discontinued operations 0.03 0.01
------------ ------------
NET INCOME PER SHARE $ 0.52 $ 0.16
============ ============
Weighted average common and equivalent shares outstanding 29,749,635 30,065,262
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed statements.
<PAGE>
STANDARD PACIFIC CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Cash and equivalents $ 3,173 $ 5,252
Investment securities held to maturity - 5,329
Mortgage notes receivable and accrued interest 2,821 3,741
Other notes and accounts receivable, net 10,916 8,648
Inventories:
Real estate in process of development and completed model homes 434,807 363,718
Real estate held for sale 6,174 8,927
Property and equipment, at cost, net of accumulated depreciation
and amortization of $4,081 and $3,320, respectively 5,903 1,741
Investments in and advances to unconsolidated joint ventures 23,879 885
Deferred income taxes 14,136 16,481
Other assets 4,087 6,325
Excess of cost over net assets acquired, net 6,850 -
-------- --------
Total assets of continuing operations 512,746 421,047
-------- --------
Net assets of discontinued operations 24,169 28,028
-------- --------
TOTAL ASSETS $536,915 $449,075
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Unsecured notes payable $ 33,200 $ 57,300
Trust deed notes payable 8,373 4,467
Accounts payable and accrued expenses 44,699 26,958
10-1/2 percent senior notes due 2000 78,800 100,000
8-1/2 percent senior notes due 2007, net 99,319 -
-------- --------
Total liabilities 264,391 188,725
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 10,000,000 shares authorized;
none issued - -
Common stock, $.01 par value; 100,000,000 shares authorized;
29,561,781 and 29,629,981 shares outstanding in 1997 and 1996,
respectively 296 296
Paid-in capital 282,827 283,331
Investment securities valuation adjustment 162 (39)
Accumulated deficit (10,761) (23,238)
-------- --------
Total stockholders' equity 272,524 260,350
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $536,915 $449,075
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed balance sheets.
<PAGE>
STANDARD PACIFIC CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 15,425 $ 4,809
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 665 531
Amortization of deferred income and discounts 4 62
Net (gain) loss on sale of investments, loans and REO (2,613) (560)
Provision for loan losses 3 465
Changes in cash and equivalents due to:
Inventories (60,192) (19,238)
Receivables and accrued interest (672) 207
Investments in and advances to joint ventures (22,994) 660
Accounts payable and accrued expenses 16,331 (2,038)
Deferred income taxes 2,541 543
Excess of cost over net assets acquired (6,850) -
Other, net 4,962 240
-------- --------
Net cash provided by (used in) operating activities $(53,390) $(14,319)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of investments and principal repayments $ 53,778 $ 15,164
Net sales of real estate owned 2,895 4,134
Net (additions to) retirements from property and equipment (1,144) (229)
Purchases of investment securities (49,207) (30,410)
New loan fundings and loan purchases (352) (1,560)
Loan sales and principal repayments from loans 187,744 52,415
-------- --------
Net cash provided by (used in) investing activities $193,714 $ 39,514
-------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
statements.
<PAGE>
STANDARD PACIFIC CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C>
Net proceeds from (payments on) bank credit facilities $ (24,100) $ 23,350
Net proceeds from the issuance of 8 1/2 percent Senior Notes 96,931 -
Proceeds from deposits to savings accounts 167,365 199,523
Payments on savings account withdrawals (230,996) (225,093)
Interest credited to savings accounts 2,392 3,537
Proceeds from FHLB advances 79,000 13,000
Principal payments on FHLB advances (170,000) (59,000)
Principal payments on notes and trust deed notes payable (25,308) (6,447)
Dividends paid (2,948) (2,705)
Net change in securities sold subject to agreements to repurchase - 3,083
Repurchase of common shares (1,964) -
Proceeds from the exercise of stock options 1,459 -
------------ ------------
Net cash provided by (used in) financing activities $(108,169) $ (50,752)
------------ ------------
Net increase (decrease) in cash and equivalents $ 32,155 $ (25,557)
Cash and equivalents at beginning of period 16,234 37,597
------------ ------------
Cash and equivalents at end of period $ 48,389 $ 12,040
============ ============
SUMMARY OF CASH BALANCES:
Homebuilding and corporate $ 3,173 $ 5,252
Discontinued operations 45,216 6,788
------------ ------------
$ 48,389 $ 12,040
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Noncash transactions:
Expenses capitalized in connection with the issuance of the
8 1/2 percent Senior Notes due 2007 $ 2,377 $ -
Land acquisitions financed by purchase money trust deeds 8,014 8,904
Loans receivable foreclosed on, net 1,110 2,013
Cash paid during the period for:
Interest, all entities $ 21,190 $ 26,350
Income taxes 3,883 1,478
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
statements.
<PAGE>
STANDARD PACIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(Dollar amounts presented in tables are in thousands)
1. Basis of presentation
---------------------
In the opinion of management, the financial statements reflect all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the financial position as of September 30, 1997 and December 31, 1996, and the
results of operations and cash flows for the periods shown.
2. Capitalization of interest
--------------------------
The following is a summary of interest capitalized and expensed related to real
estate inventories for the nine month and three month periods ended September
30, 1997 and 1996:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended,
September 30, September 30,
--------------------------- ---------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Total interest incurred during the period $12,362 $12,975 $ 4,247 $ 4,071
Less: Interest capitalized as a cost of real
estate inventories 8,406 7,929 3,138 2,229
---------- ---------- ---------- ----------
Interest expense $ 3,956 $ 5,046 $ 1,109 $ 1,842
========== ========== ========== ==========
Interest previously capitalized as a cost of real
estate inventories, included in cost of sales $17,321 $12,895 $ 7,131 $ 5,014
========== ========== ========== ==========
Interest capitalized in ending inventories $16,227 $27,551 $16,227 $27,551
========== ========== ========== ==========
</TABLE>
3. Reclassifications
-----------------
Effective January 1, 1997, the Company changed its presentation of selling costs
in its consolidated statements of operations whereby they are now combined with
general and administrative expenses. This presentation is consistent with
industry practice. Previously, the Company included these costs as a component
of cost of sales. The Company reclassified the prior period amounts to conform
with the 1997 presentation.
Additionally, certain other reclassifications have been made to the 1996
financial information to conform with current period presentation.
<PAGE>
4. Earnings per share
------------------
Earnings per share for the three month and nine month periods ended September
30, 1997 and 1996 were calculated based on the weighted average number of common
and equivalent shares outstanding during the periods. Equivalent shares were
determined by using the treasury stock method, which assumes that all dilutive
securities were exercised and that the proceeds received were applied to
repurchase outstanding shares at the average market prices during the period.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share," which is required to be adopted by the Company no
later than December 31, 1997. At that time, the Company will be required to
change the method used to compute earnings per share and to restate all prior
periods presented. Under the new requirements primary earnings per share will
be replaced with basic earnings per share and fully diluted earnings per share
will be replaced with diluted earnings per share. Basic earnings per share
excludes the dilutive effect of common stock equivalents, including stock
options. With the exception of the three month period ended September 30, 1997,
both basic and diluted net income per share, as calculated under the new
standard, would be the same as net income per share as reflected in the
accompanying consolidated statements of operations for the three month and nine
month periods ended September 30, 1997 and 1996, respectively. Basic net income
per share would have been $0.25 per share versus $0.24 per share for the three
month period ended September 30, 1997.
5. Acquisition
-----------
On September 30, 1997, the Company acquired all of the outstanding stock of Duc
Development Company (Duc), a privately held northern California homebuilding
company, for approximately $16 million in cash. In connection with the
acquisition, the Company acquired certain other real estate assets related to
Duc's operations for approximately $55 million in cash and the assumption of
approximately $8 million of debt.
The acquisition has been accounted for as a purchase, and accordingly, the
purchase price has been allocated to the net assets acquired based upon their
estimated fair market values as of the date of acquisition and are included in
the accompanying consolidated condensed balance sheets. In addition, the excess
of the purchase price over the estimated fair value of net assets acquired
totaled approximately $6.85 million, which has been recorded as excess of cost
over net assets acquired in the accompanying consolidated condensed balance
sheets and is being amortized on a straight-line basis over 7 years. Included
in the $16 million paid for the stock of Duc is contingent consideration of
approximately $5 million which is to be paid upon the Company obtaining
entitlement approvals on a certain parcel of land. Upon such payment, the amount
will be recorded as real estate inventory.
The pro forma effect of including Duc's operations in the Company's consolidated
operating results since January 1, 1997 is not presented, as the impact is not
material. Commencing October 1, 1997, the operating results of Duc will be
included in the Company's consolidated financial statements.
-2-
<PAGE>
6. Discontinued Operations
-----------------------
In May 1997, the Company's Board of Directors adopted a plan of disposition (the
"Savings Plan") for the Company's savings and loan subsidiary ("Savings"). In
June 1997, and pursuant to the Savings Plan, Savings sold substantially all of
their mortgage loan portfolio and the Company entered into a definitive
agreement to sell the remainder of Savings' business, including Savings'
charter. The proceeds from the sale of the mortgages were used to pay off
substantially all of the outstanding balances of Federal Home Loan Bank advances
with the remaining amount temporarily invested until the savings deposits are
sold along with Savings' remaining assets. The definitive sale agreement is
subject to, among other things, the approval of the Office of Thrift
Supervision. Management currently estimates that both the disposition of Savings
under the Savings Plan and the operating results of Savings for the period
through the disposition will not result in a significant gain or loss to the
Company.
In November 1997, the Company entered into a definitive agreement (the
"Agreement") to sell all of the outstanding stock of Panel Concepts, Inc.
("Panel") to a third party to be effective December 1, 1997. The net gain will
be recorded upon the closing of the sale, and as a result, no gain on
disposition has been reflected in the accompanying consolidated condensed
results of operations. Proceeds from the sale of Panel are expected to be
approximately $8.8 million before transaction and other related costs.
Additionally, certain assets of Panel totaling approximately $9 million have
been or will be distributed to the Company prior to the closing.
Savings and Panel have been accounted for as discontinued operations and,
accordingly, the results of their operations have been segregated in the
accompanying consolidated condensed statements of operations. Additionally, the
assets and liabilities of these discontinued operations have been classified in
the accompanying consolidated condensed balance sheets as "Net assets of
discontinued operations." Discontinued operations have not been segregated in
the accompanying consolidated condensed statements of cash flows.
Interest income and product sales from these discontinued operations aggregated
$25,866,000 and $29,132,000 for the nine month periods ended September 30, 1997
and 1996, respectively, and $7,637,000 and $9,326,000 for the three month
periods ended September 30, 1997 and 1996, respectively.
-3-
<PAGE>
The components of net assets of discontinued operations included in the
accompanying consolidated condensed balance sheets at September 30, 1997 and
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
At September 30, At December 31,
1997 1996
---------------- ---------------
(Dollars in thousands)
<S> <C> <C>
Assets:
Cash and equivalents $ 45,216 $ 10,981
Accounts receivable, net 2,459 2,426
Investment securities available for sale 43,402 42,401
Mortgage notes receivable and accrued interest, net 11,605 199,135
Manufacturing inventories 1,302 1,432
Property and equipment, at cost, net of accumulated
depreciation of $3,472 and $4,189, respectively 810 4,527
Real estate acquired in settlement of loans, net 1,405 2,079
Deferred income taxes 1,385 1,581
Investment in FHLB stock 8,330 7,958
Other assets 911 1,813
---------------- ---------------
Total assets--discontinued operations $116,825 $274,333
---------------- ---------------
Liabilities:
Savings accounts $ 71,574 $132,813
FHLB advances 18,000 109,000
Accounts payable and accrued expenses 3,082 4,492
---------------- ---------------
Total liabilities--discontinued operations 92,656 246,305
---------------- ---------------
Net assets of discontinued operations $ 24,169 $28,028
================= ================
</TABLE>
-4-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
A comparative summary of operating results for homebuilding and corporate
operations for the nine month and three month periods ended September 30, 1997
and 1996 is as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
-------------------------- --------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $429,030 $268,729 $177,150 $105,417
Cost of sales 364,775 234,736 149,572 91,212
-------- -------- -------- --------
Gross margin 64,255 33,993 27,578 14,205
-------- -------- -------- --------
Gross margin percentage 15.0% 12.6% 15.6% 13.5%
-------- -------- -------- --------
Selling, general and administrative expenses 38,869 25,811 16,158 9,287
Income from unconsolidated joint ventures 2,665 3,900 1,148 871
Interest expense 3,956 5,046 1,109 1,841
Other income 664 738 201 210
-------- -------- -------- --------
Homebuilding and corporate pretax income $ 24,759 $ 7,774 $ 11,660 $ 4,158
======== ======== ======== ========
</TABLE>
A summary of residential housing key operating data for the nine month and three
month periods ended September 30, 1997 and 1996 is as follows (dollar amounts in
thousands, except average selling prices):
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
-------------------------- --------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
New homes delivered:
California 1,135 773 462 307
Texas 276 244 95 83
Joint ventures (California) 46 135 17 35
---------- ---------- ---------- ----------
Total 1,457 1,152 574 425
---------- ---------- ---------- ----------
Average Selling Price:
California deliveries (excluding joint ventures) $328,610 $286,764 $341,048 $292,093
Texas deliveries $190,551 $184,185 $186,567 $186,187
Combined (excluding joint ventures) $301,605 $262,153 $314,700 $269,554
Combined (including joint ventures) $303,923 $255,757 $318,565 $262,197
Net new orders 1,591 1,455 480 431
Backlog at quarter end (in units) 633 609
Backlog at quarter end (in dollars) $210,242 $193,649
Active selling communities at quarter end 56 53
</TABLE>
-5-
<PAGE>
During the quarter ended September 30, 1997, the Company delivered 574 new homes
(including 17 by the Company's unconsolidated joint venture), a new third
quarter high, at an average selling price of $318,565 compared to 425 new homes
(including 35 by the Company's unconsolidated joint venture) at an average
selling price of $262,197 for the 1996 third quarter.
Homebuilding revenues for the quarter ended September 30, 1997, also a new third
quarter high, increased by approximately 68 percent from the year earlier
period, while cost of sales attributed to residential housing increased by
approximately 64 percent over the same period. The rise in homebuilding
revenues of approximately $71.7 million over the 1996 third quarter resulted
primarily from an increase of $45.0 million due to a 43 percent increase in unit
deliveries (excluding joint venture deliveries), an increase of $25.1 million
due to a 16.7 percent jump in the average selling price of homes delivered, with
the balance attributable to an increase in improved lot sales. The Company's
Northern California, Ventura County and Houston divisions experienced strong
growth in unit deliveries, increasing 130 percent, 48 percent and 61 percent
over the year earlier quarter, respectively, while deliveries from the Company's
Orange County division remained consistent with the strong level of deliveries
generated in the 1996 third quarter. The increase in the average selling price
resulted from a greater distribution of homes delivered in the $400,000 to
$800,000 price range in California. The Company anticipates its average selling
price to remain above the $300,000 level for the foreseeable future.
Residential housing cost of sales for the quarter ended September 30, 1997
increased by approximately $58.4 million over the 1996 third quarter primarily
as a result of an increase of $39.0 million due to a greater number of homes
delivered, an increase of $17.9 million attributable to a higher average cost of
new homes delivered and an increase of approximately $1.5 million related to
improved lots.
The homebuilding gross margin percentage increased from 13.5 percent in the
third quarter of 1996 to 15.6 percent in the third quarter of 1997. The
improvement in gross margin reflects the generally healthy housing market in
California.
Selling, general and administrative expenses for the homebuilding and corporate
segment increased as a percentage of revenues from 8.8 percent in the third
quarter of 1996 to 9.1 percent for the 1997 third quarter. This increase is
primarily attributable to the opening of several new communities in the
Company's California markets, an increase in profit based compensation and
certain nonrecurring expenses.
Income from the unconsolidated joint ventures increased from $871,000 in the
third quarter of 1996 to $1.1 million in the third quarter of 1997. Although
joint venture unit deliveries were down from the prior year, profits increased
due to stronger gross margins coupled with higher selling prices.
Interest incurred for the quarter ended September 30, 1997 was $4.2 million of
which $3.1 million was capitalized to real estate inventories compared to $4.1
million incurred for the quarter ended September 30, 1996 of which $2.2 million
was capitalized.
-6-
<PAGE>
The Company continues to see a recovery in the San Diego housing market as
evidenced by a more than doubling of net new home orders for the third quarter
over the year earlier period. Company-wide orders for the quarter were up over
11 percent from the previous year to 480, which represents the highest third
quarter order level since 1987. In addition, the Company ended the quarter with
a backlog of 633 homes valued in excess of $210 million, up 9 percent over the
1996 level.
The Company is optimistic about its opportunities in California with its
inventory of well located projects which was further enhanced by the recently
announced acquisition of a homebuilder in the San Francisco Bay Area.
Deliveries from this acquisition should have a positive effect on the Northern
California division beginning in 1998. With this acquisition, the Company adds
over 1,400 single family lots to its real estate inventory.
Inventory Financing Sources
- ---------------------------
Sources of financing for the Company's real estate inventories at September 30,
1997 were: trust deed notes payable 2%, unsecured debt 48% and equity 50%.
Financial Condition and Liquidity
- ---------------------------------
In June 1997, the Company issued $100 million of 8 1/2 percent Senior Notes due
in 2007. The notes were issued at a discount to yield approximately 8.6
percent. The Senior Notes are subject to certain restrictive financial
covenants, which among other things, impose certain limitations on the ability
of the Company to (i) incur additional indebtedness, (ii) create liens, (iii)
pay dividends, and (iv) sell assets. These notes are callable at the Company's
option commencing June 15, 2002 at a premium of 104.25% of par value, with the
call price reducing ratably to par on June 15, 2005. Net proceeds to the
Company after offering expenses were approximately $96.9 million. The Company
used the net proceeds to repay indebtedness outstanding under the Company's
unsecured revolving credit facility.
Borrowings outstanding under the Company's unsecured revolving credit facility
totaled $33.2 million at September 30, 1997 versus $57.3 million at December 31,
1996. In August 1997, the Company and its bank group amended the unsecured
revolving credit facility to, among other things, increase the commitment to
$275 million, increase the term of the facility from three years to four years
and reduce the cost of borrowings and other fees.
On March 1, 1997, the Company made its first of three annual $20 million sinking
fund payments on the 10 1/2 percent Senior Notes due in 2000.
The Company did not repurchase any shares of its common stock during the third
quarter related to the previously announced common stock repurchase program.
However, since the inception of the Company's stock buyback plan the Company has
repurchased an aggregate of 1,285,750 shares of its common stock for
approximately $8.3 million, leaving a balance of approximately $11.7 million
available under the repurchase program.
-7-
<PAGE>
On October 28, 1997, the Company's Board of Directors declared a quarterly cash
dividend of $.04 per share of common stock. The dividend will be payable on
November 27, 1997 to shareholders of record on November 13, 1997.
Cash requirements for the homebuilding and corporate segments were provided from
internally generated funds and outside borrowings, principally the revolving
credit facility and the net proceeds from the issuance of the 8 1/2 percent
Senior Notes. Management believes that these sources of cash, including capital
available through the public debt and equity markets, are sufficient to finance
its current and future working capital requirements and other needs.
-8-
<PAGE>
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
The foregoing "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains "forward looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which represent the Company's
expectations or beliefs concerning future events, including, but not limited to,
statements regarding the following: the price range of future homes constructed
by the Company; a generally healthy housing market in California; a recovery in
the San Diego housing market; the Company's opportunities in California and the
strength of its inventory in certain California markets; the expected effect of
the acquisition of a San Francisco Bay Area homebuilder on the Company's
operations; the homebuilding segment's backlog of homes; the sufficiency of the
Company's cash provided by internally generated funds and outside borrowings;
the expected gain or loss resulting from the operation of Savings prior to sale
and from the sale of Savings; and the expected sale of Panel Concepts and the
gain to be recognized on such sale. The Company cautions that these statements
are further qualified by important factors that could cause actual results to
differ materially from those in the forward looking statements, including,
without limitation, the following: change in the demand for new homes
attributable to the cyclical and competitive nature of the homebuilding
business; changes in general economic conditions; uncertainty in or changes in
the continued availability of suitable undeveloped land at reasonable prices;
adverse local market conditions; existing and changing governmental regulations,
including regulations concerning environmental matters and the permitting
process for home construction; increases in prevailing interest rates; the level
of real estate taxes and energy costs; the cost of materials and labor; the
availability of construction financing and home mortgage financing attractive to
the purchasers of homes; the availability of financing to homebuilders; and
inclement weather and other natural disasters. Results actually achieved thus
may differ materially from expected results included in these and any other
forward looking statements contained herein.
-9-
<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.
STANDARD PACIFIC CORP.
(Registrant)
Dated: November 10, 1997 By: /s/ Arthur E. Svendsen
----------------------
Arthur E. Svendsen
Chairman of the Board and
Chief Executive Officer
Dated: November 10, 1997 By: /s/ Andrew H. Parnes
--------------------
Andrew H. Parnes
Vice President of Finance, Treasurer
and Principal Financial and
Accounting Officer
-10-
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal proceedings
None
Item 2. Change in Securities
None
Item 3. Default upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.9 Stock Purchase Agreement between Standard Pacific Corp. and
Duc Development Company dated September 30, 1997
11. Statement of computation of earnings per share.
27. Financial Data Schedule.
(b) Current Reports on Form 8-K
None
-11-
<PAGE>
EXHIBIT 10.9
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement ("Agreement") is made as of September 30,
1997, by STANDARD PACIFIC CORP., a Delaware corporation ("Buyer"), DUC
DEVELOPMENT COMPANY, a California corporation (the "Company"), DANIEL A. DUC, an
individual resident in Los Gatos, California ("Seller").
RECITALS:
A. The Seller holds all of the issued and outstanding capital stock of
Company (the "Shares").
B. The Company is engaged in the business of acquisition, subdivision, and
development of real property for single-family residential purposes and the
construction and sale of single-family residential units (the "Business").
C. Buyer wishes to acquire 100% of the issued and outstanding shares of
capital stock of the Company. Seller desires to sell all of his shares of stock
in the Company and Buyer desires to purchase such shares of stock, on the terms
and conditions and for the consideration described in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants, agreements,
representations, and warranties contained in this Agreement, the parties agree
as follows:
1. DEFINITIONS
For purposes of this Agreement, the following terms have the meanings
specified or referred to in this Section 1:
"Adjustment Amount"--as defined in Section 2.5.
-------------------
"Affiliate"--with respect to a particular individual: (a) each other member
-----------
of such individual's Family; (b) any Person that is directly or indirectly
controlled by such individual or one or more members of such individual's
Family; (c) any Person in which such individual or members of such individual's
Family hold (individually or in the aggregate) a Material Interest; and (d) any
Person with respect to which such individual or one or more members of such
individual's Family serves as a director, officer, partner, executor, or trustee
(or in a similar capacity).
With respect to a specified Person other than an individual: (a) any Person
that directly or indirectly controls, is directly or indirectly controlled by,
or is directly or indirectly under common control with such specified Person;
(b) any Person that holds a Material Interest in such specified Person; (c) each
Person that serves as a director, officer, partner, executor, or trustee of such
specified Person (or in a similar capacity); (d) any Person in which such
specified Person holds a Material Interest; (e) any Person with respect to which
such specified Person serves as a general partner or a trustee (or in a similar
capacity); and (f) any Affiliate of any individual described in clause (b) or
(c).
1
<PAGE>
For purposes of this definition, (a) the "Family" of an individual includes
(i) the individual, (ii) the individual's spouse, (iii) any other natural person
who is related to the individual or the individual's spouse, and (iv) any other
natural person who resides with such individual, and (b) "Material Interest"
means direct or indirect beneficial ownership of voting securities or other
voting interests representing at least 35% of the outstanding voting power of a
Person or equity securities or other equity interests representing at least 35%
of the outstanding equity securities or equity interests in a Person.
"Balance Sheet"--as defined in Section 3.4.
---------------
"Best Efforts" or "best efforts"--the reasonable efforts that a prudent
--------------------------------
Person desirous of achieving a result would use in similar circumstances to
accomplish that result.
"Breach"--a "Breach" of a representation, warranty, covenant, obligation,
--------
or other provision of this Agreement or any instrument delivered pursuant to
this Agreement will be deemed to have occurred if there is or has been any
inaccuracy in or breach of, or any failure to perform or comply with, such
representation, warranty, covenant, obligation, or other provision, and the term
"Breach" means any such inaccuracy, breach, failure, claim, occurrence, or
circumstance.
"Buyer"--as defined in the first paragraph of this Agreement.
-------
"Closing"--as defined in Section 2.3.
---------
"Closing Date"--the date and time as of which the Closing actually takes
--------------
place.
"Closing Financial Statements"--as defined in Section 2.6.1.
------------------------------
"Company"--as defined in the first paragraph of this Agreement.
---------
"Company Contract"--any Contract (a) under which the Company has or may
------------------
acquire any rights, (b) under which the Company has or may become subject to any
obligation or liability, including warranty claims by homeowners, or (c) by
which the Company or any of the assets owned or used by it is or may become
bound.
"Consent"--any approval, consent, ratification, waiver, or other
---------
authorization (including any Governmental Authorization).
"Contingent Payment"--as defined in Section 2.2.
--------------------
"Contemplated Transactions"--all of the transactions contemplated by this
---------------------------
Agreement, including: (a) the sale of the Shares by Seller to Buyer; (b) the
execution, delivery, and performance of the Noncompetition Agreement and the
Hold Back Provisions; (c) the performance by Buyer and Seller of their
respective covenants and obligations under this Agreement; and (d) Buyer's
acquisition and ownership of the Shares and exercise of control over the
Company.
"Contract"--any agreement, contract, obligation, promise, or undertaking
----------
(whether written or oral and whether express or implied) that is legally
binding.
"Damages"--as defined in Section 9.2.
---------
2
<PAGE>
"Disclosure Schedule"--the disclosure schedules attached to this Agreement
---------------------
and any Supplemental Schedules thereto.
"Entitlements"--all Governmental Authorizations pertaining to the
--------------
Projects.
"Environmental, Health, and Safety Liabilities"--any cost, damages,
-----------------------------------------------
expense, liability, remediation, response action, obligation, or other
responsibility arising from or under Environmental Law or Occupational Safety
and Health Law.
"Environmental Law"--any Legal Requirement that requires or relates to:
-------------------
(a) advising appropriate authorities, employees, and the public of
intended or actual releases of pollutants or hazardous substances or
materials, violations of discharge limits, or other prohibitions and of the
commencements of activities, such as resource extraction or construction,
that could have significant impact on the Environment;
(b) preventing or reducing to acceptable levels the release of
pollutants or hazardous substances or materials into the Environment;
(c) reducing the quantities, preventing the release, or minimizing the
hazardous characteristics of wastes that are generated;
(d) assuring that products are designed, formulated, packaged, and used
so that they do not present unreasonable risks to human health or the
Environment when used or disposed of;
(e) protecting resources, species, or ecological amenities;
(f) reducing to acceptable levels the risks inherent in the
transportation of hazardous substances, pollutants, oil, or other
potentially harmful substances;
(g) cleaning up pollutants that have been released, preventing the
threat of release, or paying the costs of such clean up or prevention; or
(h) making responsible parties pay private parties, or groups of them,
for damages done to their health or the Environment, or permitting self-
appointed representatives of the public interest to recover for injuries
done to public assets.
"ERISA"--the Employee Retirement Income Security Act of 1974 or any
-------
successor law, and regulations and rules issued pursuant to that Act or any
successor law.
"Feasibility Date"--September 29, 1997.
------------------
"Feasibility Period"--as defined in Section 5.1.
--------------------
"GAAP"--generally accepted accounting principles.
------
"Governmental Authorization"--any approval, consent, license, permit,
----------------------------
waiver, or other authorization issued, granted, given, or otherwise made
available by or under the authority of any Governmental Body or pursuant to any
Legal Requirement.
3
<PAGE>
"Governmental Body"--any: (a) federal, state, county, city, town, village,
-------------------
district, or other jurisdiction of any nature; or (b) body exercising, or
entitled to exercise, any administrative, executive, judicial, legislative,
police, regulatory, or taxing authority or power of any nature.
"Hazardous Materials"--any waste or other substance that is listed,
---------------------
defined, designated, or classified as, or otherwise determined to be, hazardous,
radioactive, or toxic or a pollutant or a contaminant under or pursuant to any
Environmental Law, including any admixture or solution thereof, and specifically
including petroleum and all derivatives thereof or synthetic substitutes
therefor and asbestos or asbestos-containing materials.
"Hold Back Provisions"--Section 9.7 of this Agreement.
----------------------
"IRC"--the Internal Revenue Code of 1986 or any successor law, and
-----
regulations issued by the IRS pursuant to the Internal Revenue Code or any
successor law.
"IRS"--the United States Internal Revenue Service or any successor agency,
-----
and, to the extent relevant, the United States Department of the Treasury.
"Knowledge"--an individual will be deemed to have "Knowledge" of a
-----------
particular fact or other matter if such individual is actually aware of such
fact or other matter. Company shall be deemed to have "Knowledge" only of facts
or matters actually known by Daniel A. Duc or by Pat Geary. Standard Pacific
Corp. shall be deemed to have "Knowledge" only of facts or matters actually
known by Michael C. Cortney or by Andrew H. Parnes.
"Legal Requirement"--any administrative order, constitution, law,
-------------------
ordinance, regulation, or statute of any Governmental Body.
"Noncompetition Agreement"--as defined in Section 2.4.1(ii).
--------------------------
"Occupational Safety and Health Law"--any Legal Requirement designed to
------------------------------------
provide safe and healthful working conditions and to reduce occupational safety
and health hazards, and any program, whether governmental or private (including
those promulgated or sponsored by industry associations and insurance
companies), designed to provide safe and healthful working conditions.
"Ordinary Course of Business"--an action taken by a Person will be deemed
-----------------------------
to have been taken in the "Ordinary Course of Business" only if: (a) such action
is consistent with the past practices of such Person and is taken in the
ordinary course of the normal day-to-day operations of such Person; and (b) such
action is not required to be authorized by the board of directors of such
Person.
"Organizational Documents"--(a) the articles of incorporation and the
--------------------------
bylaws of a corporation; (b) any charter or similar document adopted or filed in
connection with the creation, formation, or organization of a Person; and (c)
any amendment to any of the foregoing.
"Person"--any individual, corporation (including any non-profit
--------
corporation), general or limited partnership, limited liability company, joint
venture, estate, trust, association, organization, labor union, or other entity
or Governmental Body.
4
<PAGE>
"Proceeding"--any action, arbitration, audit, hearing, investigation,
------------
litigation, or suit (whether civil, criminal, administrative, investigative, or
informal) commenced, brought, conducted, or heard by or before, or otherwise
involving, any Governmental Body or arbitrator.
"Project Specific Demand Statements"--the demand statements as to each
------------------------------------
Project referred to in that certain letter of understanding from Buyer to Seller
dated September 4, 1997.
"Projects"--as defined in Section 3.7.1.
----------
"PTR"--a preliminary title report.
-----
"Representative"--with respect to a particular Person, any director,
----------------
officer, employee, agent, consultant, advisor, or other representative of such
Person, including legal counsel, accountants, and financial advisors.
"Seller"--as defined in the first paragraph of this Agreement.
--------
"Shares"--as defined in the Recitals of this Agreement.
--------
"Tax" and "Taxes"--any tax (including any income tax, capital gains tax,
----- -------
value-added tax, sales tax, property tax, gift tax, or estate tax), payroll tax,
unemployment tax (and other similar charges payable by the company with respect
to its employees) levy, assessment, tariff, duty (including any customs duty),
deficiency, or other fee, and any related charge or amount (including any fine,
penalty, interest, or addition to tax), imposed, assessed, or collected by or
under the authority of any Governmental Body or payable pursuant to any tax-
sharing agreement or any other Contract relating to the sharing or payment of
any such tax, levy, assessment, tariff, duty, deficiency, or fee.
2. SALE AND TRANSFER OF SHARES; CLOSING
2.1 Shares. Subject to the terms and conditions of this Agreement, at the
------
Closing, Seller will sell and transfer the Shares to Buyer, and Buyer will
purchase the Shares from Seller.
2.2 Purchase Price. The purchase price (the "Purchase Price") for the
--------------
Shares will be a fixed amount of $11,000,000 and a contingent amount (the
"Contingent Payment") of $6,000,000 for an aggregate amount of $17,000,000, plus
or minus the Adjustment Amount (it being acknowledged that the Adjustment Amount
may be a positive or negative number, resulting in an increase or a decrease in
the Purchase Price, respectively).
2.2.1 The $11,000,000 fixed amount portion of the Purchase Price shall
be paid by Buyer to Seller, plus $1,000,000 of the Contingent Payment shall be
advanced by Buyer to Seller, both to be paid as follows: (a) $400,000 has
already been paid prior to the date of this Agreement; (b) the remaining
$11,600,000 shall be paid on the Closing Date by wire transfer of funds by Buyer
to Seller's designated bank account, less any adjustments that may be expressly
provided for in this Agreement and any funds of Buyer advanced to Hearthstone
(as defined in Section 7.8 below) for the account of Seller pursuant to said
Section 7.8.
5
<PAGE>
2.2.2 $5,000,000 of the $6,000,000 Contingent Payment portion of the
Purchase Price shall be held back by Buyer at the Closing pursuant to the Hold
Back Provisions. The remaining $5,000,000 portion of the Contingent Payment
shall be paid to Seller by Buyer ten business days after Seller has obtained
final approvals on terms and conditions satisfactory to Buyer in Buyer's sole
and absolute discretion (and after successful resolution to Buyer's satisfaction
of any appeals of such approvals) of planned development rezoning, a planned
development permit, and a vesting tentative map for at least 82 lots (the "Final
Approvals") on that certain property in Santa Clara County identified in
Company's files as the Dow Drive property. Currently the closing date under the
Dow Drive purchase contract is December 15, 1997. If Buyer pays for extensions
to delay the close of escrow to obtain the Final Approvals, such extension
payments shall be deducted from the Contingent Payment at the time the
Contingent Payment is made by Buyer to Seller. If Final Approvals are obtained
for the Dow Drive property for less than 82 lots, the Contingent Payment shall
nevertheless be made by Buyer to Seller, but reduced by $73,170 per lot for each
lot less than 82 lots for which Final Approvals are obtained; provided however,
if Final Approvals are obtained for less than 74 lots, Buyer may by written
notice to Seller elect not to pay Seller any of the Contingent Payment, and if
Buyer so elects, Seller may within 15 days of receipt of such notice, elect to
take an assignment of any remaining rights of Buyer in the Dow Drive property by
reimbursing to Buyer all of Buyer's out-of-pocket costs incurred with respect to
such property. Buyer's obligation to make the Contingent Payment shall terminate
if the Final Approvals are not obtained on or before December 31, 1998, unless
Buyer elects to extend such date. Upon termination of such obligation, Seller
may within 15 days elect to take an assignment of any remaining rights of Buyer
in the Dow Drive property by reimbursing to Buyer all of Buyer's out-of-pocket
costs incurred with respect to such property. Seller shall have primary
responsibility, working with the Company's consultant, Gibson Speno, to obtain
the Final Approvals. After the Close of Escrow, Buyer and the Company shall
reasonably cooperate to obtain the Final Approvals and Buyer shall pay all costs
reasonably incurred in pursuing the Final Approvals.
2.3 Closing. The purchase and sale (the "Closing") provided for in this
-------
Agreement will take place at the offices of Buyer's counsel at 1676 N.
California Blvd., Suite 200, Walnut Creek, California, at 10:00 a.m. September
30, 1997, or at such other time and place as the parties may agree. Regardless
of the time that documents and monies are delivered, the Closing shall be
effective as of the close of business on September 30, 1997.
2.4 Closing Obligations.
-------------------
2.4.1 At the Closing Seller will deliver to Buyer:
(i) certificates representing the Shares, duly endorsed (or
accompanied by duly executed stock powers), for transfer to Buyer;
(ii) a noncompetition agreement in the form of Exhibit 2.4.1(ii),
executed by Seller (the "Noncompetition Agreement");
(iii) if this Agreement is executed on a date prior to the Closing
Date, a certificate executed by Seller representing and warranting to Buyer that
each of Seller's representations and warranties in this Agreement was accurate
in all respects as of the date of this Agreement and is accurate in all respects
as of the Closing Date as if made on the Closing Date (giving full effect to any
supplements to the Disclosure
6
<PAGE>
Schedule that were delivered by Seller to Buyer prior to the Closing Date in
accordance with Section 5.6);
(iv) resignations, effective as of the Closing Date, of all current
officers and directors of the Company; and
(v) such other documents as Buyer may reasonably request evidencing
performance of certain conditions to Closing set forth in this Agreement.
2.4.2 At the Closing Buyer will deliver to Seller:
(i) by wire transfer to accounts specified by Seller, the remaining
cash portion of the Purchase Price specified in Section 2.2.1; and
(ii) if this Agreement is executed on a date prior to the Closing
Date, a certificate executed by Buyer to the effect that, except as
otherwise stated in such certificate, each of Buyer's representations and
warranties in this Agreement was accurate in all respects as of the date of
this Agreement and is accurate in all respects as of the Closing Date as if
made on the Closing Date.
2.5 Adjustment Amount. The Adjustment Amount (which may be a positive or
-----------------
negative number) will be equal to (a) certain assets of the Company described in
Disclosure Schedule 2.5 attached hereto, determined as of the Closing Date in
accordance with GAAP, and including any prepaid deposits and the amounts paid to
secure options to purchase real property related to any of the Projects for
which the Company will have credits after the Closing Date, but excluding
furniture, leasehold improvements, office systems and other operating assets of
the Company, the compensation for which is included in the Purchase Price, minus
(b) (i) liabilities of the Company as of the Closing Date determined in
accordance with GAAP other than those chargeable to a specific Project, which
liabilities shall include any accrued but unpaid compensation and benefits of
employees of the Company, (ii) if aggregate funds in the Company's bank account
at the Closing received by the Company as distributions of income from the
Project known as Sundance I are less than $475,000, the amount of the shortfall
(if such funds exceed $475,000, Seller shall not receive any credit for the
amount in excess); (iii) liability of Company for Taxes on its business and
operations arising through and including the Closing Date (including without
limitation the foregoing, Taxes (if any) arising from the transactions described
in Sections 7.8 and 7.9); and (iv) such other adjustments as to which Buyer and
Seller may agree after Buyer's receipt of the Project Specific Demand
Statements. For purposes of this Section 2.5 and Section 2.6 below, "determined
in accordance with GAAP" shall be deemed to exclude any notes to financial
statements.
2.6 Adjustment Procedure. Company will prepare in accordance with GAAP,
--------------------
and Buyer may cause its certified public accountants to review, financial
statements ("Closing Financial Statements") of the Company as of the Closing
Date. Company will deliver the Closing Financial Statements to Seller within
sixty days after the Closing Date. If within thirty days following delivery of
the Closing Financial Statements, Seller has not given Buyer notice of its
objection to the Closing Financial Statements (such notice must contain a
statement of the basis of Seller's objection), then the assets and liabilities
reflected in the Closing Financial Statements will be used in computing the
Adjustment Amount. If Seller gives such notice of objection, then the issues in
dispute will be submitted to a mutually acceptable independent certified public
accounting firm (the "Accountants"), for resolution. If issues in dispute are
submitted to the Accountants for resolution, (i) each party will furnish to the
Accountants such workpapers and other documents and information relating to the
disputed issues as the
7
<PAGE>
Accountants may request and are available to that party or its Subsidiaries (or
its independent public accountants), and will be afforded the opportunity to
present to the Accountants any material relating to the determination and to
discuss the determination with the Accountants; (ii) the determination by the
Accountants, as set forth in a notice delivered to both parties by the
Accountants, will be binding and conclusive on the parties; and (iii) Buyer and
Seller will each bear 50% of the fees of the Accountants for such determination.
3. REPRESENTATIONS AND WARRANTIES OF SELLER
Seller makes to Buyer the representations and warranties set forth in this
Section 3, which representations and warranties are subject to the exceptions
specifically noted in the Disclosure Schedules provided by Company and Seller to
Buyer on or before the date of this Agreement and in any Supplemental Schedules
provided by Company and Seller to Buyer on or before the Closing Date, and by
this reference incorporated in and made a part of this Agreement. Within five
days after delivery of any Supplemental Schedule, but in no event later than
Closing, Buyer shall advise Seller of any objection to the revised information
set forth in the Supplemental Schedule. If Buyer so objects, and the parties
are unable to agree within five days after the objection upon a resolution of
the matter or Buyer does not withdraw its objection within said five day period,
either party may terminate the Agreement without liability to the other pursuant
to Section 11.5. If Buyer does not so object within that five day period, then
such Supplemental Schedules shall be deemed accepted.
3.1 Organization And Good Standing.
------------------------------
3.1.1 The Company is a corporation duly organized, validly existing,
and in good standing under the laws of the State of California, with full
corporate power and authority to conduct its business as it is now being
conducted, to own or use the properties and assets that it purports to own or
use, and to perform all its obligations under Company Contracts. The Company has
no subsidiaries and does not conduct business in any state other than
California.
3.1.2 Seller has delivered to Buyer copies of all Organizational
Documents of the Company.
3.2 Authority; No Conflict.
----------------------
3.2.1 This Agreement constitutes the legal, valid, and binding
obligation of Seller, enforceable against Seller in accordance with its terms.
Upon Seller's assignment and delivery of the Shares and execution and delivery
by Seller of the documents described in Section 2.4.1 (collectively, the
"Seller's Closing Documents"), the Seller's Closing Documents will constitute
the legal, valid, and binding obligations of Seller, enforceable against Seller
in accordance with their respective terms. Seller has the absolute and
unrestricted right, power, authority, and capacity to execute and deliver this
Agreement and the Seller's Closing Documents and to perform his obligations
under this Agreement and the Seller's Closing Documents.
3.2.2 Except as set forth in Disclosure Schedule 3.2.2, and except as
to appropriate consents or waivers which have been duly obtained, and as to
those which would not have a materially adverse affect on its business, assets,
properties, or condition (financial or otherwise), neither the execution and
delivery of this Agreement
8
<PAGE>
nor the consummation or performance of any of the Contemplated Transactions
will, directly or indirectly (with or without notice or lapse of time):
(i) contravene, conflict with, or result in a violation of (A) any
provision of the Organizational Documents of the Company, or (B) any resolution
adopted by the board of directors or the stockholders of the Company;
(ii) contravene, conflict with, or result in a violation of, or give
any Governmental Body or other Person the right to challenge any of the
Contemplated Transactions or to exercise any remedy or obtain any relief under,
any Legal Requirement or any order to which the Company or either Seller, or any
of the assets owned or used by the Company, may be subject;
(iii) contravene, conflict with, or result in a violation of any of
the terms or requirements of, or give any Governmental Body the right to revoke,
withdraw, suspend, cancel, terminate, or modify, any Governmental Authorization
that is held by the Company or that otherwise relates to the business of, or any
of the assets owned or used by, the Company;
(iv) contravene, conflict with, or result in a violation or breach of
any provision of, or give any Person the right to declare a default or exercise
any remedy under, or to accelerate the maturity or performance of, or to cancel,
terminate, or modify, any Company Contract; or
(v) result in the imposition or creation of any encumbrance upon or
with respect to any of the assets owned or used by the Company.
Except as set forth in Disclosure Schedule 3.2.2, neither Seller nor the
Company is or will be required to give any notice to or obtain any Consent from
any Person in connection with the execution and delivery of this Agreement or
the consummation or performance of any of the Contemplated Transactions.
3.3 Capitalization. The authorized equity securities of the Company
--------------
consist of 1,000,000 shares of common stock, of which 1,125 shares are issued
and outstanding and constitute the Shares. Seller is and will be on the Closing
Date the sole record and beneficial owner and holder of the Shares, free and
clear of all encumbrances. No legend or other reference to any purported
encumbrance appears upon any certificate representing equity securities of the
Company. All of the outstanding equity securities of the Company have been duly
authorized and validly issued and are fully paid and nonassessable. There are no
Contracts relating to the issuance, sale, or transfer of any equity securities
or other securities of the Company. None of the outstanding equity securities or
other securities of the Company was issued in violation of the Securities Act of
1933, The California Corporate Securities Law of 1968, or any other Legal
Requirement. Except as set forth in Disclosure Schedule 3.3, the Company does
not own, and does not have any Contract to acquire, any equity securities or
other securities of any Person or any direct or indirect equity or ownership
interest in any other business.
3.4 Financial Statements. Seller has delivered to Buyer: (a) an internally
--------------------
prepared balance sheet for the Company as of June 30, 1997 (the "Balance Sheet")
and the related internally prepared statement of income for the six month period
then ended, and (b) working trial balances of the Company as of December 31,
1996 and for the four years for the periods then ended. Company did not prepare
financial statements for the corresponding periods. Such balance sheet and
working trial balances as were delivered to Buyer present the financial
condition and the results of
9
<PAGE>
operations of the Company on the respective dates of and for the periods
referred to therein, all in accordance with the accounting practices and methods
previously applied by Company, subject, in the case of the interim balance
sheet, to normal recurring year-end adjustments (the effect of which will not,
individually or in the aggregate, be materially adverse); the balance sheet and
working trial balances referred to in this Section 3.4 reflect the consistent
application of such accounting practices throughout the periods involved.
3.5 Books And Records. The books of account, minute books, stock record
-----------------
books, and other records of the Company, all of which have been made available
to Buyer, are complete and correct. The minute books of the Company contain
accurate and complete records of all meetings held of, and corporate action
taken by, the stockholders and the Boards of Directors of the Company, and no
meeting of any such stockholders or Board of Directors has been held for which
minutes have not been prepared and are not contained in such minute books. At
the Closing, all of those books and records will be in the possession of the
Company.
3.6 Title to Properties; Encumbrances. Disclosure Schedule 3.6 contains a
---------------------------------
complete and accurate list of all real property, leaseholds, or other interests
therein (including, without limitation, options to purchase and executory
contracts to purchase real property) owned by the Company. Seller has delivered
or made available to Buyer copies of the deeds and other instruments (as
recorded) by which the Company acquired such real property and interests, and
copies of all title insurance policies, opinions, abstracts, and surveys in the
possession of Seller or the Company and relating to such property or interests.
The Company owns (with good and marketable title in the case of real property,
subject only to the matters permitted by the following sentence) all the
properties and assets (whether real, personal, or mixed and whether tangible or
intangible) that it purports to own, including all of the properties and assets
reflected in the Balance Sheet, except property subsequently sold in the
Ordinary Course of Business, and all of the properties and assets purchased or
otherwise acquired by the Company since the date of the Balance Sheet (except
for property acquired and sold since the date of the Balance Sheet in the
Ordinary Course of Business and consistent with past practice), which
subsequently purchased or acquired properties and assets (other than inventory
and short-term investments) are listed in Disclosure Schedule 3.6.
All material properties and assets reflected in the Balance Sheet are free
and clear of all encumbrances and are not, in the case of real property, subject
to any rights of way, building use restrictions, exceptions, variances,
reservations, or limitations of any nature except, with respect to all such
properties and assets, (a) security interests pertaining to Company's phone and
computer systems, with respect to which no default (or event that, with notice
or lapse of time or both, would constitute a default) exists, (b) liens for
current taxes not yet due, and (c) with respect to real property, (i) minor
imperfections of title, if any, none of which is substantial in amount,
materially detracts from the value or impairs the use of the property subject
thereto, or impairs the operations of the Company, and (ii) zoning laws and
other land use restrictions that do not impair the present or anticipated use of
the property subject thereto. All buildings and structures owned by the Company
lie wholly within the boundaries of the real property owned by the Company and
do not encroach upon the property of, or otherwise conflict with the property
rights of, any other Person.
3.7 Representation Regarding Projects.
---------------------------------
10
<PAGE>
3.7.1 The Company has not developed, constructed or otherwise
participated in any real estate projects other than the projects identified in
the attached Disclosure Schedule 3.7.1 (the "Projects").
3.7.2 All work performed by the Company or by subcontractors on
Company's behalf on or in any of the properties involved in the Projects has
been or shall be performed in substantial accordance with the plans and
specifications approved by all Governmental Bodies, in compliance with all
applicable laws, ordinances, and regulations, and in a good and workmanlike
manner, free from any defect or lien. All improvements on any of such properties
comply in all material respects with all applicable requirements of Governmental
Bodies, and all laws, rules and regulations and building codes in effect as of
each Closing Date.
3.7.3 The Entitlements, and any agreements (for example, and not in
limitation, subdivision improvement agreements) executed in connection
therewith, are in full force and effect and no party thereto is in default
thereunder. Neither the fee owner of any property involved in any of the
Projects (if not the Company) nor Company are in default under, and neither
Company nor Seller has received any notice that any event has occurred which
with the giving of notice or the passage of time, or both, would constitute a
default under any Entitlements, contract, transaction, agreement, covenant,
condition, restriction, lease, easement, encumbrance or instrument pertaining to
the property involved in any Project. All subdivision improvement bonds and
other sureties or assurances relating in any way to any such property and
required by any applicable Governmental Body or pursuant to any Entitlements
have been posted and are being maintained in accordance with the requirements of
such applicable Governmental Bodies and/or Entitlements and no claim has been
made thereunder or thereto.
3.7.4 There is no suit, action or arbitration, or legal,
administrative, or other proceeding or governmental investigation, formal or
informal, including but not limited to eminent domain or condemnation
proceeding, proceeding to establish a new assessment district or increase the
assessments imposed by an existing assessment district, or zoning change
proceeding, pending or threatened in writing, or any judgment, moratorium or
other government policy or practice which affects any of the properties involved
in the Projects or Buyer's anticipated development of any of such properties.
3.7.5 Seller and Company (or to Company and Seller's Knowledge, the fee
owner, if Company is not the fee owner) have made no oral or, except for the
Entitlements, written commitments or representations to, or understandings or
agreements with, any person, firm or entity, any adjoining property owner or any
Governmental Body which would in any way be binding on Buyer or would interfere
with Buyer's ability to develop and improve any of the properties involved in
the Projects with residential developments in accordance with the Entitlements,
and neither Company, the fee owner, nor Seller shall make or enter into any such
commitment, representations, understandings or agreements without Buyer's
written consent.
3.7.6 To the Knowledge of Company and Seller, there are no liens
(including without limitation, mechanics liens), claims, encumbrances,
easements, covenants, conditions, restrictions or other matters of record
affecting title to any of the properties involved in the Projects which are not
disclosed in any PTR previously delivered by Company to Buyer, and except as
disclosed in any such PTR, there are no special assessments (whether from an
assessment district, facilities district, or otherwise) against any such
property nor has Company received any written notice of
11
<PAGE>
any special assessments being contemplated. Seller and Company are not aware of
any other assessment districts or areas which are being formed or contemplated.
3.7.7 Except as set forth in Disclosure Schedule 3.7.7, to the
Knowledge of Company and Seller, there are no endangered species or protected
natural habitat, flora or fauna located on any of the properties involved in the
Projects, nor are there any areas of such property that are or could be
designated as wetlands.
3.7.8 Neither Company nor Seller has received any notice from any of
Company's insurance carriers of any defects or inadequacies in any of the
properties involved in the Projects, or any portion thereof, which would
adversely affect the insurability of any such properties or the cost of any such
issuance. There are no pending insurance claims with respect to any portion of
any such properties.
3.7.9 Neither Seller nor Company has any knowledge of any soils
conditions that would require construction of foundations different than those
customarily built by the Company in its residential projects, nor any seismic
safety problems relating to any of the properties involved in the Projects, any
recent seismic activity affecting any such properties or any active fault
bisecting, underlying or adjacent to any such properties.
3.8 Brokers Or Finders. Neither Seller, nor the Company, or any of
------------------
their agents have incurred any obligation or liability, contingent or otherwise,
for brokerage or finders' fees or agents' commissions or other similar payment
in connection with this Agreement or the Contemplated Transactions. The only
broker or finder with whom Seller or Company have dealt with in respect to this
Agreement or the Contemplated Transactions is Mike Cady, with whom Seller
represents and warrants it has no agreement or arrangement, it being confirmed
by Seller that Mr. Cady has acted solely on behalf of Buyer.
3.9 No Undisclosed Liabilities. The Company has no liabilities or
---------------------------
obligations of any nature (whether known or unknown and whether absolute,
accrued, contingent, or otherwise) except for liabilities or obligations fully
reflected or reserved against in the Balance Sheet and current liabilities
incurred in the Ordinary Course of Business since the respective dates thereof.
3.10 Taxes.
-----
3.10.1 The Company has filed or caused to be filed all tax returns that
are or were required to be filed by it, pursuant to applicable Legal
Requirements. Seller has delivered to Buyer copies of all such tax returns for
periods after 1992. The Company has paid, or made provision for the payment of,
all Taxes that have or may have become due pursuant to those tax returns or
otherwise, or pursuant to any assessment received by Seller or the Company.
3.10.2 Company's tax returns have never been audited. Neither Seller
nor Company has given or been requested to give waivers or extensions (or is or
would be subject to a waiver or extension given by any other Person) of any
statute of limitations relating to the payment of Taxes of the Company or for
which the Company may be liable.
3.10.3 The charges, accruals (determined in accordance with GAAP), and
reserves with respect to Taxes on the books of the Company, and for which
reserves are now or will be funded in the Company's bank account on the Closing
Date, are
12
<PAGE>
adequate in accordance with GAAP and are at least equal to the Company's
liability for Taxes for all activities of the Company (including the Company's
participation in the Hearthstone and Olympic Projects described in Sections 7.8
and 7.9, and any other Hearthstone and Olympic projects in which the Company has
participated) through and including the Closing Date, including without limiting
the foregoing, Taxes, if any, arising from the Hearthstone and Olympic
transactions described in Sections 7.8 and 7.9. There are no proposed Tax
assessments against the Company except as disclosed in the Balance Sheet. All
Taxes that the Company is or was required by Legal Requirements to withhold or
collect have been duly withheld or collected and, to the extent required, have
been paid to the proper Governmental Body or other Person.
3.10.4 All tax returns filed by the Company are true, correct, and
complete. There is no tax sharing agreement that will require any payment by the
Company after the date of this Agreement.
3.11 No Material Adverse Change. Since the date of the Balance Sheet,
--------------------------
there has not been any material adverse change in the business, operations,
properties, prospects, assets, or condition of the Company, and no event has
occurred or circumstance exists that may result in such a material adverse
change.
3.12 Employee Benefits. Disclosure Schedule 3.12 contains a list of all
-----------------
pension, bonus, profit-sharing, stock option, or other agreements or
arrangements providing for employee remuneration or benefits to which Company is
a party or by which Company is bound. All these contracts and arrangements are
in full force and effect, are fully funded and/or adequate reserves have been
established for same, and neither Company nor any other party is in default
under them. There have been no claims of defaults and, to the best knowledge of
Seller, there are no facts or conditions that if continued, or on notice, will
result in a default under these contracts or arrangements. Company has complied
with all applicable laws for its employee benefit plans, including the
provisions of ERISA if and to the extent applicable. There are no threatened or
pending claims by or on behalf of any such benefit plan, by or on behalf of any
employee covered under any such plan, or otherwise involving any such benefit
plan, that allege a breach of fiduciary duties or violation of other applicable
state or federal law, nor is there any basis for such a claim. Except as set
forth in Disclosure Schedule 3.12, the Company has not entered into any
severance or similar arrangement in respect of any present or former employee
that will result in any obligation, absolute or contingent, of the Company, to
make any payment to any present or former employee following termination of
employment. The Company has established adequate reserves for all accrued
vacation, sick leave and similar benefits of its employees.
3.13 Compliance With Legal Requirements; Governmental Authorizations.
---------------------------------------------------------------
3.13.1 Except as set forth in Disclosure Schedule 3.13.1:
(i) the Company is in full compliance with each Legal Requirement and
Governmental Authorization that is applicable to it or to the conduct or
operation of its business or the ownership or use of any of its assets, and
has no liability as to any prior failure to be in compliance with each
Legal Requirement and Governmental Authorization then applicable to it or
to the conduct or operation of its business or the ownership or use of any
of its assets;
(ii) no event has occurred or circumstance exists that (with or
without notice or lapse of time) (A) may constitute or result in a
violation by the
13
<PAGE>
Company of, or a failure on the part of the Company to comply with, any
Legal Requirement, or (B) may give rise to any obligation on the part of
the Company to undertake, or to bear all or any portion of the cost of, any
remedial action of any nature;
(iii) the Company has not received any notice or other communication
(whether oral or written) from any Governmental Body or any other Person
regarding (A) any actual, alleged, possible, or potential violation of, or
failure to comply with, any Legal Requirement, or (B) any actual, alleged,
possible, or potential obligation on the part of the Company to undertake, or to
bear all or any portion of the cost of, any remedial action of any nature;
(iv) Disclosure Schedule 3.13.1 contains a complete and accurate
list of each Governmental Authorization that is held by the Company or that
otherwise relates to the business of, or to any of the assets owned or used
by, the Company, each of which is valid and in full force and effect.
Except as set forth in Disclosure Schedule 3.13.1; and
(v) The Governmental Authorizations listed in Disclosure Schedule
3.13.1 collectively constitute all of the Governmental Authorizations
necessary to permit the Company to lawfully conduct and operate its
businesses on and prior to the Closing Date in the manner it has conducted
and operated such businesses and to permit the Company to own and use its
assets in the manner in which it has owned and used such assets.
3.14 Legal Proceedings; Orders
-------------------------
3.14.1 Except as set forth in Disclosure Schedule 3.14.1, Neither
Seller nor Company has knowledge of any pending or threatened Proceeding:
(i) that has been commenced by or against the Company or that
otherwise relates to or may affect the business of, or any of the assets
owned or used by, the Company; or
(ii) that challenges, or that may have the effect of preventing,
delaying, making illegal, or otherwise interfering with, any of the
Contemplated Transactions.
Seller has delivered to Buyer copies of all pleadings, correspondence, and
other documents relating to each Proceeding listed in Disclosure Schedule
3.14.1. The Proceedings listed in said Disclosure Schedule will not have a
material adverse effect on the business, operations, assets, condition, or
prospects of the Company.
3.14.2 Neither Seller nor Company has knowledge of:
(i) any Order to which the Company, or any of the assets owned or
used by the Company, is subject;
(ii) any Order that relates to the business of, or any of the assets
owned or used by, the Company; and
(iii) any Order that prohibits any Company officer, director, agent,
or employee from engaging in or continuing any conduct, activity, or
practice relating to the business of the Company.
14
<PAGE>
3.14.3 (i) the Company is, and at all times has been, in full
compliance with all of the terms and requirements of each Order to which it, or
any of the assets owned or used by it, is or has been subject;
(ii) no event has occurred or circumstance exists that may
constitute or result in (with or without notice or lapse of time) a violation of
or failure to comply with any term or requirement of any Order to which the
Company, or any of the assets owned or used by the Company, is subject; and
(iii) the Company has not received any written notice or other
written communication from any Governmental Body or any other Person regarding
any actual, alleged, possible, or potential violation of, or failure to comply
with, any term or requirement of any Order to which the Company, or any of the
assets owned or used by the Company, is or has been subject.
3.15 Absence Of Certain Changes And Events. Since the earlier of August 1,
-------------------------------------
1997 and the date of the Balance Sheet, the Company has conducted its business
only in the Ordinary Course of Business and there has not been any:
(a) change in the Company's authorized or issued capital stock; grant of
any stock option or right to purchase shares of capital stock of the Company;
issuance of any security convertible into such capital stock; grant of any
registration rights; purchase, redemption, retirement, or other acquisition by
the Company of any shares of any such capital stock; or declaration or payment
of any dividend or other distribution or payment in respect of shares of capital
stock;
(b) amendment to the Organizational Documents of the Company;
(c) payment or increase by the Company of any bonuses, salaries, or
other compensation to any stockholder, director, officer, or employee or entry
into any employment, severance, or similar Contract with any director, officer,
or employee;
(d) adoption of, or increase in the payments to or benefits under, any
profit sharing, bonus, deferred compensation, savings, insurance, pension,
retirement, or other employee benefit plan for or with any employees of the
Company;
(e) damage to or destruction or loss of any asset or property of the
Company, whether or not covered by insurance, materially and adversely
affecting the properties, assets, business, financial condition, or
prospects of the Company, taken as a whole;
(f) entry into, termination of, or receipt of notice of termination of
any Contract or transaction involving a total remaining commitment by or to
the Company of at least $5,000 (other than entry into contracts with Buyer
and others pertaining to the Contemplated Transactions, and entry into and
completion of construction and development subcontracts in the Ordinary
Course of Business;
(g) sale (other than sales of inventory in the Ordinary Course of
Business), lease, or other disposition of any asset or property of the
Company or mortgage, pledge, or imposition of any lien or other encumbrance
on any material asset or property of the Company, including the sale,
lease, or other disposition of any of the Intellectual Property;
15
<PAGE>
(h) cancellation or waiver of any claims or rights with a value to the
Company in excess of $5,000;
(i) material change in the accounting methods used by the Company; or
(j) agreement, whether oral or written, by the Company to do any of the
foregoing.
3.16 Contracts; No Defaults.
----------------------
3.16.1 Disclosure Schedule 3.16.1 contains a complete and accurate
list, and Seller has made available for inspection by Buyer true and complete
copies, of:
(i) each Company Contract that involves performance of services or
delivery of goods or materials by the Company of an amount or value in excess of
$5,000;
(ii) each Company Contract that involves performance of services or
delivery of goods or materials to the Company, including contracts with
subcontractors, materialmen, or suppliers of equipment or material, of an amount
or value in excess of $5,000;
(iii) each Company Contract that was not entered into in the
Ordinary Course of Business and that involves expenditures or receipts of the
Company in excess of $5,000;
(iv) each lease, rental or occupancy agreement, license,
installment and conditional sale agreement, option agreement, purchase agreement
and any other Company Contract affecting the ownership of, leasing of, title to,
use of, or any leasehold or other interest in, any real or personal property
(except personal property leases and installment and conditional sales
agreements having a value per item or aggregate payments of less than $5,000 and
with terms of less than one year);
(v) each licensing agreement or other Company Contract with
respect to patents, trademarks, copyrights, or other intellectual property,
including agreements with current or former employees, consultants, or
contractors regarding the appropriation or the non-disclosure of any of the
Intellectual Property;
(vi) each collective bargaining agreement and other Company
Contract to or with any labor union or other employee representative of a group
of employees;
(vii) each joint venture, partnership, and other Company Contract
(however named) involving a sharing of profits, losses, costs, or liabilities by
the Company with any other Person;
(viii) each Company Contract containing covenants that in any way
purport to restrict the business activity of the Company or any Affiliate of the
Company or limit the freedom of the Company or any Affiliate of the Company to
engage in any line of business or to compete with any Person;
(ix) each Company Contract providing for payments to or by any
Person based on sales, purchases, or profits, other than direct payments for
goods;
16
<PAGE>
(x) each power of attorney that is currently effective and
outstanding;
(xi) each Company Contract for capital expenditures in excess of
$5,000;
(xii) each written warranty, guaranty, and or other similar
undertaking with respect to contractual performance extended by the Company; and
(xiii) each amendment, supplement, and modification (whether oral or
written) in respect of any of the foregoing.
3.16.2 (i) Seller (and no Affiliate of Seller) does not have and will
not acquire any rights under, and Seller does not have and will not become
subject to any obligation or liability under, any Contract that relates to the
business of, or any of the assets owned or used by, the Company; and
(ii) no officer, director, agent, employee, consultant, or
contractor of the Company is bound by any Contract that purports to limit the
ability of such officer, director, agent, employee, consultant, or contractor to
engage in or continue any conduct, activity, or practice relating to the
business of the Company.
3.16.3 Each Contract identified or required to be identified in said
Disclosure Schedule is in full force and effect and is valid and enforceable in
accordance with its terms, subject only to laws of general application relating
to bankruptcy, insolvency, reorganization, moratorium, and other relief of
debtors generally.
3.16.4 (i) the Company is, and at all times has been, in full
compliance with all material terms and requirements of each Company Contract;
(ii) each other Person that has or had any obligation or
liability under any Contract under which the Company has or had any rights is,
and at all times has been, in full compliance with all material terms and
requirements of such Contract;
(iii) no event has occurred or circumstance exists that (with or
without notice or lapse of time) may contravene, conflict with, or result in a
violation or breach of, or give the Company or other Person the right to declare
a default or exercise any remedy under, or to accelerate the maturity or
performance of, or to cancel, terminate, or modify, any Applicable Contract; and
(iv) the Company has not given to or received from any other
Person, at any time since January 1, 1995, any written notice or other written
communication regarding any actual, alleged, possible, or potential violation or
breach of, or default under, any Company Contract.
3.16.5 There are no renegotiations of, attempts to renegotiate, or
outstanding rights to renegotiate any material amounts paid or payable to the
Company under current or completed Contracts with any Person and no such Person
has made written demand for such renegotiation.
3.16.6 The Contracts relating to the sale, design, manufacture, or
provision of products or services by the Company have been entered into in the
Ordinary Course of Business and have been entered into without the commission of
any act alone or in concert with any other Person, or any consideration having
been paid or promised, that is or would be in violation of any Legal
Requirement.
17
<PAGE>
3.17 Insurance.
---------
3.17.1 Seller has delivered to Buyer:
(i) true and complete copies of all policies of insurance to which
the Company is a party or under which the Company, or any director of the
Company, is or has been covered at any time; and
(ii) true and complete copies of all pending applications for
policies of insurance.
3.17.2 Except as set forth in Disclosure Schedule 3.17.2, the Company
has none of the following arrangements or obligations:
(i) any self-insurance arrangement by or affecting the Company,
including any reserves established thereunder;
(ii) any contract or arrangement, other than a policy of insurance,
for the transfer or sharing of any risk by the Company; and
(iii) any obligations of the Company to third parties with respect to
insurance.
3.17.3 The Company has not submitted a claim under any insurance policy
for an amount in excess of $5,000, other than the Safeco automobile claim dated
February 17, 1997.
3.17.4 (i) The Company has made available for inspection by Buyer, all
policies to which the Company is a party or that provide coverage to Seller, the
Company, or any director or officer of the Company. Such policies (A) are valid,
outstanding, and enforceable; and (B) taken together, provide adequate insurance
coverage for the assets and the operations of the Company for all risks normally
insured against by a Person carrying on the same business or businesses as the
Company.
(ii) Neither Seller nor Company has received (A) any refusal of
coverage or any notice that a defense will be afforded with reservation of
rights, or (B) any notice of cancellation or any other indication that any
insurance policy is no longer in full force or effect or will not be renewed or
that the issuer of any policy is not willing or able to perform its obligations
thereunder.
(iii) The Company has paid all premiums due, and has otherwise
performed all of its obligations, under each policy to which the Company is a
party or that provides coverage to the Company or any director thereof.
(iv) The Company has given notice to the insurer of all claims
that may be insured thereby.
(v) Neither Seller nor Company have Knowledge that Company has
ever been rejected or denied for insurance for which is has applied, nor
withdrawn an application in anticipation of being rejected or denied.
3.18 Environmental Matters. Except as set forth in the reports listed in
---------------------
Disclosure Schedule 3.18:
18
<PAGE>
3.18.1 The operations and activities of the Company are, and at all
times have been, in full compliance with and not in violation of, any
Environmental Law. Neither Seller nor Company has received any communication
regarding Hazardous Materials, any actual or threatened written order, notice,
or other communication of any actual or potential violation or failure to comply
with any Environmental Law, or of any actual or threatened obligation to
undertake or bear the cost of any Environmental, Health, and Safety Liabilities,
with respect to the operations of the Company or any of the Projects or any
other properties or assets (whether real, personal, or mixed) in which Seller or
the Company has or has had an interest.
3.18.2 Seller has delivered to Buyer true and complete copies and
results of any reports, studies, analyses, tests, or monitoring possessed or
initiated by Seller or the Company pertaining to Hazardous Materials in, on, or
under the Projects or any other properties in which Seller or the Company has or
had an interest including any of the properties involved in the Projects, or
concerning compliance by Seller, the Company, or any other Person for whose
conduct they are or may be held responsible, with Environmental Laws.
3.19 Employees.
---------
3.19.1 Disclosure Schedule 3.19.1 contains a complete and accurate list
of the following information for each employee and director of the Company,
including each employee on leave of absence or layoff status: name; job title;
current compensation paid or payable and any change in compensation since
January 1, 1997; vacation accrued; and service credited for purposes of vesting
and eligibility to participate under the Company's pension, retirement, profit-
sharing, thrift-savings, deferred compensation, stock bonus, stock option, cash
bonus, employee stock ownership (including investment credit or payroll stock
ownership), severance pay, insurance, medical, welfare, or vacation plan, other
employee pension benefit plan or employee welfare benefit plan, or any other
employee benefit plan. No employee has asserted, and no employee is entitled to,
any compensation not described in Disclosure Schedule 3.19.1. All payments to
employees have been properly accounted for and properly reported for Tax
purposes, and the Company has properly reported, paid and/or withheld, as the
case may be, for all payroll taxes, unemployment taxes and other taxes and/or
governmental obligations pertaining to its employees and to other persons who
have provided services to the Company.
3.19.2 No employee of the Company is a party to, or is otherwise bound
by, any agreement or arrangement, including any confidentiality, noncompetition,
or proprietary rights agreement, between such employee and any other Person
("Proprietary Rights Agreement") that in any way adversely affects or will
affect (i) the performance of his duties as an employee or director of the
Company, or (ii) the ability of the Company to conduct its business. To Seller's
Knowledge, other than Seller, no officer or other key employee of the Company
intends to terminate his employment with the Company.
3.20 Labor Relations; Compliance. The Company is not and has never been a
---------------------------
party to any collective bargaining or other labor Contract. There has not been,
there is not presently pending or existing, and there is not threatened, (a) any
strike, slowdown, picketing, work stoppage, or employee grievance process, (b)
any Proceeding against or affecting the Company relating to the alleged
violation of any Legal Requirement pertaining to labor relations or employment
matters, or (c) any application for certification of a collective bargaining
agent. No event has occurred or circumstance exists that could provide the basis
for any work stoppage or other labor dispute. The
19
<PAGE>
Company has complied in all material respects with all Legal Requirements
relating to employment, equal employment opportunity, nondiscrimination,
immigration, wages, hours, benefits, collective bargaining, the payment of
social security and similar taxes, occupational safety and health, and plant
closing. The Company is not liable for the payment of any compensation, damages,
taxes, fines, penalties, or other amounts, however designated, for failure to
comply with any of the foregoing Legal Requirements.
3.21 Intellectual Property.
---------------------
3.21.1 Intellectual Property Defined--The term "Intellectual Property"
-----------------------------
includes all patents, patent applications, copyrights, trademarks, service
marks, trade names, trade secrets, proprietary information, technology rights
and licenses, architectural plans, proprietary rights and processes, customer
lists, know-how, research and development in progress, any and all other
intellectual property that pertains to or are used by Company, or that are
relevant to an understanding or to the development of the Company's business or
to the performance by the products of the Company's business of their intended
functions or purposes, whether tangible or intangible, in any stage of
development.
3.21.2 Rights to Intellectual Property. Company owns a valid right or
-------------------------------
license to use the Intellectual Property being used or held for use to conduct
the Company's business, and the conduct of the Company's business currently and
in the past does not conflict with and has not conflicted with valid
intellectual property rights of others. No proceedings have been instituted or,
to the knowledge of Seller, threatened, nor has any claim been made against
Company alleging any such infringement or violation. For the Intellectual
Property which Company uses, but does not own, Company is licensed to use such
Intellectual Property, is not in breach of, or default under, such license
agreements, and such license agreements include only software programs less than
$1,000 in retail price.
3.22 Certain Payments.
----------------
3.22.1 Neither the Company nor any director, officer, agent, or
employee of the Company, or to Seller's Knowledge any other Person associated
with or acting for or on behalf of the Company, has directly or indirectly (a)
made any contribution, gift, bribe, rebate, payoff, influence payment, kickback,
or other payment to any Person, private or public, regardless of form, whether
in money, property, or services (i) to obtain favorable treatment in securing
business, (ii) to pay for favorable treatment for business secured, (iii) to
obtain special concessions or for special concessions already obtained, for or
in respect of the Company or any Affiliate of the Company, or (iv) in violation
of any Legal Requirement, (b) established or maintained any fund or asset that
has not been recorded in the books and records of the Company.
3.22.2 At the Closing Date, (i) all indebtedness owed to the Company by
Seller or any Affiliate of Seller shall have been paid in full, and (ii) all
indebtedness and other obligations of the Company to any Affiliate of Seller
shall have been paid in full or otherwise fully satisfied.
3.23 Disclosure.
----------
20
<PAGE>
3.23.1 No representation or warranty of Seller in this Agreement and no
statement in the Disclosure Schedule omits to state a material fact necessary to
make the statements herein or therein, in light of the circumstances in which
they were made, not misleading.
3.23.2 No notice given pursuant to Section 5.6 will contain any untrue
statement or omit to state a material fact necessary to make the statements
therein or in this Agreement, in light of the circumstances in which they were
made, not misleading.
4. REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller as follows:
4.1 Organization And Good Standing. Buyer is a corporation duly organized,
------------------------------
validly existing, and in good standing under the laws of the State of Delaware.
4.2 Authority; No Conflict.
----------------------
4.2.1 This Agreement constitutes the legal, valid, and binding
obligation of Buyer, enforceable against Buyer in accordance with its terms.
Buyer has the absolute and unrestricted right, power, and authority to execute
and deliver this Agreement and to perform its obligations under this Agreement.
4.2.2 Neither the execution and delivery of this Agreement nor the
consummation or performance of any of the Contemplated Transactions will give
any Person the right to prevent, delay, or otherwise interfere with any of the
Contemplated Transactions pursuant to: (i) any provision of Buyer's
Organizational Documents; (ii) any resolution adopted by the board of directors
or the stockholders of Buyer; (iii) any Legal Requirement or order to which
Buyer may be subject; or (iv) any Contract to which Buyer is a party or by which
Buyer may be bound, other than pursuant to bank credit agreements, which consent
has been obtained. Buyer is not and will not be required to obtain any Consent
from any Person in connection with the execution and delivery of this Agreement
or the consummation or performance of any of the Contemplated Transactions.
4.3 Investment Intent. Buyer is acquiring the Shares for its own account
-----------------
and not with a view to their distribution within the meaning of Section 2(11) of
the Securities Act of 1933.
4.4 Certain Proceedings. There is no pending Proceeding that has been
-------------------
commenced against Buyer and that challenges, or may have the effect of
preventing, delaying, making illegal, or otherwise interfering with, any of the
Contemplated Transactions. To Buyer's Knowledge, no such Proceeding has been
threatened.
4.5 Brokers Or Finders. Except for a separate agreement with Mike Cady,
------------------
Buyer and its officers and agents have incurred no obligation or liability,
contingent or otherwise, for brokerage or finders' fees or agents' commissions
or other similar payment in connection with this Agreement and Buyer will
indemnify and hold Seller harmless from any such payment alleged to be due Mr.
Cady or any other person by or through Buyer as a result of the actions of
Buyer, its officers or agents.
21
<PAGE>
5. COVENANTS OF COMPANY AND SELLER PRIOR TO CLOSING DATE
5.1 Feasibility Study. Prior to execution of this Agreement by the
-----------------
parties, Company provided Buyer with complete copies of all studies, reports,
agreements, documents, plans, maps, permits and Entitlements in Company's
possession or control concerning each of the Projects and their improvement,
development and construction, and Company instructed its engineers, architects,
surveyors, marketing consultants and other advisors and consultants to share any
information or knowledge they have concerning each of the Projects with Buyer.
Buyer had until 5:00 p.m. on the Feasibility Date (the "Feasibility Period") to
investigate and review, in Buyer's sole and absolute discretion, the condition
and suitability of each of the Projects for Buyer' s use and development, to
obtain approval of this Agreement by Buyer's board of directors, and to deliver
to Seller a notice of approval or, alternatively, written notice of Buyer's
disapproval. Buyer's execution of this Agreement constitutes notice to Seller of
Buyer's approval. Buyer's review and investigation of the Projects shall not in
any way preclude Buyer from relying on the representations and warranties made
by Seller in this Agreement.
5.2 Access And Investigation. Seller has previously, and between the date
------------------------
of this Agreement and the Closing Date, Seller will, and will cause the Company
and its Representatives to, (a) afford Buyer and its Representatives and
prospective lenders and their Representatives (collectively, "Buyer's Advisors")
full and free access to the Company's personnel, properties, contracts, books
and records, and other documents and data, (b) furnish Buyer and Buyer's
Advisors with copies of all such contracts, books and records, and other
existing documents and data as Buyer may reasonably request, and (c) furnish
Buyer and Buyer's Advisors with such additional financial, operating, and other
data and information as Buyer may reasonably request. Seller further grants to
Buyer and Buyer's agents, employees and consultants a nonexclusive license to
enter upon each of the properties involved in each of the Projects for the
purpose of allowing Buyer to conduct whatever soil and engineering tests,
feasibility studies, surveys and other physical examinations of such properties
Buyer deems appropriate (the reported results of which shall provided to both
parties). Buyer shall indemnify, defend and hold Seller free and harmless from
all loss or liability (including, without limitation, attorneys' fees) arising
solely and directly from such activities of Buyer and its agents and employees
upon such properties during the Feasibility Period, and from all mechanic's,
materialmen's and other liens resulting solely and directly from any such
conduct of Buyer and its agents and employees; provided, however, that Buyer
shall have no liability for any loss or damage attributable to the acts or
omissions of Seller or Company or their agents, employees, invitees or licensees
or resulting from latent defects or Hazardous Substances (as herein defined)
within, on or adjacent to any of such properties. In the event that the
Contemplated Transactions are not completed, Buyer agrees to return to Seller or
destroy (at Seller's request) all copies of contracts, books, documents, data
and records, and any notes or other written or electronically recorded materials
prepared by Buyer, pertaining to the Company, its projects, and assets and not
to use or disclose to others any information contained therein.
5.3 Operation Of The Businesses of the Company. Between August 1, 1997
------------------------------------------
through the date of this Agreement and until the Closing Date, Seller and the
Company have, and Seller will, and will cause the Company to:
5.3.1 conduct the business of the Company only in the Ordinary Course
of Business;
22
<PAGE>
5.3.2 use his Best Efforts to preserve intact the current business
organization of the Company, keep available the services of the current
officers, employees, and agents of the Company, and maintain the relations and
good will with suppliers, customers, landlords, creditors, employees, agents,
and others having business relationships with the Company;
5.3.3 confer with Buyer concerning operational matters of a material
nature; and
5.3.4 otherwise report periodically to Buyer concerning the status of
the business, operations, and finances of the Company.
5.4 Negative Covenant. Except as otherwise expressly permitted by this
-----------------
Agreement, between the date of this Agreement and the Closing Date, Seller will
not, and will cause the Company not to, without the prior consent of Buyer, take
any affirmative action, or fail to take any reasonable action within his or its
control, as a result of which any of the changes or events listed in Section
3.15 is likely to occur.
5.5 Required Approvals. On or before the Closing Date, Seller will, and
------------------
will cause the Company to, make all filings required by Legal Requirements to be
made by them in order to consummate the Contemplated Transactions. Between the
date of this Agreement and the Closing Date, Seller will, and will cause the
Company to, (a) cooperate with Buyer with respect to all filings that Buyer
elects to make or is required by Legal Requirements to make in connection with
the Contemplated Transactions.
5.6 Notification. Between the date of this Agreement and the Closing Date,
------------
Seller will promptly notify Buyer in writing if Seller or the Company becomes
aware of any fact or condition that causes or constitutes a Breach of any of
Seller's representations and warranties as of the date of this Agreement, or if
Seller or the Company becomes aware of the occurrence after the date of this
Agreement of any fact or condition that would (except as expressly contemplated
by this Agreement) cause or constitute a Breach of any such representation or
warranty had such representation or warranty been made as of the time of
occurrence or discovery of such fact or condition.
5.7 Payment Of Indebtedness by or to Affiliates. Prior to the Closing
-------------------------------------------
Date, (i) Seller shall cause all indebtedness owed to the Company by Seller or
any Affiliate of Seller to be paid in full, and (ii) Seller shall cause all
indebtedness and other obligations of the Company to any Affiliate of Seller to
have been paid in full or otherwise fully satisfied.
5.8 No Negotiation. Until such time, if any, as this Agreement is
--------------
terminated pursuant to Section 9, Seller will not, and will cause the Company
and each of their Representatives not to, directly or indirectly solicit,
initiate, or encourage any inquiries or proposals from, discuss or negotiate
with, provide any non-public information to, or consider the merits of any
unsolicited inquiries or proposals from, any Person (other than Buyer) relating
to any transaction involving the sale of the business or assets (other than in
the Ordinary Course of Business) of the Company, or any of the capital stock of
the Company, or any merger, consolidation, business combination, or similar
transaction involving the Company.
5.9 Best Efforts. Between the date of this Agreement and the Closing Date,
------------
Seller will use his Best Efforts to cause the conditions in Sections 7 and 8 to
be satisfied.
23
<PAGE>
5.10 No Encumbrance, Etc. Except as agreed to in writing by Buyer, Company
-------------------
shall not, directly or indirectly, alienate, encumber, transfer, option, lease,
assign, sell, transfer or convey its interest or any portion of its interest in
any of the Projects or any portion thereof so long as this Agreement is in
force. Company shall timely discharge, prior to the Closing, any and all
obligations relating to work performed on or conducted at or materials delivered
to any of the Projects from time to time by Company, or at Company 's direction
or on its behalf, in order to prevent the filing of any claim or mechanic's lien
with respect to such work or materials.
5.11 Cooperation. Company shall (and Company shall cause its consultants,
-----------
engineers, contractors, affiliates and lenders and any other persons with an
interest in any of the properties involved in the Projects to) fully cooperate
with Buyer in connection with Buyer's feasibility investigations under this
Agreement and Buyer's efforts to seek any other Entitlements which Buyer
reasonably requires or deems necessary in order to develop and sell homes on any
of the properties involved in the Projects, including without limitation
executing any maps, applications, permits, filings or other documents, including
grants of easements and licenses, deemed by Buyer to be necessary or
appropriate.
5.12 Bonds. Without limiting the generality of any provision of this
-----
Agreement, Company shall obtain and continue to renew all subdivision
improvement bonds and maintain any other sureties or assurances relating in any
way to each of the Projects (including bonds required to be posted pursuant to
the requirements of the California Department of Real Estate ("DRE") until the
Closing Date.
6. COVENANTS OF BUYER AND SELLER
6.1 Approvals Of Governmental Bodies. As promptly as practicable after the
--------------------------------
date of this Agreement, Buyer will, and will cause each of its Affiliates to,
make all filings required by Legal Requirements to be made by them to consummate
the Contemplated Transactions. Between the date of this Agreement and the
Closing Date, Buyer will, and will cause each Affiliate to, cooperate with
Seller with respect to all filings that Seller is required by Legal Requirements
to make in connection with the Contemplated Transactions, and (ii) cooperate
with Seller in obtaining all consents identified in Disclosure Schedule 3.2.2;
provided that this Agreement will not require Buyer to dispose of or make any
change in any portion of its business or to incur any other burden to obtain a
Governmental Authorization.
6.2 Best Efforts. Except as set forth in the proviso to Section 6.1,
------------
between the date of this Agreement and the Closing Date, Buyer will use its Best
Efforts to cause the conditions in Sections 7 and 8 to be satisfied.
6.3 Notification. Between the date of this Agreement and the Closing Date,
------------
Buyer will promptly notify Seller in writing if Buyer becomes aware of any fact
or condition that causes or constitutes a Breach of any of Company's or Seller's
representations and warranties as of the date of this Agreement, or if Buyer
becomes aware of the occurrence after the date of this Agreement of any fact or
condition that would (except as expressly contemplated by this Agreement) cause
or constitute a Breach of any such representation or warranty had such
representation or warranty been made as of the time of occurrence or discovery
of such fact or condition.
6.4 Post-Closing Maintenance of Insurance Coverage. So long as
----------------------------------------------
commercially and reasonably available, Buyer agrees, at its own expense, to
obtain
24
<PAGE>
and maintain in force through October 31, 2007 comprehensive general liability
insurance against claims arising out of construction defects, bodily injury,
illness, and death and from damage to or destruction of property of others
comparable to that previously maintained by Company (but in such amounts and
with such deductibles as Buyer determines in its sole business judgment to be
appropriate). Such policies shall include Company as a named insured. If so
requested by Seller from time to time, Buyer shall arrange to have delivered to
Seller certificates of insurance verifying the existence of each such policy of
coverage.
6.5 Bonds. Without limiting the generality of any provision of this
-----
Agreement, provided that Seller has personal liability with respect thereto,
Buyer shall continue to renew all subdivision improvement bonds and maintain any
other sureties or assurances relating in any way to each of the Projects
(including bonds required to be posted pursuant to the requirements of the
California Department of Real Estate ("DRE") following the Closing Date. After
the Closing, Buyer shall use best efforts to cause Buyer, Company or another
Affiliate to be substituted as surety in place of Seller as to any bonds for
which Seller has personal liability.
6.6 Post-Closing Services. In order to assure a smooth transition of the
---------------------
Hearthstone Projects, the Olympic Projects and other business of the Company to
Buyer, Seller and Buyer agree that Seller shall be employed by Buyer from the
Closing Date through December 31, 1999. Pursuant to such employment
arrangement, Seller agrees to make himself reasonably available (subject to
disability or death of Seller, which shall not affect Buyer's obligation to
compensate Seller hereunder) to provide information, assistance and services as
reasonably requested by Buyer with respect to all prior Company projects, the
Projects referenced above and obtaining Final Approvals for the Dow Drive
property. As compensation for such services, Buyer shall pay to Seller the sum
of $1,000,000 on December 31, 1998 and the like sum of $1,000,000 on December
31, 1999 (net of any payroll and similar taxes), subject to offset as to both of
such payments for any amounts that Buyer is entitled to offset or holdback
pursuant to the Holdback Provisions and the indemnity provisions of this
Agreement. While such payments shall be made to Seller in his capacity of an
employee of Buyer, in light of the substantial amount of such compensation, it
is expressly agreed that Seller shall be excluded from participation in all
fringe benefits payable to other employees of Buyer, including without
limitation, health insurance and life insurance benefits, and pension and profit
sharing benefits.
7. CONDITIONS PRECEDENT TO BUYER'S OBLIGATION TO CLOSE
Buyer's obligation to purchase the Shares and to take the other actions
required to be taken by Buyer at the Closing is subject to the satisfaction, at
or prior to the Closing, of each of the following conditions (any of which may
be waived by Buyer, in whole or in part):
7.1 Accuracy of Representations. All of Seller's representations and
---------------------------
warranties in this Agreement (considered collectively), and each of these
representations and warranties (considered individually), must have been
accurate in all material respects as of the date of this Agreement, and must be
accurate in all material respects as of the Closing Date as if made on the
Closing Date, without giving effect to any supplement to the Disclosure
Schedule.
7.2 Seller's Performance.
--------------------
25
<PAGE>
7.2.1 All of the covenants and obligations that Seller is required to
perform or to comply with pursuant to this Agreement at or prior to the Closing
(considered collectively), and each of these covenants and obligations
(considered individually), must have been duly performed and complied with in
all material respects.
7.2.2 Each document required to be delivered pursuant to Section 2.4
must have been delivered.
7.3 Consents. Each of the Consents identified in Disclosure Schedule
--------
3.2.2 must have been obtained and must be in full force and effect.
7.4 Additional Documents. Each of the following documents must have been
--------------------
delivered to Buyer:
(a) an opinion of Bancroft & McAlister, A Professional Corporation,
dated the Closing Date, in the form of Exhibit 7.4;
(b) written confirmations in form satisfactory to Buyer executed on
behalf of the Jules and Marilynn Duc Trust, the Marilynn L. Duc Trust One and
the Jules Duc Trust Two (collectively, the "Duc Trusts", evidencing that the Duc
Trusts have waived and terminated any rights and claims the Duc Trusts may have
against the Company, including without limitation, any rights to receive
payments on account of funds received by the Company from any of the Projects;
(c) such other documents as Buyer may reasonably request for the purpose
of (i) evidencing the accuracy of any of Seller's representations and
warranties, (ii) evidencing the performance by either Seller of, or the
compliance by either Seller with, any covenant or obligation required to be
performed or complied with by such Seller, (iii) evidencing the satisfaction of
any condition referred to in this Section 7, or (iv) otherwise facilitating the
consummation or performance of any of the Contemplated Transactions.
7.5 No Proceedings. Since the date of this Agreement, there must not have
--------------
been commenced or threatened against Buyer, or against any Person affiliated
with Buyer, any Proceeding (a) involving any challenge to, or seeking damages or
other relief in connection with, any of the Contemplated Transactions, or (b)
that may have the effect of preventing, delaying, making illegal, or otherwise
interfering with any of the Contemplated Transactions.
7.6 No Claim Regarding Stock Ownership or Sale Proceeds. There must not
---------------------------------------------------
have been made or threatened by any Person any claim asserting that such Person
(a) is the holder or the beneficial owner of, or has the right to acquire or to
obtain beneficial ownership of, any stock of, or any other voting, equity, or
ownership interest in, the Company, or (b) is entitled to all or any portion of
the Purchase Price payable for the Shares.
7.7 Employees and Salespersons. While it is contemplated that Buyer and
--------------------------
Patrick Geary will enter into an employment arrangement providing for Mr.
Geary's employment by Company and/or Buyer for a period of five months after the
Closing Date, execution of an employment contract between Buyer and Mr. Geary
shall not be a condition to Closing. Also, while it is contemplated that new
employment contracts in form and substance satisfactory to Buyer shall have been
entered into by the Company or Buyer with the sales agents listed on the
attached Disclosure Schedule 7.7.1, and the existing agency contracts with such
sales agents shall have been terminated
26
<PAGE>
effective as of the Closing Date, Buyer may elect to waive such condition or
defer implementing it until after the Close of Escrow.
7.8 Buy-Out of Hearthstone. Certain of the Company's current Projects have
----------------------
been undertaken pursuant to agreements with Hearthstone Advisors, Inc. and/or
its Affiliates ("Hearthstone"). Such Projects are identified on the attached
Disclosure Schedule 3.7.1, as "Seabreeze Cottages," "Seabreeze Estates,"
"Clearbrook," "Crosspointe," and "Sundance." At Buyer's request, Seller has
negotiated with Hearthstone for Buyer's acquisition of the fee interest in all
such Projects other than Sundance and the concurrent termination of all
Hearthstone involvement in such Projects other than Sundance. Based on such
negotiations, Buyer has been working with Hearthstone to reach agreement on the
details of the Hearthstone buyout, including the documentation of same and the
final price to acquire each Hearthstone Project. Such final price is to be
evidenced by an agreed upon Project Specific Demand Statement for each Project.
The closing of escrow on Buyer's purchase of all of the Hearthstone Projects
concurrent with the Closing under this Agreement, shall be pursuant to
documentation, price, terms and conditions satisfactory to Buyer in its absolute
discretion, and shall be a condition precedent to the Closing hereunder. Buyer
and Seller acknowledge that a portion of Hearthstone's demand for final payment
will include an "accrual/contingency" amount and an "unpaid fees" amount. Such
amounts are under negotiation, and as of September 28, 1997, Hearthstone had
demanded $956,966 for the accrual/contingency and $750,000 for unpaid fees.
Ultimately, it shall be Seller's responsibility to agree with Hearthstone on the
amount of such payments. As part of Buyer's purchase of the Hearthstone
Projects, Buyer agrees to pay up $300,000 of the unpaid fee amount and $250,000
of the accrual/contingency amount, for a total of $550,000. All remaining funds
payable to Hearthstone for the accrual/contingency and the unpaid fees shall be
the sole responsibility of Seller. At the direction of Seller, Buyer agrees to
fund such payments to Hearthstone for the account of Seller, and the amount so
funded by Buyer shall be credited against and thereby reduce the $11,600,000
cash payment to be made by Buyer to Seller on the Closing Date pursuant to
Section 2.2.1.
7.9 Buy-Out of Olympic Realty. Two of the Company's current Projects have
-------------------------
been undertaken pursuant to agreements with Olympic Realty Advisors and/or its
Affiliates ("Olympic"). Such Projects are identified on the attached Disclosure
Schedule 3.7.1, as "Chaparral" and "Heron Bay/Stillwater Cove" (collectively,
the "Olympic Projects"). At Buyer's request, Seller has negotiated with Olympic
for Buyer's acquisition of the fee interest in the Olympic Projects and the
termination of all Olympic involvement in such Projects. Based on such
negotiations, Buyer and Seller have been working with Olympic to reach agreement
on the details of the Olympic buyout, including the documentation of same and
the final price to buyout the Olympic Projects, which will be evidenced by an
agreed upon Project Specific Demand Statement for such Projects. The closing of
escrow on Buyer's purchase of all of the Olympic Projects shall be pursuant to
documentation, price, terms and conditions satisfactory to Buyer in its absolute
discretion, and shall be a condition precedent to the Closing hereunder.
7.10 September 4 Conditions. The conditions set forth in Paragraphs 8
----------------------
through 13 of the September 4, 1997 letter from Buyer to Seller shall have been
satisfied, as determined by Buyer in its sole and absolute discretion, exercised
in good faith.
27
<PAGE>
8. CONDITIONS PRECEDENT TO SELLER'S OBLIGATION TO CLOSE
Seller's obligation to sell the Shares and to take the other actions
required to be taken by Seller at the Closing is subject to the satisfaction, at
or prior to the Closing, of each of the following conditions (any of which may
be waived by Seller, in whole or in part):
8.1 Accuracy of Representations. All of Buyer's representations and
---------------------------
warranties in this Agreement (considered collectively), and each of these
representations and warranties (considered individually), must have been
accurate in all material respects as of the date of this Agreement and must be
accurate in all material respects as of the Closing Date as if made on the
Closing Date.
8.2 Buyer's Performance.
-------------------
8.2.1 All of the covenants and obligations that Buyer is required to
perform or to comply with pursuant to this Agreement at or prior to the Closing
(considered collectively), and each of these covenants and obligations
(considered individually), must have been performed and complied with in all
material respects.
8.2.2 Buyer must have delivered each of the documents required to be
delivered by Buyer pursuant to Section 2.4 and must have made the cash payments
required to be made by Buyer pursuant to Section 2.4.2(i).
8.3 Consents. Each of the Consents identified in Disclosure Schedule 3.2.2
--------
must have been obtained and must be in full force and effect, unless waived by
Buyer.
8.4 Additional Documents. Buyer must have caused the following documents
--------------------
to be delivered to Seller: such documents as Seller may reasonably request for
the purpose of (i) evidencing the accuracy of any representation or warranty of
Buyer, (ii) evidencing the performance by Buyer of, or the compliance by Buyer
with, any covenant or obligation required to be performed or complied with by
Buyer, (iii) evidencing the satisfaction of any condition referred to in this
Section 8, or (iv) otherwise facilitating the consummation of any of the
Contemplated Transactions.
9. INDEMNIFICATION; REMEDIES
9.1 Survival; Right To Indemnification Not Affected By Knowledge. All
------------------------------------------------------------
representations, warranties, covenants, and obligations in this Agreement, the
Disclosure Schedule, the supplements to the Disclosure Schedule and any
certificate or document delivered pursuant to this Agreement will survive the
Closing. The right to indemnification, payment of Damages or other remedy based
on such representations, warranties, covenants, and obligations will not be
affected by any investigation conducted with respect to, or any Knowledge
acquired (or capable of being acquired) at any time, whether before or after the
execution and delivery of this Agreement or the Closing Date, with respect to
the accuracy or inaccuracy of or compliance with, any such representation,
warranty, covenant, or obligation. The waiver of any condition based on the
accuracy of any representation or warranty, or on the performance of or
compliance with any covenant or obligation, will not affect the right to
indemnification, payment of Damages, or other remedy based on such
representations, warranties, covenants, and obligations.
28
<PAGE>
9.2 Indemnification and Payment of Damages By Seller. To the fullest
------------------------------------------------
extent permitted by law, but subject to the limitations set forth in Section
9.4, Seller shall indemnify and hold harmless Buyer, the Company, and their
respective Representatives, stockholders, controlling persons, and affiliates
(collectively, the "Indemnified Persons") for, and shall pay to the Indemnified
Persons the amount of, any loss, liability, claim, damage, expense (including
costs of investigation and defense and reasonable attorneys' fees, and
including, subject to the limitations in Section 9.4.4, consequential damages)
less amounts recovered after exercise of Best Efforts by Buyer and Company (net
of the costs of such efforts) under available insurance policies, whether or not
involving a third-party claim (collectively, "Damages"), arising, directly or
indirectly, from or in connection with:
9.2.1 any Breach of any representation or warranty made by Seller in
this Agreement, the Disclosure Schedule, the supplements to the Disclosure
Schedule, or any other certificate or document delivered by Seller pursuant to
this Agreement;
9.2.2 any Breach by Seller of any covenant or obligation of Seller in
this Agreement;
9.2.3 any demands, causes of action, damages, costs, expenses,
attorneys' fees, property damage, bodily injury, personal injury, contract
disputes, penalties, or losses to the extent they arise out of, relate to or
result from the Company's completed operations, construction work in process as
of the Closing Date, including warranty claims (express or implied), defective
or poor workmanship in construction, or strict products liability, whether said
liability or claims arise in contract, tort, or strict liability, and regardless
of whether any of the above involve negligence on the part of Buyer, except
where Buyer's negligence or willful misconduct is a substantial contributing
cause of damage, Buyer shall make a good faith allocation of Buyer's and
Seller's (including Company's) respective responsibility for such damage and
provide such written allocation to Seller. Buyer's allocation shall be presumed
correct unless within 30 days after Seller's receipt of such allocation, Seller
gives written notice to Buyer objecting thereto, together with a detailed
explanation of the allocation that Seller asserts in good faith to be
appropriate. If the parties do not agree on the allocation of responsibility
within 30 days of Buyer's receipt of Seller's notice, either party may seek a
resolution of the dispute by arbitration pursuant to Section 10.3. Seller shall
bear the burden of proving its allocation is correct in the arbitration
proceeding. Notwithstanding the foregoing, (a) recovery by Buyer under this
Section 9.2.3 shall be limited as set forth in Section 9.4.6, and (b) as to
matters for which warranty reserves have been set aside as listed in Disclosure
Schedule 3.17.2 and for which Seller has not received credit on the Closing
Financial Statement, indemnification shall apply only to the extent that claims
exceed the amount of those reserves which Company and Buyer, after Best Efforts
(and net of the cost of such efforts) are able to collect and apply to the costs
of such warranty matters.
9.2.4 any claims for Damages (including costs of cleanup, containment,
or other remediation) arising, directly or indirectly, from or in connection
with any Environmental, Health, and Safety Liabilities arising out of or
relating to any Hazardous Materials or other contaminants, wherever located,
that were, or were allegedly, generated, transported, stored, treated, released,
or otherwise handled by Seller or the Company or their contractors,
subcontractors, agents, or Affiliates at any time on or prior to the Closing;
29
<PAGE>
9.2.5 any claims relating to Taxes of the Company and its operations,
for the period from its incorporation through the Closing Date, which are not
fully reserved against in the Closing Financial Statements;
9.2.6 any claims against the Company relating to, by or from the Duc
Trusts;
9.2.7 the Company's failure to (i) obtain all necessary licenses to
conduct its business and activities prior to the Closing Date, or (ii) conduct
its business and activities prior to the Closing Date in conformity with the
requirements of its licenses;
9.2.8 any other claims against the Company relating to or arising out
of the conduct of the Company's business and operations prior to the Closing
Date;
9.2.9 as to the Clearbrook Project, any excess of direct onsite
construction costs (as defined in Disclosure Schedule 9.2.9) above $60 per
square foot for the 21 "split lot" homes in such project, provided that any such
excess shall be offset by 50% of amount, if any, by which the average sales
price for said 21 homes exceeds $402,000 (said sales price to include the base
home price plus any view premiums, but to exclude any upgrades), and provided
further that Seller's maximum exposure to Buyer under this Section 9.2.9 shall
be $500,000; and
9.2.10 as to the Clearbrook Project, (a) an amount equal to the water
district assessment imposed on the Project, if Buyer is unable to obtain, after
Seller has exercised Best Efforts to assist Buyer, all necessary approvals to
enable Buyer to pass such assessment through to the homebuyers in such Project,
and (b) any claims asserted by Jack Smith, his successors, affiliates or
assigns, against Buyer relating to such assessments and/or Smith's ability to
seek or obtain reimbursement of any costs pertaining thereto.
9.3 Indemnification and Payment of Damages By Buyer. Buyer will indemnify
-----------------------------------------------
and hold harmless Seller, and will pay to Seller the amount of any Damages
arising, directly or indirectly, from or in connection with:
9.3.1 any Breach of any representation or warranty made by Buyer in
this Agreement or in any certificate delivered by Buyer pursuant to this
Agreement,
9.3.2 any Breach by Buyer of any covenant or obligation of Buyer in
this Agreement,
9.3.3 any claim by any Person for brokerage or finder's fees or
commissions or similar payments based upon any agreement or understanding
alleged to have been made by such Person with Buyer (or any Person acting on its
behalf) in connection with any of the Contemplated Transactions.
9.3.4 any demands, causes of action, damages, costs, expenses,
attorneys' fees, property damage, bodily injury, personal injury, contract
disputes, penalties, or losses to the extent that they arise out of, relate to,
or result from the Buyer's acts in the completion of the Company's construction
work in process after the Closing Date, whether said liability or claims arise
in contract, tort, or strict liability, except where Seller's or Company's
negligence or willful misconduct is a cause of any claim or liability, in which
event allocation of responsibility for the claim shall be resolved pursuant to
the provisions of Section 9.2.3;
30
<PAGE>
9.3.5 any claims for Damages (including costs of cleanup, containment,
or other remediation) arising, directly or indirectly, from or in connection
with any Environmental, Health, and Safety Liabilities arising out of or
relating to any Hazardous Materials or other contaminants, wherever located,
that were, or were allegedly, generated, transported, stored, treated, released,
or otherwise handled by Buyer or the Company or their contractors,
subcontractors, agents or Affiliates at any time on or after the Closing;
9.3.6 any claims relating to Taxes of the Company and its operations,
for the period following the Closing Date;
9.3.7 any other claims against the Company relating to or arising out
of the conduct of the Company's business and operations following the Closing
Date.
9.4 Limitations.
-----------
9.4.1 Seller shall have no liability (for indemnification or otherwise)
with respect to any representation or warranty, or for any covenant or
obligation to be performed and complied with prior to the Closing Date, unless
on or before October 31, 2007, Buyer notifies Seller of a claim specifying the
factual basis of that claim in reasonable detail to the extent then known by
Buyer. Buyer shall have no liability (for indemnification or otherwise) with
respect to any representation or warranty, or for any covenant or obligation to
be performed and complied with prior to the Closing Date, unless on or before
October 31, 2007, Seller notifies Buyer of a claim specifying the factual basis
of that claim in reasonable detail to the extent then known by Seller.
9.4.2 Seller shall not be liable to Buyer as a result of the
indemnities in this Agreement for any and all claims, demands, losses, costs,
expenses, obligations, liabilities, damages, recoveries, and deficiencies,
including interest, penalties, and reasonable attorneys' fees, unless and until
the aggregate of such items exceeds Seventy-Five Thousand Dollars ($75,000.00)
(the "Threshold Limit"). However, once the Threshold Limit is reached,
indemnification shall be made from the first dollar of loss.
9.4.3 In order to accomplish the acquisition of the Hearthstone
Projects, Buyer has given, or will give, certain indemnities to the three
partnerships controlled by Hearthstone, each or which own one of the three
Hearthstone Projects. The parties hereto confirm that notwithstanding any
indemnities given by Buyer with respect to its acquisition of the Hearthstone
Projects, neither Company or Seller is intended to be the beneficiary of or
benefit from such indemnities, and that as among their parties to this
Agreement, the provisions of this Agreement are to control the rights and
obligations of the parties as to any indemnities and releases pertaining to the
Hearthstone Projects. Similarly, if and to the extent that Buyer provides any
indemnities to the two limited liability companies that each own one of the
Olympic Projects, the parties hereto confirm that notwithstanding any such
indemnities given by Buyer, neither Company or Seller is intended to be the
beneficiary of or benefit from such indemnities, and that as among their parties
to this Agreement, the provisions of this Agreement are to control the rights
and obligations of the parties as to any indemnities and releases pertaining to
the Olympic Projects.
9.4.4 Seller's liability for consequential damages on any claim of
Buyer under Section 9.2 shall be limited to profits that Buyer reasonably proves
Buyer would have earned, but for the matter on which the claim is based, on one
or more of the following projects: the Hearthstone Projects, the Olympic
Projects, the projects known as
31
<PAGE>
Sundance II and Quail Hollow, the project known as Dow Drive, and the project
known as Tracy/Westgate.
9.4.5 Seller's liability under Section 9.2.3 shall exclude minor
homeowner warranty claims, which for purposes hereof shall mean claims that (a)
are not common to a significant number of homes in one or more of the projects
listed in Disclosure Schedule 3.7.1, and (b) do not as to any one home, exceed
---
$1000 in repair/damage costs for such home.
9.4.6 Notwithstanding any other provision of this Agreement, the
liability of the Seller as a result of the indemnities given in this Agreement
shall not exceed the amount of the Purchase Price; provided however that
Seller's liability under Section 9.2.3 shall be limited to and shall not exceed
$4,000,000.
9.5 Procedure For Indemnification--Third Party Claims.
-------------------------------------------------
9.5.1 Promptly after receipt by an indemnified party under Section 9.2
or Section 9.3 of notice of the existence of a third party claim for which the
indemnified party will desire to make a claim for indemnification against an
indemnifying party under such Section, the indemnified party shall give notice
to the indemnifying party of the existence of such claim so that the
indemnifying party may undertake defense and settlement of the claim. Failure to
notify the indemnifying party will not relieve the indemnifying party of any
liability that it may have to any indemnified party, except to the extent that
the indemnifying party demonstrates that the defense of such action is
prejudiced by the indemnifying party's failure to give such notice.
9.5.2 Each party will be entitled to participate (at its own expense
and with its own counsel) in the defense and settlement of any third party claim
being defended by another party. No compromise or settlement of a claim being
defended by an indemnifying party may be effected by the indemnifying party
without the indemnified party's reasonable consent. Provided, however, that if
an indemnifying party has the opportunity to settle or compromise a third party
claim for a fixed monetary amount but the indemnified party is unwilling to
permit the matter to be settled, then the indemnified party may take over
defense of the third party claim (at the indemnified party's expense), and the
indemnifying party's liability shall be limited to the fixed monetary amount for
which the claim then could be settled or compromised. An indemnifying party
shall have the right to defend any third party claim, which right shall be
elected promptly after notice from the indemnified party of the existence of the
third party claim. Should the indemnifying party fail to assume the defense of a
third party claim, the indemnifying party will be bound by any determination
made in a Proceeding involving the claim or any compromise or settlement
effected by the indemnified party prior to the indemnifying party's actual
assumption of the defense.
9.6 Procedure For Indemnification--Other Claims. A claim for
-------------------------------------------
indemnification for any matter not involving a third-party claim may be asserted
by notice to the party from whom indemnification is sought.
9.7 Hold-Back Provisions. At Close of Escrow, Buyer shall hold back from
--------------------
the funds otherwise payable to Seller the aggregate amount of $5,000,000 to
secure Seller's obligations to Buyer under this Agreement and as a deferral of
the Contingent Payment portion of the Purchase Price described in Section 2.2.2.
Said $5,000,000 plus the $2,000,000 in compensation to be paid to Seller by
Buyer pursuant to Section 6.6 above are collectively referred to as the
"Holdback Funds", and this Agreement shall be deemed a security agreement as to
the Holdback Funds pursuant to the
32
<PAGE>
provisions of the California Commercial Code. The Holdback Funds shall be
available to Buyer for the following purposes: (i) $6,000,000 represents the
"Purchase Price Contingency" and the remainder (the "Indemnity Holdback") is to
secure all of Seller's indemnity obligations to Buyer under Section 9.2 of this
Agreement (the "Indemnity Obligations"). Notwithstanding the above allocation of
the Holdback Funds, until Buyer's release of any such funds to Seller pursuant
to Section 6.6 and this Section 9.7, all then remaining portions of the Holdback
Funds shall be held to secure Seller's Indemnity Obligations to Buyer. Thus, if
Final Approvals are not obtained and Seller does not become entitled to the
$6,000,000 Contingent Payment, Buyer may offset $5,000,000 of the Holdback Funds
that would otherwise have been payable to Seller pursuant to Section 2.2, and
Buyer may offset the $1,000,000 compensation that would otherwise have been
payable to Seller on December 31, 1998 pursuant to Section 6.6. Subject to the
foregoing, the Holdback Funds shall be released to Seller upon satisfaction of
the following conditions:
9.7.1 $5,000,000 shall be released to Seller pursuant to the provisions
of Section 2.2.
9.7.2 The remainder shall be released to Seller when payable as
compensation by Buyer to Seller pursuant to Section 6.6.
Buyer shall pay interest to Seller at the rate of 8.5% per annum on the
Purchase Price Contingency, which interest shall accrue, but shall not compound,
commencing the day following the Closing Date. Such interest shall be payable by
Buyer to Seller only if the Purchase Price Contingency becomes payable, and
then, only on the actual amount of the Contingent Payment made by Buyer to
Seller. Such accrued interest shall be paid concurrent with Buyer's payment of
the Contingent Payment to Seller.
Any disputes regarding payment of the Holdback Funds and interest thereon
shall be resolved pursuant to the mediation and arbitration provisions of this
Agreement set forth at Section 10 below. Neither Buyer's exercise nor its
failure to exercise its right under these Hold Back Provisions shall constitute
an election of remedies or limit Buyer in any manner in the enforcement of any
other remedies that may be available to it.
9.8 Remedies. Subject to the limitations of Sections 9.2 and 9.4 and the
--------
dispute resolution provisions of Section 10, the remedies provided in this
Section 9 shall not be exclusive of or limit any other remedies that may be
available to Buyer, Seller or any other Indemnified Person.
10. DISPUTE RESOLUTION
10.1 Dispute Resolution; Confidentiality. Any controversy, dispute or
claim ("Claim") between the parties arising out of or relating to this
Agreement, including the scope and appealability of this provision, whether
arising in contract or tort, law or equity, shall be subject to a non-binding
mediation, and if not then resolved, shall be finally determined by a binding
arbitration, both conducted as set forth below. The parties agrees that any
Claim, and all matters concerning any Claim, will be considered confidential,
and will not be disclosed to any person except as required by law or as provided
below with respect to the Mediation or Arbitration contemplated by Section 10.2
or Section 10.3 below.
33
<PAGE>
10.2 Mediation.
10.2.1 Any Claim shall first be the subject of a non-binding mediation
("Mediation"), conducted by a retired judge or other mediator who is a member of
Judicial Arbitration & Mediation Services, Inc./Endispute ("JAMS") or other
agreed upon mediator. Any party may initiate the Mediation by written notice to
the other party. The date the notice is given is called the "Mediation
Initiation Date."
10.2.2 The mediator ("Mediator") shall be a retired judge or other
mediator, selected by mutual agreement of the parties to the dispute, and if
they cannot so agree within thirty (30) days after the Mediation Initiation
Date, the Mediator shall be selected through such procedures as JAMS regularly
follows.
10.2.3 The Mediation shall be held within thirty (30) days after the
Mediator is selected, or such longer period as the parties and the Mediator
mutually decide.
10.2.4 The parties shall bear equally the cost of the Mediator's fees
and expenses, but each party shall pay its own attorneys' and expert witness
fees and any other associated costs.
10.3 Arbitration.
10.3.1 In the event any Claim is not fully resolved by mutual agreement
at the Mediation, the Claim shall be submitted for final and binding arbitration
("Arbitration"), which shall be heard by three arbitrators chosen by the parties
as described below. A party may initiate the Arbitration by written notice to
the other party and to the "Arbitration Tribunal," as defined below. The date
the notice is given is called the "Arbitration Initiation Date."
10.3.2 Except as expressly modified herein, the Arbitration shall be
conducted in accordance with the provisions of Section 1280 et seq. of the
-- ---
California Code of Civil Procedure, or their successor sections ("CCP"), and
shall constitute the exclusive remedy for the determination of any Claim,
including whether the Claim is subject to arbitration. The Arbitration shall be
conducted under the procedures of the Arbitration Tribunal, except as modified
herein. The Arbitration Tribunal shall be JAMS, unless the parties to the
dispute cannot agree on a JAMS arbitrator, in which case the Arbitration
Tribunal shall be the San Francisco Office of the American Arbitration
Association ("AAA").
10.3.3 The arbitrators ("Arbitrator") shall be retired judges or other
arbitrators employed by JAMS selected by the same procedures as described above
for selecting the Mediator. If the parties to the dispute are unable to
mutually select a JAMS Arbitrator, then the Arbitrator shall be selected from a
panel of the AAA, by mutual agreement of the parties to the dispute. If the
parties to the dispute cannot agree on an Arbitrator within 60 days after the
Arbitration Initiation Date, the Arbitrator shall be selected by AAA, through
such procedures as the AAA regularly follows. If for any reason the AAA does
not so act, either party may apply to the Superior Court in and for Santa Clara
County, for the appointment of the Arbitrator.
10.3.4 Unless the parties agree otherwise, no party shall have the
right to conduct discovery in connection with the Arbitration proceeding except
for (i) the pre-hearing production of relevant documents, (ii) one deposition of
each opposing party, and (iii) one deposition of an expert witness.
34
<PAGE>
10.3.5 The Arbitrator shall try any and all issues of law or fact and
make the award within thirty (30) days after the close of evidence in the
Arbitration. The Arbitrator shall issue an award at the close of the arbitration
proceeding which shall dispose of all of the Claims. The arbitration award must
be based on, and accompanied by, a written statement of decision explaining the
factual and legal basis for the award, including any interest awarded, according
to the laws of the State of California as to each of the principal controverted
issues at the hearing. The arbitrator must follow the laws of the State of
California as interpreted by the California Appellate Courts, California Supreme
Court and United States Supreme Court. The arbitrator shall have the power to
grant any remedy or relief to which a party is entitled under this Agreement and
California law.
10.3.6 Judgment upon the award rendered by the Arbitrator may be
entered in any court having jurisdiction thereof. The following time periods set
forth in the CCP shall be shortened as follows: Section 1288 - from four years
to 90 days, and from 100 days to 30 days; Section 1288.2 - from 100 days to 30
days.
10.3.7 Either party, before or during any arbitration, may apply to a
court having jurisdiction for a temporary restraining order or preliminary
injunction where such relief is necessary to protect its interests pending
completion of the arbitration proceedings. Arbitration will not be required for
actions for recovery of specific property, such as actions for replevin and
unlawful detainer.
10.3.8 The costs of any civil action or arbitration, including
arbitration administration fees (including costs and attorneys' fees within the
meaning of Code of Civil Procedure 1032 - 1033.5), shall be borne by the non-
prevailing party or among the parties in such proportions as the Arbitrator
shall decide. The appropriate court shall have jurisdiction to award attorneys'
fees and costs of enforcement of any final judgment. If any arbitration embraces
more than one dispute and one party is the prevailing party with respect to one
but not all of such disputes, the Arbitrator shall apportion the arbitration
administration fees to the separate disputes embraced by the proceeding, and
thereby equitably determine the amount thereof to be borne by each party.
10.3.9 For the purpose of entry and enforcement of judgment and of the
arbitration provisions of this Agreement, each of the parties consents to the
jurisdiction of courts of the State of California, County of Contra Costa and
Santa Clara County, or, if it has or can acquire jurisdiction, in the United
States District Court for the Northern District of California, and waives any
objection to venue laid therein.
11. GENERAL PROVISIONS
11.1 Expenses. Except as otherwise expressly provided in this Agreement,
--------
Seller and Company will bear their expenses and Buyer will bear its expenses
incurred in connection with the preparation, execution, and performance of this
Agreement and the Contemplated Transactions, including all fees and expenses of
agents, representatives, counsel, and accountants (collectively "Third Party
Fees"). To the extent that Company or Seller incur Third Party Fees that are to
be paid by Company but are not paid prior to the Closing Date, such Third Party
Fees shall be accrued on the Closing Financial Statements and shall be taken
into account in determining the Adjustment Amount. In the event of termination
of this Agreement, the obligation of each party to pay its own expenses will be
subject to any rights of such party arising from a breach of this Agreement by
another party.
35
<PAGE>
11.2 Public Announcements. Any public announcement or similar publicity
--------------------
with respect to this Agreement or the Contemplated Transactions will be issued,
if at all, at such time and in such manner as Buyer determines. Unless consented
to by Buyer in advance or required by Legal Requirements, prior to the Closing
Seller shall, and shall cause the Company to, keep this Agreement strictly
confidential and may not make any disclosure of this Agreement to any Person.
Seller and Buyer will consult with each other concerning the means by which the
Company's employees, customers, and suppliers and others having dealings with
the Company will be informed of the Contemplated Transactions, and Buyer will
have the right to be present for any such communication.
11.3 Confidentiality. Buyer and Seller will maintain in confidence, and
---------------
will cause the directors, officers, employees, agents, and advisors of Buyer and
the Company to maintain in confidence, and not use to the detriment of another
party any written, oral, or other information obtained in confidence from
another party in connection with this Agreement or the Contemplated
Transactions, unless (a) such information is already known to such party or to
others not bound by a duty of confidentiality or such information becomes
publicly available through no fault of such party, (b) the use of such
information is necessary or appropriate in making any filing or obtaining any
consent or approval required for the consummation of the Contemplated
Transactions, or (c) the furnishing or use of such information is required by
legal proceedings.
If the Contemplated Transactions are not consummated, each party will
return or destroy as much of such written information as the other party may
reasonably request.
11.4 Notices. All notices, consents, waivers, and other communications
-------
under this Agreement must be in writing and will be deemed to have been duly
given when (a) delivered by hand (with written confirmation of receipt), (b)
sent by telecopier (with written confirmation of receipt), provided that a copy
is mailed by registered mail, return receipt requested, or (c) when received by
the addressee, if sent by a nationally recognized overnight delivery service
(receipt requested), in each case to the appropriate addresses and telecopier
numbers set forth below (or to such other addresses and telecopier numbers as a
party may designate by notice to the other parties):
Seller: Daniel A. Duc
120 Sierra Azule
Los Gatos, CA 95030
Facsimile No.: (408) [to be provided by
post-closing notice]
with a copy to: Bancroft & McAlister, A Professional Corporation
601 Montgomery Street, Suite 900
San Francisco, CA 94111
Attention: James H. McAlister
Facsimile No.: (415) 397-1925
Buyer: Standard Pacific of Northern California
3825 Hopyard Road, Suite 195
Pleasanton, CA 94588
Attention: President
Facsimile No.: (510) 847-9167
36
<PAGE>
with a copy to: Standard Pacific Corp.
1565 W. MacArthur Blvd.
Costa Mesa, CA 92626
Attention: Chief Financial Officer
Fax: (714)641-5570
with a copy to: Morgan, Miller & Blair Professional Corporation
1676 N. California Blvd., Suite 200
Walnut Creek, CA 94596
Attention: Gil Berkeley & Ken Miller
Facsimile No.: (510) 943-1106
11.5 Termination.
-----------
11.5.1 This Agreement may be terminated at any time before the Closing:
(a) by mutual consent of Buyer and Seller;
(b) by Buyer, upon notice to Seller, if any condition stated in Section
7 has not been met or waived;
(c) by Seller, upon notice to Buyer, if any condition stated in Section
8 has not been met or waived;
(d) by either Buyer or Seller, provided the party attempting to
terminate is not in breach of this Agreement, upon notice to the other if the
Closing has not occurred on or before the date provided for in Section 2.3, or
if they fail to reach agreement regarding a matter covered by a Supplemental
Schedule to which Buyer timely objects pursuant to the preamble of Section 3.
11.5.2 If this Agreement is terminated for any reason other than a
breach of a party's obligations hereunder, it shall become void and have no
further effect, without any further liability on the part of any Party, except
for the Confidentiality provisions of Section 11.3
11.6 Further Assurances. The parties agree (a) to furnish upon request to
------------------
each other such further information, (b) to execute and deliver to each other
such other documents, and (c) to do such other acts and things, all as the other
party may reasonably request for the purpose of carrying out the intent of this
Agreement and the documents referred to in this Agreement.
11.7 Waiver. The rights and remedies of the parties to this Agreement are
------
cumulative and not alternative. Neither the failure nor any delay by any party
in exercising any right, power, or privilege under this Agreement or the
documents referred to in this Agreement will operate as a waiver of such right,
power, or privilege, and no single or partial exercise of any such right, power,
or privilege will preclude any other or further exercise of such right, power,
or privilege or the exercise of any other right, power, or privilege.
37
<PAGE>
11.8 Entire Agreement and Modification. This Agreement together with all
---------------------------------
schedules and exhibits attached hereto supersedes all prior agreements between
the parties with respect to its subject matter and constitutes (along with the
documents referred to in this Agreement) a complete and exclusive statement of
the terms of the agreement between the parties with respect to its subject
matter. This Agreement may not be amended except by a written agreement executed
by the party to be charged with the amendment.
11.9 Assignments, Successors, and No Third-Party Rights. Neither party may
--------------------------------------------------
assign any of its rights under this Agreement without the prior consent of the
other parties, except that Buyer may assign any of its rights under this
Agreement to any subsidiary of Buyer. Subject to the preceding sentence, this
Agreement will apply to, be binding in all respects upon, and inure to the
benefit of the successors and permitted assigns of the parties. Nothing
expressed or referred to in this Agreement will be construed to give any Person
other than the parties to this Agreement any legal or equitable right, remedy,
or claim under or with respect to this Agreement or any provision of this
Agreement. This Agreement and all of its provisions and conditions are for the
sole and exclusive benefit of the parties to this Agreement and their successors
and assigns.
11.10 Severability. If any provision of this Agreement is held invalid or
------------
unenforceable by any court of competent jurisdiction, the other provisions of
this Agreement will remain in full force and effect. Any provision of this
Agreement held invalid or unenforceable only in part or degree will remain in
full force and effect to the extent not held invalid or unenforceable.
11.11 Section Headings, Construction. Both parties participated in the
------------------------------
drafting of this Agreement; this Agreement shall be construed without reference
to California Civil Code Section 1654. The headings of Sections in this
Agreement are provided for convenience only and will not affect its construction
or interpretation. All words used in this Agreement will be construed to be of
such gender or number as the circumstances require. Unless otherwise expressly
provided, the word "including" does not limit the preceding words or terms. In
the event of any inconsistency between the statements in the body of this
Agreement and those in the Disclosure Schedule (other than an exception
expressly set forth as such in the Disclosure Schedule with respect to a
specifically identified representation or warranty), the statements in the body
of this Agreement will control.
11.12 Governing Law. This Agreement will be governed by the laws of the
-------------
State of California without regard to conflicts of laws principles.
11.13 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which will be deemed to be an original copy of this
Agreement and all of which, when taken together, will be deemed to constitute
one and the same agreement.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date first written above.
38
<PAGE>
Company: Seller:
DUC DEVELOPMENT COMPANY,
a California corporation
By: ---------------------------
---------------------- DANIEL A. DUC
President
Buyer:
STANDARD PACIFIC CORP.,
a Delaware corporation
By:
------------------------
Senior Vice-President
By:
------------------------
Chief Financial Officer
39
<PAGE>
Exhibit 11
STANDARD PACIFIC CORP. AND SUBSIDIARIES
EARNINGS PER SHARE CALCULATIONS
FOR THE NINE MONTH AND THREE MONTH PERIODS ENDED
SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
--------------------------------- ------------------------------------
1997 1996 1997 1996
--------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Primary Earnings Per Common
and Equivalent Share:
Income from continuing operations $14,596,000 $ 4,658,000 $ 6,874,000 $ 2,497,000
Income (loss) from discontinued operations 829,000 151,000 367,000 (472,000)
--------------- --------------- -------------- ---------------
Net income $15,425,000 $ 4,809,000 $ 7,241,000 $ 2,025,000
=============== =============== ============== ===============
Common and equivalent shares:
Average shares outstanding 29,476,413 30,060,281 29,508,917 30,060,281
Equivalent shares 273,222 4,981 326,278 3,530
--------------- --------------- -------------- ---------------
Total 29,749,635 30,065,262 29,835,195 30,063,811
=============== =============== ============== ===============
Primary Earnings Per Share:
Income from continuing operations $ 0.49 $ 0.15 $ 0.23 $ 0.08
Income (loss) from discontinued operations 0.03 0.01 0.01 (0.01)
--------------- --------------- -------------- ---------------
Primary Earnings Per Share $ 0.52 $ 0.16 $ 0.24 $ 0.07
=============== ============== ============== ===============
Fully Diluted Earnings Per Common
and Equivalent Share:
Common and equivalent shares:
Average shares outstanding 29,476,413 30,060,281 29,508,917 30,060,281
Equivalent shares 336,106 4,981 326,278 3,530
--------------- -------------- -------------- ---------------
Total 29,812,519 30,065,262 29,835,195 30,063,811
=============== ============== ============== ===============
Fully Diluted Earnings Per Share:
Income from continuing operations $ 0.49 $ 0.15 $ 0.23 $ 0.08
Income (loss) from discontinued operations 0.03 0.01 0.01 (0.01)
--------------- -------------- -------------- ---------------
Fully Diluted Earnings Per Share $ 0.52 $ 0.16 $ 0.24 $ 0.07
=============== ============== ============== ===============
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEPTEMBER
30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JUL-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 3,173 0
<SECURITIES> 0 0
<RECEIVABLES> 13,737 0
<ALLOWANCES> 0 0
<INVENTORY> 440,981 0
<CURRENT-ASSETS> 0<F1> 0
<PP&E> 9,984 0
<DEPRECIATION> 4,081 0
<TOTAL-ASSETS> 536,915 0
<CURRENT-LIABILITIES> 0<F1> 0
<BONDS> 178,119 0
0 0
0 0
<COMMON> 296 0
<OTHER-SE> 272,228 0
<TOTAL-LIABILITY-AND-EQUITY> 536,915 0
<SALES> 177,150 429,030
<TOTAL-REVENUES> 177,150 429,030
<CGS> 149,572 364,775
<TOTAL-COSTS> 165,730 403,644
<OTHER-EXPENSES> (201) (664)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,109 3,956
<INCOME-PRETAX> 11,660 24,759
<INCOME-TAX> 4,786 10,163
<INCOME-CONTINUING> 6,874 14,596
<DISCONTINUED> 367 829
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 7,241 15,425
<EPS-PRIMARY> 0.24 0.52
<EPS-DILUTED> 0.24 0.52
<FN>
<F1>AMOUNTS FOR CURRENT ASSETS AND CURRENT LIABILITIES ARE NOT SHOWN SINCE THE
BALANCE SHEET PRESENTED IS UNCLASSIFIED.
</FN>
</TABLE>
