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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File No. 0-20614
THE ROTTLUND COMPANY, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1228259
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2681 LONG LAKE ROAD
MINNEAPOLIS, MINNESOTA 55113
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (651) 638-0500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.10
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, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of voting stock held by nonaffiliates of the
registrant as of June 30, 1998 was approximately $5,900,000.
As of June 30, 1998, there were 5,772,913 shares of Common Stock of the
registrant issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the documents listed below have been incorporated by
reference into the indicated part of this Form 10-K.
DOCUMENT INCORPORATED PART OF FORM 10-K
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Proxy Statement for 1998 Annual Meeting of Shareholders Part III
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FORM 10-K INDEX
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PAGE
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PART I.........................................................................................................1
Item 1. BUSINESS.........................................................................................1
Item 2. PROPERTIES.......................................................................................7
Item 3. LEGAL PROCEEDINGS................................................................................7
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS DURING FOURTH QUARTER OF FISCAL YEAR.........7
PART II........................................................................................................8
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.............................8
Item 6. SELECTED FINANCIAL DATA AND STATISTICAL COMPARISON...............................................9
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION...........10
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................................13
Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................................................14
Item 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES............14
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PART III......................................................................................................29
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................................29
Item 11. EXECUTIVE COMPENSATION.........................................................................29
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................29
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................30
PART IV.......................................................................................................31
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K...............................31
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
The Rottlund Company, Inc. ("Rottlund" or the "Company"), through its
subsidiaries, designs, builds, and markets detached single family homes and
attached townhomes and villas in the Minneapolis-St. Paul, Minnesota, Des
Moines, Iowa, Indianapolis, Indiana, Southern New Jersey and Naples-Ft. Myers,
Orlando and Tampa, Florida metropolitan areas. The Company began operations in
1973 and, through February 1993, had built all of its developments in the
Minneapolis-St. Paul metropolitan area. Rottlund is currently ranked among the
top 100 builders in the nation by two leading trade publications. Since 1973,
the Company has built and sold over 8,900 homes. During the year ended March 31,
1994 ("fiscal 1994") the Company began home building operations in Naples-Ft.
Myers, Florida and Des Moines, Iowa and, during the first quarter of the year
ended March 31, 1995 ("fiscal 1995"), began home building operations in
Indianapolis, Indiana and Orlando and Tampa, Florida and during the year ended
March 31, 1996 ("fiscal 1996") the Company acquired certain assets and assumed
certain liabilities of Kevin Scarborough, Inc., a residential homebuilder
operating in Southern New Jersey. All references to the Company contained
herein, unless the context indicates otherwise, include its wholly owned
subsidiaries Rottlund Homes of Iowa, Inc., Rottlund Homes of Florida, Inc.,
Rottlund Homes of Indiana, Inc., Rottlund Homes of New Jersey, Inc., and
Rottlund Homes of Indiana Limited Partnership.
As of March 31, 1998, the Company owned or controlled through options
over 2,100 home sites in communities under development and land for the
development of over 2,000 additional planned home sites in proposed communities.
The Company's homes are sold primarily through its own staff of sales
personnel. The Company markets its homes to a wide range of buyers, emphasizing
high quality construction and customer satisfaction. Its promotional efforts
include advertisements in newspapers and other printed media, radio and
television, illustrated brochures, billboards, on-site displays and model homes.
Purchasers of the Company's homes are given the opportunity to select, at
additional cost, various optional amenities such as upgraded carpet, fireplaces,
varied interior and exterior color schemes, lighting and upgraded appliances.
The Company offers a diverse product line ranging from townhomes to
single-family homes at prices generally ranging from $70,000 to $300,000. The
average price of the Company's homes delivered in fiscal 1998 was approximately
$146,000.
The Company believes that its success has been due to its strategy of
(i) marketing the Company's homes to many segments of the home-buying public,
which enables the Company to respond rapidly to changing market conditions and
the cyclical nature of the home-building industry, (ii) controlling costs by
closely monitoring the construction process through the use of an advanced,
industry-specific, management information system, (iii) controlling the
Company's inventory of home sites and unsold homes, and (iv) emphasizing the
Company's design capabilities that enable it to offer quality homes at all price
levels in the markets in which the Company competes. Further, the Company
generally attempts to reduce the effect of certain risks in the home-building
industry by purchasing land through options whenever possible, beginning
construction of multi-family buildings only after contracts for sales of
approximately 75% of units have been executed and of single family homes only
after an agreement of sale has been executed by a purchaser, and by using
subcontractors to perform all site improvement and construction work on a
fixed-price basis.
OPERATING STRATEGY
Set forth below are the major elements of the Company's operating
strategy:
MARKETS. The Minneapolis-St. Paul metropolitan area has been the
Company's primary market and has accounted for the majority of revenues since
the Company's inception. The Company has built and delivered more homes in this
market over the last five years than has any other home builder. The Company's
marketing strategy in the Minneapolis-St. Paul market has been to establish
itself as a name brand builder. Management believes this
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strategy has helped Rottlund to build and deliver more homes in this market
than any other builder during the last five years. The Company presently
accounts for approximately 4.0% of all homes sold in this market. The Company
does not presently intend to increase its share of the Minneapolis-St. Paul
market, but rather to expand its operations in the Des Moines, Iowa,
Indianapolis, Indiana, Southern New Jersey and Naples-Ft. Myers, Tampa, and
Orlando, Florida markets. Rottlund is implementing its name brand builder
strategy in these markets.
PRODUCTS. The Company markets its homes to a wide range of buyers,
including entry level, move-up and retirees. Accordingly, the Company offers a
number of home styles and price ranges at various locations. The Company's
product offerings include villas, townhomes and detached single family homes.
Sales prices presently range from approximately $70,000 to $300,000, and the
average sales price of homes being delivered during fiscal 1998 was
approximately $146,000. Management believes the Company's ability and
willingness to build homes in accordance with home buyers' needs will enable the
Company to continue to grow. Management believes that the Company's
long-standing strategy of product diversification enables it to respond rapidly
to changing market conditions and the cyclical nature of the home-building
industry.
COST CONTROL. The Company controls the cost of construction through
the efficient design of its homes and favorable pricing from subcontractors due
to the high volume of work performed for the Company. Rottlund uses an advanced,
industry-specific management information system to control construction costs.
This system allows the Company to monitor subcontractor performance and
expenditures for each home built. All subcontracted work is authorized through
the generation of purchase orders which are approved for payment by the
Company's on-site construction supervisors upon completion of work. Any
additional costs require authorization through the issuance of variance purchase
orders which require reporting of the reason for the variance and measures taken
to eliminate further variances. This strategy permits the Company to monitor
gross margins on each individual home from the time a purchase agreement is
signed through the building process to closing. The Company requires all
subcontractors to perform all home construction and site improvement work on a
fixed price basis. In addition, management continually monitors selling, general
and administrative expenses in an effort to control overhead and improve
efficiency.
INVENTORY MANAGEMENT. Two of the major risks in the home-building
industry are excessive home site inventory and inventory of completed homes. The
Company attempts to reduce its vulnerability to these risks by (i) acquiring
control of improved home sites through option contracts which allow the Company
to build homes with relatively minimal capital expenditures and limited risks,
(ii) acquiring land for development with seller financing, (iii) acquiring land
through purchase agreements on a nonrecourse basis which enables the Company to
obtain necessary governmental approvals before the acquisition of the land
(generally, the down payment on a land purchase or option agreement will be
returned to the Company if all approvals are not obtained, although
pre-development costs may not be recoverable), (iv) beginning construction of a
single family home only after execution of a sales contract, receipt of
satisfactory earnest money and, where applicable, a tentative mortgage approval,
(v) minimizing inventory homes by requiring contracts for at least 75% of the
units in attached buildings to be executed prior to construction, and (vi)
controlling the number of finished homes held in inventory.
LAND ACQUISITION AND DEVELOPMENT
The Company generally follows a policy of acquiring options to
purchase land for future community developments. The Company attempts to acquire
land with a minimum cash investment and the maximum degree of purchase money
financing that the Company is able to obtain from sellers. The purchase money
financing and purchase agreements are generally on a nonrecourse basis, thereby
limiting the Company's financial exposure to the amounts invested in property
and predevelopment costs. This policy may raise the cost of land the Company
acquires somewhat, but significantly reduces risk to the Company. In addition,
this policy allows the Company to obtain necessary development approvals prior
to acquisition of land.
The Company's purchase agreements are typically subject to numerous
conditions including, but not limited to, the Company's ability to obtain
necessary zoning and other governmental approvals for the proposed development.
The Company believes it has been successful in obtaining local governmental
approvals through proactive interaction with neighborhood and citizen groups.
The Company maintains a policy of holding
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neighborhood meetings to gain support for its development activities. During
the initial municipal approval process, the Company confirms the availability
of utilities, conducts environmental reviews, arranges acquisition
development and financing, and completes its marketing construction
feasibility studies. As a result, the Company is generally able to begin
marketing immediately after closing the land purchase. This results in
reduced carrying costs and increased liquidity for future development
opportunities.
The Company has been able to acquire control of improved single
family detached home sites through option contracts which enables the Company to
build in an area if it purchases a specified number of home sites each month.
Contracts of this nature enable the Company to begin offering homes for sale in
a new community with relatively minimal capital expenditures and limited risk.
Accordingly, the Company has adopted a strategy of acquiring control of single
family detached home sites through option contracts when appropriate
opportunities exist which meet the Company's marketing strategy. The Company
expects the availability of such contracts to satisfy the majority of the
Company's requirements for detached single family home sites. Due to the
product-specific nature of the Company's attached home sites, the Company
expects limited opportunities for option contracts for this portion of its
developed home site requirements. Accordingly, the continuation of the Company's
development activities to satisfy its land inventory requirements will depend
upon its continued ability to locate, enter into contracts to acquire, obtain
governmental approvals for, obtain acquisition and development financing for,
consummate the acquisition of, and improve, suitable parcels of land.
AVAILABLE HOME SITE INVENTORY (ALL CITIES)
The following table sets forth information with respect to the
Company's available lot inventory by state as of March 31, 1998.
<TABLE>
<CAPTION>
Homes Under Construction
Total ---------------------------------------------------------- Unsold Sites Available
Market Available Sold (1) Models Inventory (2) for Future Construction
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<S> <C> <C> <C> <C> <C>
Minnesota..................... 1,339 350 26 52 911
Florida....................... 662 117 21 10 514
Iowa.......................... 240 50 8 12 170
Indiana....................... 140 35 6 9 90
New Jersey.................... 545 79 9 0 457
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Total......................... 2,926 631 70 83 2,142
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</TABLE>
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(1) Under contract and under construction but not yet closed.
(2) Inventory are homes which are unsold that are completed or in various
stages of construction.
Although the Company does not purchase land for speculation, the
Company has and will purchase land with the intent of selling home sites within
developments to other builders. Additionally, the Company has attempted to
manage the risk of home building in particular areas through cooperation with
other builders, such as Centex Homes Corporation, by building in the same
subdivision. This arrangement provides for a diversity of types of homes in the
Company's communities and the advantages of joint marketing.
Rottlund strives to maintain a supply of developed home sites to meet
anticipated homebuilding requirements for not more than 24 months. As of March
31, 1998 the Company had an aggregate of 2,142 home sites available for future
construction which represents approximately a 16-month supply based on actual
deliveries anticipated in fiscal 1999. The Company believes there is an adequate
supply of undeveloped land in all metropolitan areas where it conducts business
to maintain adequate home site inventories.
Detached single family homes sold by the Company are marketed to
move-up and entry-level buyers. Move-up homes are sold in the $170,000 to
$300,000 price range while entry level homes are sold in the $110,000 to
$160,000 price range. Detached single family homes are offered by the Company in
a variety of floor plans and exterior styles with two, three and four bedrooms,
two or more bathrooms and a two-car attached garage.
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The Company also offers attached product lines which offer a variety
of floor plans and provide for certain options. Entry-level townhomes are sold
in the $70,000 to $105,000 price range, and the balance of townhome sales are
sold in the $100,000 to $200,000 price range. The Company believes that the
fastest growing segments of the home buying market are singles and couples
without children. The Company has adopted a strategy to capture these segments
by developing expertise in the design, marketing, financing and construction of
alternative or attached housing types which appeal to these segments.
Contracts for the sale of homes are at fixed retail prices. The
prices at which homes are offered have generally increased from time to time
during the sellout period for each community and in response to cost increases,
however, there can be no assurance that sales prices will increase in the
future.
All of the attached home communities are governed by a homeowner's
association (the "Association"). The Company, acting as declarant, is
responsible for the management of the Association until 75% of the homes within
the Association are closed.
The Company's line of homes is designed to promote efficient use of
space and materials to minimize construction costs and time, thereby maximizing
the value of the homes in the marketplace. The Company is continually developing
new home designs to replace or augment existing home designs in an effort to
assure that the Company's homes are responsive to current consumer preferences
and are unique in the marketplace. In order to respond to consumer preferences
the Company relies primarily upon its internal marketing department to analyze
information gathered from buyer profiles, focus groups, exit interviews at model
sites, telephone surveys and demographic data bases. For new designs, the
Company has engaged a number of unaffiliated architectural firms in addition to
its in-house architectural staff. All home designs are copyrighted by the
Company. The Company does not license its home designs to other builders and
vigorously pursues infringers.
The Company expends considerable effort in developing a design and
marketing concept for each of its communities. This includes determination of
product line, layout of streets, layout of individual home sites or structures
and overall community design. The communities have attractive entrances with
distinctive signage and landscaping. The Company recognizes the importance of
the sense of "neighborhood" and strives to create this feeling within its
communities to preserve and enhance the investment of its home buyers.
CONSTRUCTION
Rottlund acts as the general contractor for the construction of its
residential communities. The Company's construction supervisors monitor the
construction of each home, participate in design and building decisions,
coordinate the activities of subcontractors and suppliers, maintain quality and
cost controls and monitor compliance with zoning and building codes.
The Company maintains a strategy of subcontracting all home
construction at a fixed cost basis. The Company believes this strategy limits
its financial exposure during downturns in the housing market. All subcontracted
work is authorized by purchase orders which require approval for payment by the
construction supervisor upon completion. Any additional costs require
authorization through the issuance of variance purchase orders. All variances
require reporting of the reason therefor, and measures taken to eliminate
further variances.
Subcontractors typically are retained by the Company for a specific
time period or project pursuant to a contract which obligates the subcontractor
to complete its duties at a fixed price. Contracts with the Company's
subcontractors and material suppliers are entered into after competitive bidding
during predetermined time periods or on a project by project basis.
The construction of detached single family homes is generally tied to
home buyer sales contracts to minimize the costs and risks of completed but
unsold inventory. Similarly, the Company's policy is to require 75% of the units
on attached home buildings having executed sales contracts prior to
construction.
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Construction time for each home is tied to a construction schedule
established for each of the Company's home types. Variances from the schedule
are infrequent but may occur due to weather conditions or availability of labor,
materials and supplies. The Company's line of homes is designed to promote
efficient use of space and materials to minimize construction costs and time.
The Company's construction schedules are typically from three to four months.
The personnel of the Company's corporate headquarters are responsible
for sales processing, estimating, architectural design, centralized purchasing
through the generation of purchase orders, contract management, home site
planning, obtaining governmental approvals, closing, accounting and warranty
service, among other responsibilities. The Company's management information
system is designed to monitor the progress of each home built by the Company,
from acceptance of a sales contract to delivery of a completed home to the
buyer. At any time after contract acceptance the Company can provide the home
buyer with the construction status of its home and the anticipated delivery
date.
The Company historically has maintained its construction schedule
throughout the entire year, despite seasonal climate changes in the
Minneapolis-St. Paul and Des Moines metropolitan areas. However, additional
winter construction charges are incurred due to propane heating costs, frost
ripping charges, utility construction charges and special footing designs. The
Company is also required to put into escrow at closing amounts to cover items
which cannot be installed in the winter which may include driveways, sidewalks
and air conditioning.
MARKETING AND SALES
In Minnesota, Indiana, New Jersey and Florida, the Company sells its
homes through commissioned employees who work from sales offices in model homes
located in each Rottlund community. In addition, the Company cooperates with
outside independent brokers on approximately 33% of all of its sales. The
Company utilizes independent realtors for home sales in Iowa. In all instances,
Company sales employees assist prospective buyers through the home buying
process by providing information on the Company's line of homes, pricing,
options and upgrades, mortgage financing, warranties, construction, and
information regarding the Company itself. The Company provides a home buyer's
guide to all prospective customers. The home buyer's guide highlights the steps
and process of buying a new home in an effort to accurately set the expectations
of the Company's customers. Sales personnel are trained by the Company and
attend periodic meetings where they are updated on current financing,
construction schedules, marketing and advertising plans.
Rottlund has adopted a strategy of becoming a "name brand" builder in
the Minneapolis-St. Paul market. This strategy has been implemented through its
visible support of public television, the Children's Minneapolis Hospital, and
other community organizations. Rottlund also advertises through newspaper,
radio, TV and a billboard campaign. In its expansion to new markets, the Company
over time will attempt to utilize this same strategy of advertising to increase
customer awareness of the Company's products. In order to respond to consumer
preferences, the Company relies upon its internal marketing department to
analyze information which is gathered from buyer profiles, focus groups, exit
interviews at model sites, telephone surveys, and demographic data bases. The
Company's comprehensive marketing program also includes direct mail,
participation in home tour events and use of fully merchandised model homes.
Management believes model homes play an important role in demonstrating the
functional use of space in the Company's homes and in allowing prospective
buyers to experience the emotional aspects of the home buying process. The
Company attempts to create attractive model homes and chooses interior
merchandising for each type of home based upon the lifestyles of targeted
customers.
The Company builds most of its homes under the guidelines and
specifications of the Federal Housing Administration (FHA) and the Veterans
Administration (VA), thereby providing eligible prospective buyers the added
benefit of the availability of FHA/VA-insured mortgages. The Company may also
from time to time help its customers secure below market interest rates by
contributing points to buy-down the existing mortgage rates.
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CUSTOMER SERVICE AND QUALITY CONTROL
Rottlund is committed to providing a high level of customer service
as an important component of its competitive strategy. The Company, through its
on-site team of a sales representative and a construction supervisor maintains
personalized contact with its customers.
The Company's construction supervisors follow a 14-step inspection
process on each home the Company builds. This process is followed to ensure each
home meets or exceeds the Company's performance standards for its homes.
Upon completion of construction of each home and prior to closing, an
employee of the Company's Customer Care Department conducts a quality control
inspection of the completed home. From this inspection, a list is created which
sets forth those areas which do not meet the Company's performance standards and
require correction by the contract builder. Also prior to closing, the Customer
Care Department accompanies the buyer on a customer orientation of their home to
demonstrate the proper use and care of the home including the mechanical
equipment and other components of the home. At this time, additional items which
do not meet the Company's performance standards may be added to the quality
control inspection list. All such items are repaired or replaced within 15 days
of being added to the quality control inspection list. At the customer
orientation, the buyer is also familiarized with the service warranty process
following closing on its home.
The Company's Customer Care Department handles all service and
warranty requests following the closing of each home. Management believes the
participation of Customer Care personnel prior to and after closing reduces
post-closing service costs, fosters the Company's reputation for service, and
ultimately leads to the building of a referral base of business.
The Company provides all home owners with a one-year comprehensive
warranty and a two-year warranty on all mechanical systems and provides, from an
unaffiliated insurance company, a five-year warranty on appliances
(single-family product) and a ten-to fifteen-year structural warranty. The
five-year appliance warranty and fifteen-year structural warranty are unique in
the Minneapolis-St. Paul market and help to distinguish the Company from its
competitors.
COMPETITION AND MARKET FACTORS
The development and sale of residential properties is highly
competitive and fragmented. The Company competes on the basis of a number of
interrelated factors, including location, product design, perceived value, price
and reputation in the marketplace with a number of national home builders and
numerous local builders. The Company's homes must also compete with resale of
existing homes and available rental housing. Management believes Rottlund's
primary competitive advantages are based upon the following strengths: (i)
product innovation, (ii) offering homes with the highest perceived value, (iii)
product diversification which enables the Company to offer homes to all segments
of the population, (iv) marketing programs and community involvement programs
which have established Rottlund as a "name brand" builder in the Minneapolis-St.
Paul market, (v) the location of its communities, and (vi) its reputation for
superior customer service and quality.
Rottlund maintains a strong position in its markets due in part to
product innovation. The Company's ability to respond to the changing needs of
home buyers has allowed it to continue to grow despite declining demand for
previously popular products. The Company continuously examines its markets to
determine if certain housing needs are not being met and attempts to design and
build homes to meet such needs. Management believes this is one of the primary
reasons for its long-term success. The Company's years of experience provide it
with expertise in the area of design, construction and financing of attached
housing. The Company believes that this experience is especially important in
the attached home market which is subject to stricter regulation than the
detached home market.
The housing industry is cyclical and affected by consumer confidence
levels, prevailing economic conditions and interest rate levels. Other factors
affecting the industry include increases in construction costs,
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increases in costs associated with home ownership such as property taxes,
changes in consumer preferences and demographic trends. The Company believes
its experience provides a sound understanding of the nature of the industry
which enables it to base its strategic planning on such cyclical conditions.
EMPLOYEES
As of March 31, 1998, the Company employed 248 persons, 56 as on-site
sales personnel, 70 involved in construction, 17 as customer care personnel, 18
as estimating, drafting and architectural design personnel and 87 as executive,
administrative and clerical personnel. The Company's employees are not covered
by a collective bargaining agreement and the Company believes its relationships
with its employees are good.
GOVERNMENTAL REGULATION
The Company's business is subject to regulation by a variety of state
and federal laws and regulations relating to, among other things, advertising,
charging, collection of state sales and use taxes, zoning and product safety.
While the Company believes it is presently in material compliance with such
regulations, in the event that it should be determined that the Company is not
in compliance with all such laws and regulations, the Company could become
subject to cease and desist orders, injunctive proceedings, civil fines and
other penalties.
ITEM 2. PROPERTIES
The Company's principal offices are located at 2681 Long Lake Road,
Minneapolis, Minnesota 55113. The offices total 10,000 square feet, and are
leased from an unrelated party through March 31, 1999, at a base annual rent of
$94,000. Various computer equipment and office furniture are also leased by the
Company.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any material pending legal
proceedings. From time to time the Company may become involved in routine
litigation incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS DURING FOURTH
QUARTER OF FISCAL YEAR
There were no matters submitted to a vote of the Company's
shareholders during the three-month period ended March 31, 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
On February 19, 1998, the Company's Common Stock was listed on the
American Stock Exchange ("AMEX") under the symbol "RH". Also on that date, the
Company's Common Stock ceased trading on the NASDAQ National Market System.
The following table sets forth the range of high and low sale prices
for the Company's Common Stock for each of the fiscal quarters of the two years
ended March 31, 1997 and 1998.
STOCK QUOTATIONS
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal 1998
First Quarter........................................... 5 1/4 4 1/4
Second Quarter.......................................... 5 1/4 4 1/2
Third Quarter........................................... 4 3/4 3 1/8
Fourth Quarter.......................................... 4 3/4 3
Fiscal 1997
First Quarter........................................... 8 1/2 6 1/2
Second Quarter.......................................... 8 5
Third Quarter........................................... 7 1/4 4 1/2
Fourth Quarter.......................................... 6 4 5/8
</TABLE>
As of June 30, 1998, the Company had approximately 150 holders of
record of its Common Stock.
The transfer agent for the Company's Common Stock is Norwest Bank
Minnesota, N.A.. 161 North Concord Exchange. South St. Paul, Minnesota,
55075-0738, telephone: (651) 450-4064.
The Company has not paid any dividends on its Common Stock since its
initial public offering in October 1992 and expects that for the foreseeable
future it will follow a policy of retaining earnings in order to finance the
continued development of its business. Payment of dividends is within the
discretion of the Company's Board of Directors and will depend upon the
earnings, capital requirements and operating and financial condition of the
Company, among other factors. In addition, the terms of the Company's 9.42%
Senior Notes Due December 1, 2004 and the 12.11% Senior Notes Due December 1,
2004 contain restrictions on the ability of the Company to pay dividends. The
Company has not made any sales of restricted stock during the previous three
fiscal years.
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ITEM 6. SELECTED FINANCIAL DATA AND STATISTICAL COMPARISON
The following table sets forth selected financial data with respect
to the Company for the periods indicated. This information should be read in
conjunction with the Financial Statements and related notes appearing elsewhere
herein and "Management's Discussion and Analysis of Results of Operations and
Financial Conditions." The Company's Statement of Operations and balance data
for each of the years set forth below have been derived from financial
statements which have been audited by Arthur Andersen LLP, independent public
accountants.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND UNIT DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales...................................... $160,830 $180,457 $131,583 $116,520 $ 94,076
Cost of sales.................................. 139,284 156,332 110,589 96,344 78,292
------------ ------------ ------------ ------------- -------------
Gross profit................................... 21,546 24,125 20,994 20,176 15,784
Selling, general and administrative expenses... 20,541 19,569 13,671 13,307 9,469
Write-down of land(1) - 1,500 - - -
------------ ------------ ------------ ------------- -------------
Operating income............................... 1,005 3,056 7,323 6,869 6,315
Interest expense............................... 2,018 958 153 295 198
Income (loss) before provision for income
taxes......................................... (1,013) 2,098 7,170 6,574 6,117
Provision for income taxes..................... (415) 862 2,928 2,695 2,500
------------ ------------ ------------ ------------- -------------
Net income (loss)........................... (598) $ 1,236 $ 4,242 $ 3,879 $ 3,617
------------ ------------ ------------ ------------- -------------
------------ ------------ ------------ ------------- -------------
Basic earnings (loss) per Share................ $ (0.10) $ 0.22 $ 0.75 $ 0.69 $ 0.64
------------ ------------ ------------ ------------- -------------
------------ ------------ ------------ ------------- -------------
Diluted earnings (loss) per Share.............. $ (0.10) $ 0.22 $ 0.74 $ 0.68 $ 0.63
------------ ------------ ------------ ------------- -------------
------------ ------------ ------------ ------------- -------------
Weighted average shares outstanding............ 5,745 5,735 5,749 5,661 5,645
------------ ------------ ------------ ------------- -------------
------------ ------------ ------------ ------------- -------------
OPERATING DATA:
Number of home sales closed.................... 1,092 1,346 1,187 1,003 867
Average sales price............................ $ 146 $ 134 $ 111 $ 116 $ 108
------------ ------------ ------------ ------------- -------------
------------ ------------ ------------ ------------- -------------
BALANCE SHEET DATA:
Inventories and properties held for
development or sale............................ $ 74,379 $ 81,825 $ 74,650 $ 60,450 $ 42,604
Total assets................................... 88,281 96,234 83,756 68,549 50,330
Notes and mortgage notes payable............... 47,907 54,137 40,584 33,746 18,673
Shareholders' equity........................... $ 26,315 $ 26,819 $ 25,396 $ 21,033 $ 17,030
</TABLE>
- ------------------------
(1) The Company recorded a noncash write-down of land development costs and
finished lots at development sites in Florida and Indiana in fiscal
1997. See Note 1 of the Notes to Consolidated Financial Statements.
9
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
GENERAL
The following table sets forth, for the periods indicated, unit
activity, average sales price and revenue from home sales:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Homes closed:
Single family.............. 431 397 181
Multi-family............... 661 949 1,006
Average sales price:
Single family.............. $ 186,000 $ 199,000 $ 154,000
Multi-family............... 122,000 107,000 103,000
Net sales:
Single family.............. $ 80,370,000 $ 79,083,000 $ 27,916,000
Multi-family............... 80,460,000 101,374,000 103,667,000
------------ ------------ ------------
Total net sales $160,830,000 $180,457,000 $131,583,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
- -------------------------------
The following table sets forth the Company's backlog (homes under
contract but not closed):
<TABLE>
<CAPTION>
MARCH 31 NUMBER OF HOMES SALES VALUE
- -------- --------------- -----------
<S> <C> <C>
1998.............................................. 631 $98,380,000
1997.............................................. 409 $60,908,000
1996.............................................. 533 $69,319,000
</TABLE>
The Company estimates that the period between receipt of sales
contracts and delivery of completed homes to the purchasers is generally four to
six months. The Company's backlog historically tends to increase between January
and April. Trends in the Company's backlog are subject to change from period to
period based upon economic conditions including consumer confidence levels,
interest rates and the availability of mortgages.
RESULTS OF OPERATIONS
YEAR ENDED MARCH 31, 1998 COMPARED TO YEAR ENDED MARCH 31, 1997
The Company's home sales decreased $19.6 million or 11% during fiscal
1998 as compared to fiscal 1997 as a result of a 18.9% decrease in the number of
homes closed which was partially offset by a 9% increase in the average sales
price of homes closed. The decrease in the number of homes closed was
principally due to delays in opening new communities for sales in New Jersey,
Minneapolis and Iowa which resulted in those projected closings being pushed to
fiscal 1999. This also accounts for a portion of the increase in backlog at
March 31, 1998.
Gross profit decreased by $2.6 million or 11% during fiscal 1998 as
compared to fiscal 1997. Gross profit margins remained constant at 13% during
both years. The decrease in gross profit was primarily due to the decrease in
home sales during fiscal 1998.
Selling, general and administrative expenses increased by $972,000 to
$20.5 million in fiscal 1998 from $19.6 million in fiscal 1997. As a percentage
of net sales, selling, general and administrative expenses increased to
10
<PAGE>
12.8% in fiscal 1998 from 10.8% in fiscal 1997. This increase was primarily
due to the decrease in home sales during fiscal 1998.
Interest expense was $2.0 million in fiscal 1998 as compared to
$958,000 in fiscal 1997. The increase in interest expense is primarily due to
the Company terminating capitalizing interest on a piece of commercial land that
it has held for approximately ten years. This land is currently for sale and has
a book value of about $9.0 million. The Company capitalizes certain interest
costs for land development and includes such capitalized interest in cost of
sales when the related homes are delivered to purchasers. Accordingly, total
interest incurred by the Company was approximately $5.1 million for fiscal 1998
and $5.2 million for fiscal 1997.
The Company's tax rate was approximately 41% in fiscal 1998 and 1997
which reflects the federal statutory rate plus the effect of state taxes, net of
federal benefit.
Net income decreased from $1.2 million in fiscal 1997 to a net loss
of $598,000 in fiscal 1998. This decrease was primarily due to the decrease in
home sales, increased interest expense and a slight increase in selling, general
and administrative expenses for which the Company invested in increased
advertising and overhead to fund an expected increase in home sales in fiscal
1999 as witnessed by the large increase in backlog at March 31, 1998.
YEAR ENDED MARCH 31, 1997 COMPARED TO YEAR ENDED MARCH 31, 1996
The Company's home sales increased $48.9 million or 37% during fiscal
1997 as compared to fiscal 1996 as a result of a 13.4% increase in the number of
homes closed combined with an 29% increase in the average sales price of single
family homes closed and a 4% increase in the average sales price of multifamily
homes closed. The increase in the average sales price of single family homes was
principally due to a greater number of homes closed in Tampa, Orlando and New
Jersey where the products are larger and sold at higher price levels than those
achieved historically in single family developments.
Gross profit increased by $3.1 million or 15% during fiscal 1997 as
compared to fiscal 1996. Gross profit margins decreased to 13% in fiscal 1997
from 16% in fiscal 1996. This decrease was primarily due to rising material and
labor costs caused by the strength in the homebuilding industry as well as tight
labor markets in many of the Company's markets, and slower sales than
anticipated in some of the Company's newer markets.
Selling, general and administrative expenses increased by 43.0% to
$19.6 million in fiscal 1997 from $13.7 million in fiscal 1996. As a percentage
of net sales, selling, general and administrative expenses increased to 10.8% in
fiscal 1997 from 10.4% in fiscal 1996.
Interest expense was $958,000 in fiscal 1997 as compared to $153,000
in fiscal 1996 due to an increased percentage of borrowings under the Company's
credit facility. The Company capitalizes certain interest costs for land
development and includes such capitalized interest in cost of sales when the
related homes are delivered to purchasers. Accordingly, total interest incurred
by the Company was approximately $5.2 million for fiscal 1997 and $3.9 million
for fiscal 1996. This increase was primarily due to increased borrowings to fund
the Company's increased business level.
The Company's tax rate was approximately 41% in fiscal 1997 and 1996 which
reflects the federal statutory rate plus the effect of state income taxes, net
of federal benefit.
Net income decreased from $4.2 million in fiscal 1996 to $1.2 million
in fiscal 1997. This decrease was primarily due to a noncash write-down of $1.5
million, representing an inventory valuation adjustment of certain land for
approximately 250 unsold lots located in Orlando and Indianapolis, and an
overall decline in the gross profit margin partially offset by an increase in
home sales.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities increased $14.2 million
from ($9.8) million in fiscal 1997 to $4.4 million in fiscal 1998. This increase
was primarily due to decreased investments in residential housing completed and
under construction resulting from the decrease in sales activity, combined with
the lower level of inventory homes at March 31, 1998. Cash flows used for
investing activities were not significant. Cash flows provided by (used for)
financing activities decreased by $19.9 from $13.7 in fiscal 1997 to ($6.1) in
fiscal 1998. This decrease was primarily due to reduced borrowings under the
company's revolving credit facility to finance the lower levels of land
inventory and residential housing completed and under construction.
Cash flows used for operating activities increased $7.5 million from
($2.3) million in fiscal 1996 to ($9.8) million for fiscal 1997. This increase
was primarily due to increased investments in residential housing completed and
under construction resulting from the Company's expansion to additional
geographic regions, combined with an increase in sales activity. Cash flows used
for investing activities were not significant. Cash flows provided by financing
activities increased by $13.4 million from $336,000 in fiscal 1996 to $13.7
million in fiscal 1997. This increase was primarily due to increased borrowings
under the Company's revolving credit facility to finance the increased level of
business over the previous year, and the resulting higher levels of land
inventory and residential housing completed and under construction.
The Company's financing needs depend primarily upon sales volume,
asset turnover, land acquisition and inventory balances. In December 1994, the
Company issued $25 million of 12.11% Senior Notes payable and in February 1996,
the Company issued an additional $10 million of 9.42% Senior Notes payable
(collectively referred to as the "Senior Notes"). Proceeds were used to retire
certain mortgage notes payable and for working capital purposes. Principal and
interest payments of approximately $552,000 are due monthly through December
2004.
At March 31, 1998, the Company also had a $23.0 million unsecured
revolving credit facility from a commercial lender. Borrowings under this
facility totaled $15.0 million at March 31, 1998. The Company believes that
amounts available under its existing borrowing arrangements (assuming extensions
and renewals of debt in the ordinary course of business) and amounts generated
from operations will provide funds adequate for its home-building activities and
debt service. The Company has no significant commitments as of March 31, 1998
requiring the use of funds.
Due to the lower than expected financial results for the fiscal year
ended March 31, 1998, the Company was not in compliance with certain financial
covenants under both its Senior Note agreements and its revolving credit
facility. All of the Company's lenders have agreed to waive the violations and
in addition the agreements have been amended. Certain financial covenants have
been reset over the next fiscal year in order to give the Company time to reach
original covenant levels. The Company will pay an additional $100,000 principal
per month amortization on the Senior Notes for the remaining life of the notes.
The Company has generally been able to secure financing for its
acquisition, development and construction activities, and management believes
that such arrangements will continue to be available on terms satisfactory to
the Company. There can be no assurance, however, that continued financing for
land acquisitions will be available or, if available, will be on terms
satisfactory to the Company.
INFLATION AND EFFECTS OF CHANGING PRICES
Real estate and residential housing prices are affected by inflation,
which can cause increases in the price of land, raw materials and subcontracted
labor. Unless such costs are recovered through higher sales prices, gross profit
margins will decrease. As interest rates increase, construction and financing
costs, as well as the cost of borrowing funds, also increase which can result in
lower gross profits. High mortgage interest rates would make it more difficult
for the Company's customers to qualify for home mortgage loans. These factors
have a much more significant effect on the Company's operations than does
seasonality, in part because homes can be constructed year-round.
12
<PAGE>
YEAR 2000 CONSIDERATIONS
The Company has reviewed the implications of year 2000 compliance and
has taken steps designed to ensure that the Company's computer systems and
applications will manage dates beyond 1999. The Company believes that it has
allocated adequate resources for this purpose and that planned software
upgrades, which are underway and in the normal course of business, will address
the Company's internal year 2000 needs. While the Company expects that efforts
on the part of current employees of the company will be required to monitor year
2000 issues, no assurances can be given that these efforts will be successful.
The Company does not expect the cost of addressing any year 2000 issue to be a
material event or uncertainty that would have a material adverse effect on
future operating results or financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
13
<PAGE>
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the company as of March 31, 1998 and 1997
together with the Report of Independent Public Accountants are included in
this Form 10-K on the pages indicated below.
THE ROTTLUND COMPANY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants................................................................. 14
Consolidated Balance Sheets as of March 31, 1998 and 1997................................................ 15
Consolidated Statements of Operations for the Years Ended March 31,1998, 1997 and 1996................... 16
Consolidated Statements of Shareholders' Equity for the Years Ended March 31,1998, 1997 and 1996......... 17
Consolidated Statements of Cash Flows for the Years Ended March 31, 1998, 1997 and 1996.................. 18
Notes to Consolidated Financial Statements............................................................... 19
</TABLE>
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
14
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Rottlund Company, Inc.:
We have audited the accompanying consolidated balance sheets of The Rottlund
Company, Inc. (a Minnesota corporation) and Subsidiaries as of March 31, 1998
and 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended March 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Rottlund Company, Inc.
and Subsidiaries as of March 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended March 31, 1998, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
May 15, 1998 (except for Note 3
which date is July 10, 1998)
15
<PAGE>
THE ROTTLUND COMPANY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of March 31
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS $ 4,247 $ 7,016
ESCROW AND OTHER RECEIVABLES 2,520 1,512
LAND, DEVELOPMENT COSTS AND FINISHED LOTS 47,247 49,236
RESIDENTIAL HOUSING COMPLETED AND UNDER CONSTRUCTION 27,132 32,589
PROPERTY AND EQUIPMENT, net 1,251 710
DEFERRED INCOME TAXES 1,164 1,350
INTANGIBLE AND OTHER ASSETS, net 4,720 3,821
$88,281 $96,234
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Revolving credit facility $15,010 $15,185
Senior notes payable 30,925 33,868
Mortgage notes payable 1,972 5,084
Accounts payable 11,553 9,289
Accrued liabilities 2,506 4,079
Income taxes payable - 1,910
Total liabilities 61,966 69,415
------- -------
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY:
Preferred stock, $.10 par value, 10,000 shares authorized;
none issued - -
Common stock, $.10 par value, 40,000 shares authorized;
5,745 and 5,716 shares issued and outstanding 141 138
Paid-in capital 11,747 11,656
Retained earnings 14,427 15,025
Total shareholders' equity 26,315 6,819
$88,281 $96,234
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part
of these consolidated balance sheets.
16
<PAGE>
THE ROTTLUND COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended March 31
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
NET SALES $160,830 $180,457 $131,583
COST OF SALES 139,284 156,332 110,589
GROSS PROFIT 21,546 24,125 20,994
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE 20,541 19,569 13,671
WRITE-DOWN OF LAND - 1,500 -
Operating income 1,005 3,056 7,323
INTEREST EXPENSE 2,018 958 153
Income (loss) before provision (benefit) for income taxes
(1,013) 2,098 7,170
PROVISION (BENEFIT) FOR INCOME TAXES (415) 862 2,928
Net income (loss) $(598) $1,236 $4,242
BASIC EARNINGS (LOSS) PER SHARE $(0.10) $0.22 $0.75
DILUTED EARNINGS (LOSS) PER SHARE $(0.10) $0.22 $0.74
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED BALANCE SHEETS.
17
<PAGE>
THE ROTTLUND COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the Years Ended March 31
(In Thousands)
<TABLE>
<CAPTION>
Common Stock Paid-In Retained
Shares Amount Capital Earnings Total
<S> <C> <C> <C> <C> <C>
BALANCE, March 31, 1995 5,661 $132 $11,354 $ 9,547 $21,033
Net income - - - 4,242 4,242
Stock issued under employee stock purchase plan 22 2 119 - 121
BALANCE, March 31, 1996 5,683 134 11,473 13,789 25,396
Net income - - - 1,236 1,236
Stock issued under employee stock purchase plan 22 3 125 - 128
Stock options exercised 11 1 58 - 59
BALANCE, March 31, 1997 5,716 138 11,656 15,025 26,819
Net loss - - - (598) (598)
Stock issued under employee stock purchase plan 29 3 91 - 94
BALANCE, March 31, 1998 5,745 $141 $11,747 $14,427 $26,315
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
18
<PAGE>
THE ROTTLUND COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended March 31
(In Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (598) $ 1,236 $ 4,242
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating
activities-
Depreciation and amortization 626 479 233
Write-down of land - 1,500 -
Deferred income taxes 186 (833) (186)
Change in operating items:
Escrow and other receivables (1,008) 483 (848)
Land, development costs and finished lots 1,989 (1,797) (2,193)
Residential housing completed and under construction 5,457 (6,878) (3,137)
Intangible and other assets (1,012) (1,457) (1,199)
Accounts payable 2,264 (1,475) (2,196)
Accrued liabilities (1,573) 158 789
Income taxes payable (1,910) (1,181) 2,218
Net cash provided by (used for) operating activities 4,421 (9,765) (2,277)
INVESTING ACTIVITIES:
Purchase of property and equipment, net (1,054) (383) (307)
Net cash received from acquisition (Note 2) - - 109
Other - (13) (19)
Net cash used for investing activities (1,054) (396) (217)
FINANCING ACTIVITIES:
Proceeds from (repayments of) revolving credit facility, net (175) 14,685 500
Proceeds from issuance of senior notes payable - - 10,000
Proceeds from issuance of mortgage notes payable 174 5,205 1,117
Repayments of senior notes payable (2,943) (1,132) -
Repayments of mortgage notes payable (3,286) (5,205) (11,402)
Proceeds from stock options exercised - 59 -
Proceeds from stock issued under employee stock purchase plan 94 128 121
Net cash provided by (used for) financing activities (6,136) 13,740 336
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,769) 3,579 (2,158)
CASH AND CASH EQUIVALENTS:
Beginning of year 7,016 3,437 5,595
End of year $ 4,247 $ 7,016 $ 3,437
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized $ 2,025 $ 906 $ 153
Cash paid for income taxes $ 2,022 $ 2,948 $ 1,010
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
19
<PAGE>
THE ROTTLUND COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998 and 1997
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS
The Rottlund Company, Inc. (a Minnesota corporation) and its subsidiaries,
collectively referred to as the Company, are engaged in the design,
construction, marketing and sale of residential real estate. The Company's
primary developments are in Minnesota, with additional development sites in
Iowa, Florida, Indiana and New Jersey; accordingly, the Company's operations can
be impacted significantly by the residential real estate market conditions in
each of these geographic areas.
During fiscal 1998, the Company disposed of a wholly owned subsidiary which
was engaged in the business of originating residential mortgage loans as a
correspondent for various mortgage banking companies. Through the date of
disposal, such mortgage activity was not significant. The reserves the
Company established in fiscal 1997 were adequate to cover the costs the
Company incurred to dispose of this subsidiary. The Company has generally
been able to secure financing for its acquisition, development and
construction activities, and management believes that such arrangements will
continue to be available on terms satisfactory to the Company. However, there
can be no assurance that continued financing for land acquisitions will be
available or, if available, will be on terms satisfactory to the Company.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of The
Rottlund Company, Inc. and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Ultimate results could differ from those estimates.
REVENUE RECOGNITION
Revenue from sales of properties is recognized upon a formal closing and
conveyance of title to the buyer. Escrow receivables represent funds held in
escrow because the Company is obligated to perform minor activities subsequent
to formal closing. Customer earnest money deposits received under binding
purchase agreements are reflected as accrued liabilities until formal closing.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. As of March 31, 1998
and 1997, approximately $811,000 and $597,000, respectively, of cash and cash
equivalents was restricted for customer earnest money deposits.
20
<PAGE>
LAND, DEVELOPMENT COSTS AND FINISHED LOTS
Direct costs related to land development, including land acquisition costs;
improvement and construction costs for clearing and grading, roads and
utility systems; architectural, surveying, engineering and legal fees; and
real estate taxes, are capitalized as costs of land. The Company also
capitalizes interest incurred in connection with land held for development up
to the point it is deemed fully realizable upon sale. Interest of
approximately $2,942,000, $4,196,000 and $3,698,000 was capitalized in fiscal
1998, 1997 and 1996, respectively. Aggregate development costs are allocated
to finished lots and charged to cost of sales upon a formal closing and
conveyance of title to the buyer.
During fiscal 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires that
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable and that impairment losses be recorded on long-lived assets when
indications of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. Prior to the adoption of SFAS No. 121, inventories were recorded at
the lower of cost or net realizable value for each parcel or subdivision.
Under SFAS No. 121, inventories to be held and used are stated at cost unless
a subdivision is determined to be impaired, in which case the impaired
inventories are written down following the provisions of SFAS No. 121.
Write-downs of impaired inventories are recorded as adjustments to the cost
basis of the respective inventory. The Company recorded a noncash write-down
of land, development costs and finished lots at development sites in Florida
and Indiana of $1,500,000 in fiscal 1997. The impairment was determined by
the Company's management based on decreases in the market value of the sites
as well as development costs which were in excess of management's original
estimates. Management determined the fair value of these development sites
based on various methods, including discounted cash flow projections and
evaluations of comparable market prices of land, as appropriate. The
write-down for impairment of long-lived assets was calculated in accordance
with the requirements of SFAS No. 121 but was not necessitated by the
implementation of SFAS No. 121. Had the Company not adopted SFAS No. 121, a
similar write-down would have been required.
The estimation process involved in determining if assets have been impaired
and in determining fair value is inherently uncertain since it requires
estimates of current market yields, as well as future events and conditions.
Such future events and conditions include economic and market conditions, as
well as the availability of suitable financing to fund development and
construction activities. The realization of the estimates applied to the
Company's real estate projects is dependent upon future uncertain events and
conditions and, accordingly, the actual timing and amounts realized by the
Company may differ materially from the estimated fair values, as described
herein.
RESIDENTIAL HOUSING COMPLETED AND UNDER CONSTRUCTION
Residential housing completed and under construction represents the direct costs
of construction of single-family and multifamily home projects, excluding land
costs. Residential housing is valued at the lower of cost or estimated fair
value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Additions and major renewals are
capitalized, while maintenance and repairs are charged to expense as incurred.
Depreciation is provided using accelerated methods, principally over three to
five years for model home furnishings and five to seven years for furniture and
equipment. Accumulated depreciation totaled $780,000 and $725,000 as of March
31, 1998 and 1997, respectively.
INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist primarily of the excess of the purchase
price paid for business acquisitions over the net assets acquired, deferred
financing costs and deposits for the option to acquire land. The excess of the
purchase price paid for business acquisitions over the net assets acquired is
being amortized over 20 years, with accumulated amortization of $147,000 and
$73,000 as of March 31, 1998 and 1997, respectively. Deferred financing costs
are amortized over the lives of the respective financing agreements, with
accumulated amortization of $125,000 and $87,000 as of March 31, 1998 and 1997,
respectively. Deposits for the option to acquire land are capitalized as land,
development costs and finished lots at the time of exercise or are charged to
expense upon expiration.
21
<PAGE>
INCOME TAXES
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
and tax bases of assets and liabilities using currently enacted tax rates.
PRODUCT WARRANTY
The Company warrants its residential housing for periods of 10 and 15 years. The
Company purchases insurance coverage for periods after two years. Warranty costs
are estimated at the time of sale and adjusted annually to reflect ultimate
experience. Product warranty costs are included in cost of sales in the
accompanying consolidated statements of operations.
ADVERTISING
The Company's advertising expense amounted to $2,316,000, $1,795,000 and
$1,352,000 in fiscal 1998, 1997 and 1996, respectively.
NET EARNINGS (LOSS) PER SHARE
The Company adopted SFAS No. 128, "Earnings per Share," effective December 31,
1997. As a result, all prior periods presented have been restated to conform to
the provisions of SFAS No. 128, which requires presentation of basic and diluted
earnings per share. Basic earnings per share is computed by dividing net income
available to common shareholders by the weighted average number of common shares
outstanding during the year. Diluted earnings per share is computed under the
treasury stock method and is calculated to reflect the dilutive effect of the
Company's stock option plans. A reconciliation of these amounts is as follows
(in thousands, except for per share data):
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net income $ (598) $1,236 $4,242
Weighted average number of common shares outstanding:
Basic 5,745 5,712 5,684
Dilutive effect of stock options - 23 69
Common and potential common shares outstanding:
Diluted 5,745 5,735 5,753
Basic earnings (loss) per share $(0.10) $ 0.22 $ 0.75
Diluted earnings (loss) per share $(0.10) $ 0.22 $ 0.74
</TABLE>
22
<PAGE>
As a result of the adoption of SFAS No. 128, the Company's reported earnings per
share (EPS) for fiscal 1997 and 1996 have been restated as follows:
<TABLE>
<CAPTION>
1977 1996
<S> <C> <C>
Primary EPS as reported $ 0.22 $ 0.74
Effect of SFAS No. 128 - 0.01
Diluted EPS as reported $ 0.22 $ 0.74
Effect of SFAS No. 128 - -
Diluted EPS as restated $ 0.22 $ 0.74
</TABLE>
NEW ACCOUNTING PRONOUNCEMENTS
SFAS NO. 130
On March 31, 1998 the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which requires companies to report all changes in
equity during a period, except those resulting from investment by owners
and distribution to owners, in a financial statement for the period in
which they are recognized. The Company has no other elements of
comprehensive income outside its reported net loss; thus, net loss is
equivalent to comprehensive income for all periods presented.
SFAS NO. 131
The Financial Accounting Standards Board issued SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information," in June, 1997.
SFAS No. 131 requires that public business enterprises report information
about operating segments in annual financial statements and requires
selected information in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers, and is effective for
fiscal years beginning after December 15, 1997. The Company believes
adoption will not have a significant impact on the consolidated financial
statements.
2. ACQUISITION:
On February 20, 1996, the Company acquired certain assets, including land, work
in process and contractual rights, and assumed certain liabilities of Kevin
Scarborough, Inc. (Scarborough), a residential home builder operating in New
Jersey. The purchase price, which included liabilities assumed by the Company,
was approximately $9,800,000. The acquisition was accounted for using the
purchase method of accounting, which resulted in an excess of the purchase price
over the net assets acquired of approximately $1,000,000. In connection with the
acquisition, the Company entered into employment agreements with certain key
employees who were former shareholders of Scarborough. These agreements have
five-year terms and provide for compensation based in part on earnings of the
acquired Scarborough operations. Results of operations of Scarborough have been
included in the accompanying consolidated financial statements from the date of
acquisition.
The following unaudited pro forma financial data gives effect to the
Scarborough acquisition as if it had occurred on the first day of each period
presented. This pro forma information has been prepared utilizing the
historical consolidated financial statements of the Company and Scarborough.
The pro forma financial data is provided for comparative purposes only and
does not purport to be indicative of the results which would have been
obtained if the acquisition had been effected during the periods presented.
The pro forma financial information reflects adjustments to record the excess
purchase price over the fair value of net assets acquired and adjusts income
taxes for the pro forma adjustments (in thousands, except per share data):
<TABLE>
<CAPTION>
March 31,1996
<S> <C>
Net sales $147,467
</TABLE>
23
<PAGE>
<TABLE>
<S> <C>
Net income 3,405
Basic earnings per share 0.60
Diluted earnings per share 0.59
</TABLE>
3. DEBT:
REVOLVING CREDIT FACILITY
In October 1996, the Company entered into an unsecured revolving credit
agreement (the Credit Facility) with a group of banks that provides borrowings
of up to $23 million, of which $5 million may be used for letters of credit.
Borrowings under the Credit Facility are subject to a borrowing base calculation
based on a defined percentage of land, development costs, finished lots,
residential housing completed and under construction, and the working capital of
the Company less amounts outstanding under the Senior Notes, as defined herein.
Borrowings under the Credit Facility bear interest at the greater of the agent
bank's base rate or the federal funds rate plus 1.0% (9.5% as of March 31,
1998). As of March 31, 1998, borrowings outstanding under the Credit Facility's
line of credit totaled $15,010,000, outstanding letters of credit totaled
$646,000 and $7,344,000 was available for borrowing under the calculation
described above. The Credit Facility expires in October 1999.
During fiscal 1998, 1997 and 1996, the maximum balance outstanding under
current and former revolving credit facilities was $20,860,000, $16,585,000
and $6,500,000, and the average balance was $12,359,000, $9,507,000 and
$1,464,000, respectively. The weighted average interest rate during such
years was 9.5%, 8.9% and 9.6%, respectively. The carrying amount of
borrowings outstanding under the Credit Facility as of March 31, 1998 and
1997 approximates their fair value due to their current maturities and/or
variable interest rates.
SENIOR NOTES PAYABLE
In December 1994, the Company issued $25 million of 12.1% senior notes payable,
and in February 1996, the Company issued an additional $10 million of 9.4%
senior notes payable (collectively, the Senior Notes). Proceeds were used to
retire certain mortgage notes payable and for working capital purposes. Interest
on the Senior Notes was due monthly through November 1996, with monthly
principal and interest payments of approximately $552,000 due from December 1996
through December 2004. As of March 31, 1998 and 1997, the fair value of the
Senior Notes was approximately $32,800,000 and $35,690,000, respectively.
MORTGAGE NOTES PAYABLE
Mortgage notes payable are primarily for the acquisition and development of
land, with fixed interest rates ranging from 8.0% to 9.0% and variable interest
rates at prime plus 1.0%. These nonrecourse notes are collateralized by land,
with a carrying cost of approximately $2,379,000 as of March 31, 1998, and
mature at various dates through December 2001. The carrying amounts of mortgage
notes payable approximate their fair value due to their current maturities
and/or variable interest rates. Scheduled annual maturities of the Senior Notes
and mortgage notes payable as of March 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year
<S> <C>
1999 $ 3,996
2000 4,695
2001 4,256
2002 4,748
2003 5,171
Thereafter 10,031
$32,897
</TABLE>
The Senior Notes and the Credit Facility contain various restrictive covenants
including, among others, certain financial covenants relating to minimum
consolidated tangible net worth and earnings levels, as well as funding,
24
<PAGE>
borrowing base requirements, payment of dividends and maximum land and
construction limitations. The Company was in compliance with, or had obtained
waivers for, all covenants as of March 31, 1998.
4. INCOME TAXES:
The following summarizes the provision (benefit) for income taxes
(in thousands):
<TABLE>
<CAPTION>
Years Ended March 31
1998 1997 1996
<S> <C> <C> <C>
Current:
Federal $(606) $1,346 $2,424
State 5 349 690
Deferred 186 (833) (186)
Provision (benefit) for income taxes $(415) $ 862 $2,928
</TABLE>
The components of deferred income taxes consist of the following as of March 31
(in thousands):
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Inventory $ 606 $ 493
State--net operating loss carryforward 191 -
Warranty reserves 144 554
Other accrued liabilities 93 217
Other 130 86
Deferred income tax asset $1,164 $1,350
</TABLE>
A reconciliation of the Company's statutory federal income tax rate to the
effective tax rate is as follows:
<TABLE>
<CAPTION>
Years Ended March 31
1998 1997 1996
<S> <C> <C> <C>
Statutory federal rate 34.0% 34.0% 34.0%
State income taxes, net of federal benefit 6.0 5.8 6.3
Other 1.0 1.3 0.5
Effective tax rate 41.0% 41.1% 40.8%
</TABLE>
5. EMPLOYEE STOCK PLANS:
STOCK OPTION PLANS
The Company has a stock option plan (the Plan) which provides for the granting
of options to designated employees, nonemployees and consultants of the Company
to purchase up to an aggregate of one million shares of common stock at an
exercise price not less than the fair market value of the common stock on the
dates the options are granted. The options become exercisable in equal amounts
over a five-year period from the date of grant and expire ten years from the
date of grant.
The Company also has a director stock option plan (DSOP), pursuant to which
100,000 shares of common stock have been reserved for the granting of stock
options to the Company's outside directors. Under the DSOP, the Company
granted an initial option for the purchase of 1,000 shares to each of the two
outside directors and thereafter will grant stock options for the purchase of
1,000 additional shares of common stock annually for each year of continued
service on the board. Each option is granted at fair market value on the date
of grant and is exercisable for a period of four years, commencing one year
after the date of grant.
25
<PAGE>
The following table summarizes activity in the stock option plans:
<TABLE>
<CAPTION>
Weighted
Average
Number of Shares Exercise
The Plan DSOP Price
<S> <C> <C> <C>
Balance, March 31, 1995 299,872 3,000 $5.91
Granted 128,468 2,000 8.12
Balance, March 31, 1996 428,340 5,000 6.59
Granted 166,196 2,000 5.38
Exercised (10,420) - 5.62
Canceled (8,480) (3,000) 5.87
Balance, March 31, 1997 575,636 4,000 6.26
Canceled (40,534) - 6.37
Balance, March 31, 1998 535,102 4,000 $5.55
Options exercisable as of March 31, 1998 329,073 4,000 $6.08
Shares available for future grants 445,998 92,000
</TABLE>
Shares outstanding under the stock option plans as of March 31, 1998 have
exercise prices ranging from $5.13 to $8.87 and a weighted average remaining
contractual life of 6.8 years.
The Company follows the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation." As permitted by SFAS No. 123, the Company has
elected to continue to account for its stock option plans under the
provisions of APB Opinion No. 25, under which no compensation costs have been
recognized. Because the measurement provisions of SFAS No. 123 have not been
applied to options granted prior to April 1, 1995, the resulting pro forma
compensation costs may not be representative of those to be expected in
future years. Had compensation costs for these plans been recorded at fair
value consistent with the provisions of SFAS No. 123, the Company's net
income (loss) and earnings (loss) per share would have been as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net income (loss) (in thousands):
As reported $(598) $1,236
Pro forma (713) 1,168
Basic and diluted earnings (loss) per share:
As reported $(.10) $ 0.22
Pro forma $(.12) $ 0.20
</TABLE>
The weighted average fair value of stock options granted in fiscal 1997 was
$2.64.The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model. The following assumptions were used to
estimate the fair value of options granted in fiscal 1997:
<TABLE>
<CAPTION>
<S> <C>
Risk-free interest rate 5.97%-6.11%
Expected life 5-10 Years
Expected volatility 34%-36%
Expected dividend yield None
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
The Company sponsors an employee stock purchase plan (the Purchase Plan). A
total of 125,000 shares of common stock are reserved for issuance under the
Purchase Plan. The Purchase Plan permits eligible employees to purchase
26
<PAGE>
common stock at 85% of the lower fair market value of the common stock at
certain dates. During the years ended March 31, 1998, 1997 and 1996, employee
contributions of approximately $94,000, $128,000 and $121,000, respectively,
were used to purchase common stock under the terms of the Purchase Plan.
6. RETIREMENT SAVINGS PLAN:
The Company sponsors a 401(k) profit-sharing plan which covers all employees
over the age of 20 1/2 who elect to participate. The Company may, at its
discretion, make contributions to the 401(k) plan. All plan contributions vest
in equal installments over a five-year period. The Company contributed $80,000,
$83,000 and $53,000 to the 401(k) plan in fiscal 1998, 1997 and 1996,
respectively.
7. COMMITMENTS AND CONTINGENCIES:
LETTERS OF CREDIT AND BONDS
Letters of credit are issued by banks, and bonds are issued by insurance
companies on behalf of the Company during the ordinary course of business, as
required by certain development agreements with municipalities. As of March 31,
1998, the Company had outstanding letters of credit totaling $2,200,000 and
outstanding bonds totaling $944,000.
LITIGATION
The Company is party to certain claims arising in the ordinary course of
business. In the opinion of management, based upon the advice of legal counsel,
the outcomes of such claims are not expected to be material to the Company's
financial position or results of operation.
LEASES
The Company is obligated under various noncancelable operating leases for office
facilities and certain equipment. Rental expense under these agreements,
excluding leaseback of model homes, was approximately $714,000, $866,000 and
$600,000 in fiscal 1998, 1997 and 1996, respectively.
Future minimum lease payments required under noncancelable operating lease
agreements are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Amount
------------------- ------------
<S> <C>
1999 $575
2000 271
2001 57
2002 16
$919
</TABLE>
On March 29, 1998, the Company entered into an agreement for the sale and
leaseback of ten of its model homes in Minnesota and New Jersey for
approximately $1,400,000. The lease term on individual model homes is 11 months.
Total lease payments are based on LIBOR plus 5.0%, and no rental expense was
incurred in fiscal 1998. Additional future rental commitments approximate
$155,000 in fiscal 1999.
8. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
The following is a condensed summary of quarterly results of operations for
fiscal 1998 and 1997 (in thousands, except per share data):
Basic and
Diluted
Net Earnings
Gross Income (Loss) Per
Net Sales Profit (Loss) Share
----------- -------- -------- ------------
----------- -------- -------- ------------
27
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Fiscal 1998:
First quarter $ 42,704 $ 6,076 $ 454 $ 0.08
Second quarter 41,674 5,642 94 0.02
Third quarter 32,008 4,082 (732) (0.13)
Fourth quarter 44,444 5,746 (414) (0.07)
$160,830 $21,546 $ (598) $(0.10)
Fiscal 1997:
First quarter $ 38,074 $ 5,572 $ 652 $ 0.11
Second quarter 46,669 5,971 429 0.08
Third quarter 49,614 6,412 823 0.14
Fourth quarter* 46,100 6,170 (668) (0.11)
$180,457 $24,125 $1,236 $ 0.22
</TABLE>
*Fourth quarter of fiscal 1997 reflects adjustments relating to land impairment
that reduced income before provision (benefit) for income taxes by $1,500,000.
28
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors of the Company is incorporated
herein by reference to the descriptions set forth under the caption "Election of
Directors" in the Proxy Statement for Annual Meeting of Shareholders to be held
September 10, 1998 (the "1998 Proxy Statement"). Set forth below are the names,
ages and positions of the executive officers of the Company.
<TABLE>
<S> <C> <C>
David H. Rotter 51 President, Secretary and Director
Bernard J. Rotter 55 Vice President, Treasurer and Director
Todd M. Stutz 40 Executive Vice President and Director
John J. Dierbeck, III 52 Executive Vice President and Director
Lawrence B. Shapiro 42 Chief Financial Officer and Director
</TABLE>
The officers of the Company are elected annually and serve at the
discretion of the Board of Directors. None of the Company's officers is employed
pursuant to a written employment contract.
BACKGROUND OF EXECUTIVE OFFICERS
DAVID H. ROTTER is a founder of the Company and has been a member of
its Board of Directors since its inception. He served as the Company's Vice
President for 1973 through March 1990 and has served as its President from April
1990 through the present. He has also served as the Company's secretary since
its inception. He is the brother of Bernard J. Rotter.
BERNARD J ROTTER has served as a Director, Vice President and
Treasurer of the Company since July 1984. He is the brother of David H.
Rotter.
TODD M. STUTZ was elected a Director of the Company in August 1992
and has served as Executive Vice President since June 1991. He joined the
Company in April 1989 and served as its Land Development Manager until June
1991. Between April 1980 and March 1989 he was employed by the Housing and
Redevelopment Authority of the City of Columbia Heights, Minnesota as Executive
Director.
JOHN J. DIERBECK, III was elected Executive Vice President in May
1996. He was elected a Director of the Company in August 1992. He served as the
Company's sales manager for more than five years prior to becoming an Executive
Vice President.
LAWRENCE B. SHAPIRO was elected Chief Financial Officer and a
Director of the Company in August 1992. Prior to that time, he served as the
Company's Controller.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated herein by reference
to the information set forth under the caption "Executive Compensation" in the
1998 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners
and management of the Company is incorporated herein by reference to the
information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the 1998 Proxy Statement.
29
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions
with the Company is incorporated herein by reference to the information set
forth under the caption "Certain Transactions" in the 1998 Proxy Statement.
30
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED WITH THIS REPORT.
(1) See index to consolidated financial statements
on page 14 of this report.
(2) All supplemental schedules are omitted because of
the absence of conditions under which they are
required or because the information is shown in
the Consolidated Financial Statements or notes
thereto.
(b) REPORTS ON FORM 8-K. During the quarter ended March 31,
1998, the Company filed no reports on Form 8-K with the
Securities and Exchange Commission.
(c) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
3.1 The Company's Restated Articles of Incorporation.(1)
3.2 The Company's Bylaws.(1)
10.1 The Rottlund Company, Inc. 1992 Stock Option Plan.(1)
10.2 The Rottlund Company, Inc. 1992 Director Stock Option Plan.(1)
10.3 The Rottlund Company, Inc. Employee Stock Purchase Plan.(1)
10.4 Form of Shareholders Agreement.(1)
10.5 Note Agreement, dated as of December 2, 1994, by and among the Company and the purchasers listed therein.(2)
10.6 Note Agreement, dated as of February 15, 1996, by and among the Company and the purchasers listed therein.(3)
10.7 Letter Amendment, dated December 30, 1996, by and among the Company and the note purchasers listed therein.
10.8 Waiver and Amendment, dated March 31, 1997, by and among the Company and the note purchasers listed therein.
10.9 Waiver and Amendment, dated December 31, 1997, by and among the Company and the note purchasers listed therein.
10.10 Waiver and Amendment, dated as of March 31, 1998, by and among the Company and the note purchasers listed therein.
10.11 Credit Facility, dated October 23, 1996 with First National Bank of Boston.(4)
10.12 First Modification of Credit Agreement, dated November 19, 1996.
10.13 Second Modification of Credit Agreement, dated December 24, 1996.
10.14 Third Modification of Credit Agreement, dated January 18, 1997.
10.15 Fourth Modification of Credit Agreement, dated June 25, 1997.
10.16 Fifth Modification of Credit Agreement, dated January 15, 1998.
10.17 Sixth Modification of Credit Agreement, dated July 10, 1998.
11 Computation of Per Share Earnings.
22 Subsidiaries of the Company.
23 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1, Registration No. 33-51726 (the "Form S-1").
(2) Incorporated by reference to the Company's filing on Form 10-K for the
year ended March 31, 1995.
(3) Incorporated by reference to the Company's filing on Form 10-K for the
year ended March 31, 1996.
31
<PAGE>
(4) Incorporated by reference to the Company's filing on Form 10-Q for the
three month period ending December 31, 1996.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE ROTTLUND COMPANY. INC.
Dated: July 13, 1998
By /s/ DAVID H. ROTTER
------------------------------------
David H. Rotter
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND DIRECTOR
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ DAVID H. ROTTER President, Chief Executive Officer July 13, 1998
- ------------------------------ and Director
David H. Rotter
/s/ BERNARD J. ROTTER Vice President, Treasurer and Chairman July 13, 1998
- ------------------------------ of the Board
Bernard J. Rotter
/s/ JOHN J. DIERBECK, III Executive Vice President and Director July 13, 1998
- ------------------------------
John J. Dierbeck, III
/s/ LAWRENCE B. SHAPIRO Chief Financial Officer and Director July 13, 1998
- ------------------------------ (Principal Financial and Accounting Officer)
Lawrence B. Shapiro
/s/ TODD M. STUTZ Executive Vice President and Director July 13, 1998
- ------------------------------
Todd M. Stutz
Director
Dennis Doyle
- ------------------------------
Director
Scott D. Rued
- ------------------------------
</TABLE>
33
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Manually
Numbered Page
Exhibit No. Exhibit References
- ----------- --------- ---------------
<S> <C>
10.7 Letter Amendment, dated December 30, 1996, by and among the Company and the note purchasers
listed therein.
10.8 Waiver and Amendment, dated March 31, 1997, by and among the Company and the note
purchasers listed therein.
10.9 Waiver and Amendment, dated December 31, 1997, by and among the Company and the note
purchasers listed therein.
10.10 Waiver and Amendment, dated as of March 31, 1998, by and among the Company and the note
purchasers listed therein.
10.12 First Modification of Credit Agreement, dated November 19, 1996.
10.13 Second Modification of Credit Agreement, dated December 24, 1996.
10.14 Third Modification of Credit Agreement, dated January 18, 1997.
10.15 Fourth Modification of Credit Agreement, dated June 25, 1997.
10.16 Fifth Modification of Credit Agreement, dated January 15, 1998.
10.17 Sixth Modification of Credit Agreement, dated July 10, 1998.
11 Computation of Per Share Earnings
22 Subsidiaries of The Rottlund Company, Inc.
23 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
</TABLE>
<PAGE>
LETTER AMENDMENT
Dated as of December 30, 1996
Principal Mutual Life Insurance Company
Northern Life Insurance Company
Modern Woodmen of America
Royal Neighbors of America
Bankers Security Life Insurance Society
United Services Life Insurance Company
Ladies and Gentlemen:
Reference is made to (1) the Note Agreement dated as of December 2, 1994
(as amended by that certain Letter Amendment dated as of February 15, 1996, the
"1994 Agreement") among Principal Mutual Life Insurance Company ("Principal"),
Northern Life Insurance Company ("Northern"), Modern Woodmen of American ("MWA")
and Royal Neighbors of America ("RNA", and together with Principal, Northern and
MWA, collectively the "1994 Purchasers") and The Rottlund Company, Inc., a
Minnesota corporation (the "Company"), and (ii) the Note Agreement dated as of
February 15, 1996 (the "1996 Agreement", and together with the 1994 Agreement,
collectively the "Agreements" and each individually an "Agreement") among
Principal, Bankers Security Life Insurance Society ("Bankers") and United
Services Life Insurance Company ("United", and together with Principal and
Bankers, collectively the "1996 Purchasers", and, together with the 1994
Purchasers, collectively the "Purchasers").
The Company has requested that Section 5.6 of each of the Agreements be
amended as herein set forth, to which amendment the Purchasers have agreed in
consideration of the amendment of Section 5.7 ~f each of the Agreements as
herein set forth. Accordingly, in consideration of the premises herein set
forth, and of other good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, it is hereby agreed as follows:
1. Section 5.6(c) of each of the Agreements is hereby amended and
restated in its entirety as follows:
(c) Current Debt and Funded Debt of the Company and its
Subsidiaries not otherwise permitted by this Section
5.6;
<PAGE>
2. Section 5.6(e) of each of the Agreements is hereby amended and
restated in its entirety as follows:
(e) any renewal, extension, substitution, refinancing, or
replacement of any Current Debt or Funded Debt
permitted by Section 5.6(b), provided that the
principal amount of Funded Debt or Current Debt
resulting from such renewal, extension, substitution,
refinancing or replacement does not exceed the
principal amount of Current Debt or Funded Debt so
refinanced;
3. Section 5.6 of each of the Agreements is hereby amended by adding at
the end thereof the following proviso:
provided, however, that at no time shall (i) the ratio of
(A) the sum of Consolidated Current Debt and Consolidated
Funded Debt to (B) Consolidated Net Tangible Assets exceed
67% at any time on and prior to December 31, 1998 and 62% at
any time thereafter, or (ii) the sum of the aggregate
Current Debt and Funded Debt of all Subsidiaries (exclusive
of such Debt permitted by Section 5.6(d) hereof) exceed 20%
of Consolidated Tangible Net Worth.
4. Section 5.7(g)(v) of each of the Agreements is hereby amended as
restated in its entirety as follows:
(v) at no time shall the aggregate amount then remaining
unpaid on Debt secured by such Liens and by Liens
permitted by Section 5.7(e) exceed an amount equal to
15% of Consolidated Net Tangible Assets.
Except as specifically amended hereby, all terms and conditions of each of
the Agreements shall remain in full force and effect. This Letter Amendment may
be executed simultaneously in two or more counterparts, each of which shall be
an original, but all of which constitute but one agreement. This Letter
Amendment shall be governed by, and enforced in accordance with Minnesota law.
The Company represents and warrants to the Purchasers that (i) no
Default or Event of Default (as defined in each Agreement) has occurred and
is continuing, (ii) this Letter Amendment has been duly authorized, executed
and delivered by the Company and each Agreement, as amended by this Letter
Amendment, constitutes a legal, valid and binding obligation of the Company,
and (iii) there is no provision in the Articles of Incorporation of the
Company or in its bylaws or in any indenture, contract or agreement to which
the Company is a party or by which it is bound nor any provision of law or
any order of any court or governmental authority which prohibits the
execution and delivery by the Company of this Letter Amendment, the
performance or observance by the Company of the terms and conditions of this
Letter Amendment, or the performance or observance by the Company of the
terms and conditions of
-2-
<PAGE>
the Agreements, as modified by the amendments set forth in this Letter
Amendment. All representations and warranties contained herein or made in
writing by the Company in connection herewith shall survive the execution and
delivery hereof. It shall be deemed to be an Event of Default under each
Agreement if any of such representations or warranties proves to be false in
any material respect as of the date hereof.
If you agree to amending the Agreements in the manner set forth above,
please so indicate by executing the form of acknowledgment set forth below. In
accordance with Section 7.1 of each of the Agreements, this Letter Amendment
shall become a binding agreement between you and the Company with respect to
each Agreement, and the amendments set forth herein shall take effect as of the
date hereof with respect to such Agreement, upon the execution of the form of
acknowledgment set forth below by the holders of at least 66-2/3% in the
aggregate principal amount of the outstanding Notes (as defined in such
Agreement) issued pursuant to such Agreement (die percentage of the aggregate
principal amount of the outstanding Notes held by each of you being set forth on
Schedule I hereof).
Very truly yours,
THE ROTTLUND COMPANY, INC.
By
----------------------------------
Its
-------------------------------
-3-
<PAGE>
SCHEDULE I
1995 Agreement
<TABLE>
<CAPTION>
Principal Amount of
Holder Outstanding Note Percentage
-------- --------------------- ------------
<S> <C> <C>
Principal Mutual Life $16,000,000 64%
Insurance Company
Northern Life Insurance $ 5,000,000 20%
Company
Modern Woodmen of America $ 3,000,000 12%
Royal Neighbors of $ 1,000,000 4%
America
----------- ----
$25,000,000 100%
1996 Agreement
Principal Amount of
Holder Outstanding Note Percentage
------- --------------------- ------------
Principal Mutual Life $ 7,000,000 70%
Insurance Company
Siglar & Co., as nominee $ 1,000,000 10%
for Bankers Security Life
Insurance Society
Siglar & Co., as nominee $ 2,000,000 20%
for United Services Life ----
Insurance Company
100%
</TABLE>
-4-
<PAGE>
Agreed to as of the date first above written.
As to the 1994 Agreement and the 1996 Agreement:
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
By
--------------------------------------
Its
--------------------------------
And
-------------------------------------
Its
--------------------------------
As to the 1994 Agreement:
NORTHERN LIFE INSURANCE COMPANY
By
--------------------------------------
Its
--------------------------------
MODERN WOODMEN OF AMERICA
By
--------------------------------------
Its
--------------------------------
And
-------------------------------------
Its
--------------------------------
-5-
<PAGE>
Agreed to as of the date first above written.
As to the 1994 Agreement and the 1996 Agreement:
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
By
--------------------------------------
Its
--------------------------------
And
-------------------------------------
Its
--------------------------------
As to the 1994 Agreement:
NORTHERN LIFE INSURANCE COMPANY
By
--------------------------------------
Its
--------------------------------
MODERN WOODMEN OF AMERICA
By
--------------------------------------
Its
--------------------------------
And
-------------------------------------
Its
--------------------------------
-6-
<PAGE>
ROYAL NEIGHBORS OF AMERICA
By
--------------------------------------
Its
--------------------------------
And
-------------------------------------
Its
--------------------------------
As to the 1994 Agreement:
RELIASTAR BANKERS SECURITY LIFE INSURANCE COMPANY F/K/A
BANKERS SECURITY LIFE INSURANCE SOCIETY
By
--------------------------------------
Its
--------------------------------
UNITED SERVICES LIFE INSURANCE COMPANY
By
--------------------------------------
Its
--------------------------------
-7-
<PAGE>
WAIVER AND AMENDMENT
Dated as of March 31, 1997
Principal Mutual Life Insurance Company
Northern Life Insurance Company
Modern Woodmen of America
Royal Neighbors of America
ReliaStar Bankers Security Life Insurance Company
ReliaStar United Services Life Insurance Company
Ladies and Gentlemen:
Reference is made to (i) the Note Agreement dated as of December 2, 1994
(as amended by that certain Letter Amendment dated as of February 15, 1996 and
that certain Letter Amendment dated as of December 30, 1996, the "1994
Agreement") among Principal Mutual Life Insurance Company ("Principal"),
Northern Life Insurance Company ("Northern"), Modern Woodmen of America ("MWA")
and Royal Neighbors of America ("RNA", and together with Principal, Northern and
MWA, collectively the "1994 Purchasers") and The Rottlund Company, Inc., a
Minnesota corporation (the "Company"), pursuant to which the 1994 Purchasers
purchased promissory notes of the Company in the aggregate original principal
amount of $25,000,000 (collectively, the "1994 Notes") and (ii) the Note
Agreement dated as of February 15, 1996 (as amended by that certain Letter
Amendment dated as of December 30, 1996, the "1996 Agreement", and together with
the 1994 Agreement, collectively the "Agreements" and each individually an
"Agreement") among Principal, Bankers Security Life Insurance Society, n/k/a
ReliaStar Bankers Security Life Insurance Company ("Bankers") and United
Services Life Insurance Company, n/k/a ReliaStar United Services Life Insurance
Company ("United", and together with Principal and Bankers, collectively the
"1996 Purchasers", and, together with the 1994 Purchasers, collectively the
"Purchasers"), pursuant to which the 1996 Purchasers purchased promissory notes
of the Company in the aggregate original principal amount of $10,000,000
(collectively, the "1996 Notes"). Capitalized terms used and not otherwise
defined herein shall have the meanings ascribed thereto in each Agreement.
The Company has advised the Purchasers that the Company is at present in
default under Sections 5.5, 5.6 and 5.16 of each of the Agreements, which
defaults the Company hereby acknowledges. The Company has further advised the
Purchasers that the Company is likely to continue to be so in default under
Sections 5.5 and 5.16 of each of the Agreements in the near future. The Company
has accordingly requested certain waivers relating to Sections 5.5, 5.6 and 5.16
of each of the Agreements, and certain amendments relating to Sections 5.5 and
5.16 of each of the Agreements.
In consideration of the premises herein set forth, and of other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, it is hereby agreed as follows:
<PAGE>
1. The Purchasers hereby waive the defaults existing as of the date
hereof under Sections 5.5, 5.6 and 5.16 of each of the Agreements, and each
Event of Default rising directly therefrom.
2. Section 5.5 of each of the Agreements is hereby amended and
restated in its entirety as follows:
The Company shall at all times maintain Consolidated Tangible Net
Worth in an amount not less than $24,750,000 PLUS 70% of the positive
Consolidated Net Income, if any, for each Fiscal Quarter commencing on
or after April 1, 1997.
3. Section 5.13 of each Agreement is hereby amended by (i) changing
the lettering of subsection (i) to (j), and (ii) adding thereto the
following new subsection (i):
(i) LEVERAGE RATIO CERTIFICATES. As soon as available and in any
event within 15 days after the close of any Fiscal Quarter, a Leverage
Ratio Certificate, correctly setting forth the ratio, as of the close
of such Fiscal Quarter, of (A) the sum of Consolidated Current Debt
and Consolidated Funded Debt to (B) Consolidated Net Tangible Assets,
all in reasonable detail and certified as complete and correct by a
financial officer of the Company; and
4. Section 5.16 of each of the Agreements is hereby amended and
restated in its entirety as follows:
The Company shall maintain, as of the close of each month, Net
Income Available for Fixed Charges for the immediately preceding
twelve-month period of at least the following percentages of Fixed
Charges for such twelve-month period:
125% as of the close of each month on and prior to September 30,
1997;
145% as of the close of each month on and prior to February 28,
1998; and
200% as of the close of each month thereafter.
As an inducement to and in consideration of the agreement by the Purchasers
to waive the defaults under the Agreements specified in Section 1 of this Waiver
and Amendment and to amend the Agreements as set forth in Sections 2, 3 and 4 of
this Waiver and Amendment, the Company hereby agrees, notwithstanding anything
in the Agreements, the 1994 Notes or the 1996 Notes (as the case may be) to the
contrary, as follows:
(i) if as of the close of any Fiscal Quarter commencing on or after
April 1, 1997 the ratio of (A) the sum of Consolidated Current Debt
and Consolidated Funded Debt to (B) Consolidated Net Tangible Assets
(such ratio being herein referred to as the "Leverage Ratio"), as
disclosed in the Leverage Ratio Certificate
2
<PAGE>
referred to in Section 5.13(i) of each of the Agreements (each a
"Leverage Ratio Certificate") for such Fiscal Quarter, equals or
exceeds 64%, or if the Company fails to deliver the Leverage Ratio
Certificate for such Fiscal Quarter to the Holders in accordance
with Section 5.13(i) of each of the Agreements (and, in such event,
in addition to any other rights the Holders may exercise under
Section 6 of each Agreement), then, effective as of the first day
of the Fiscal Quarter immediately following the Fiscal Quarter to
which the Leverage Ratio Certificate applies (where the Company
delivers such Leverage Ratio Certificate) or would apply (where the
Company fails to do so), as the case may be, the 1994 Notes shall
bear interest at the rate of 12.61 % per annum and the 1996 Notes
shall bear interest at the rate of 9.92% per annum;
(ii) if as of the close of any Fiscal Quarter commencing on or after
April 1, 1997 the Leverage Ratio, as disclosed in the Leverage Ratio
Certificate for such Fiscal Quarter, equals or exceeds 60% but is less
than 64%, then, effective as of the first day of the Fiscal Quarter
immediately following the Fiscal Quarter to which the Leverage Ratio
Certificate applies, the 1994 Notes shall bear interest at the rate of
12.36% per annum and the 1996 Notes shall bear interest at the rate of
9.67% per annum; and
(iii) if as of the close of any Fiscal Quarter commencing on or
after April 1, 1997 the Leverage Ratio, as disclosed in the Leverage
Ratio Certificate for such Fiscal Quarter, is less than 60%, then,
effective as of the first day of the Fiscal Quarter immediately
following the Fiscal Quarter to which the Leverage Ratio Certificate
applies, the 1994 Notes shall bear interest at the rate of 12.11 % per
annum and the 1996 Notes shall bear interest at the rate of 9.42% per
annum.
The amount of each combined installment of principal and interest payable on the
1994 Notes or the 1996 Notes, as the case may be, shall be adjusted to reflect
the foregoing arrangements, but the portion of each such combined installment
allocable to principal shall remain unchanged. Default in the payment of
interest, as calculated in accordance with the foregoing arrangements, shall
constitute an Event of Default under Section 6.1 of each of the Agreements. The
Company hereby agrees to execute, at the request of the Holders or any of them,
addenda to the 1994 Notes and the 1996 Notes evidencing the foregoing
arrangements.
Except as specifically amended hereby, all terms and conditions of each of
the Agreements shall remain in full force and effect. This Waiver and Agreement
may be executed simultaneously in two or more counterparts, each of which shall
be an original, but all of which constitute but one agreement. This Waiver and
Amendment shall be governed by, and enforced in accordance with Minnesota law.
The Company represents and warrants to the Purchasers that (i) except as
disclosed herein, no Default or Event of Default has occurred and is continuing,
(ii) this Waiver and Amendment has been duly authorized, executed and delivered
by the Company and each Agreement, as amended by this Waiver and Amendment,
constitutes a legal, valid and binding
3
<PAGE>
obligation of the Company, and (iii) there is no provision in the Articles of
Incorporation of the Company or in its bylaws or in any indenture, contract
or agreement to which the Company is a party or by which it is bound nor any
provision of law or any order of any court or governmental authority which
prohibits the execution and delivery by the Company of this Waiver and
Amendment, the performance or observance by the Company of the terms and
conditions of this Waiver and Amendment, or the performance or observance by
the Company of the terms and conditions of the Agreements, as modified by the
amendments set forth in this Waiver and Amendment. All representations and
warranties contained herein or made in writing by the Company in connection
herewith shall survive the execution and delivery hereof. It shall be deemed
to be an Event of Default under each Agreement if any of such representations
or warranties proves to be false in any material respect as of the date
hereof.
If you are in agreement with the foregoing, please so indicate by executing
the form of acknowledgment set forth below, whereupon this Waiver and Amendment
shall become a binding agreement among you and the Company.
Very truly yours
THE ROTTLUND COMPANY, INC.
By
------------------------------------------
Its
--------------------------------------
4
<PAGE>
Agreed to as of the date first above written.
AS TO THE 1994 AGREEMENT AND THE 1996 AGREEMENT:
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
By
--------------------------------------
Its
--------------------------------
And
Its
--------------------------------
AS TO THE 1994 AGREEMENT:
NORTHERN LIFE INSURANCE COMPANY
By
--------------------------------------
Its
--------------------------------
MODERN WOODMEN OF AMERICA
By
--------------------------------------
Its
--------------------------------
And
Its
--------------------------------
5
<PAGE>
ROYAL NEIGHBORS OF AMERICA
By
--------------------------------------
Its
--------------------------------
And
Its
--------------------------------
AS TO THE 1994 AGREEMENT:
RELIASTAR BANKERS SECURITY LIFE INSURANCE COMPANY
f/k/a Bankers Security
Life Insurance Society
By
--------------------------------------
Its
--------------------------------
UNITED SERVICES LIFE INSURANCE COMPANY
By
--------------------------------------
Its
--------------------------------
6
<PAGE>
WAIVER AND AMENDMENT
Dated as of December 31, 1997
Principal Mutual Life Insurance Company
Northern Life Insurance Company
Modern Woodmen of America
Royal Neighbors of America
ReliaStar Life Insurance Company of New York
ReliaStar United Services Life Insurance Company
Ladies and Gentlemen:
Reference is made to (i) the Note Agreement dated as of December 2, 1994
(as amended by that certain Letter Amendment dated as of February 15, 1996,
and that certain Letter Amendment dated as of December 30, 1996, and that
certain Waiver and Amendment dated as of March 31, 1997, the "1994
Agreement") among Principal Mutual Life Insurance Company ("Principal"),
Northern Life Insurance Company ("Northern"), Modern Woodmen of America
("MWA") and Royal Neighbors of America ("RNA", and together with Principal,
Northern and MWA, collectively the "1994 Purchasers") and The Rottlund
Company, Inc., a Minnesota corporation (the "Company"), pursuant to which the
1994 Purchasers purchased promissory notes of the Company in the aggregate
original principal amount of $25,000,000 (collectively, the "1994 Notes") and
(ii) the Note Agreement dated as of February 15, 1996 (as amended by that
certain Letter Amendment dated as of December 30, 1996 and that certain
Waiver and Amendment dated as of March 31, 1997, the "1996 Agreement", and
together with the 1994 Agreement, collectively the "Agreements" and each
individually an "Agreement") among Principal, Bankers Security Life Insurance
Society, n/k/a ReliaStar Life Insurance Company of New York ("Bankers") and
United Services Life Insurance Company, n/k/a ReliaStar United Services Life
Insurance Company ("United", and together with Principal and Bankers,
collectively the "1996 Purchasers", and, together with the 1994 Purchasers,
collectively the "Purchasers"), pursuant to which the 1996 Purchasers
purchased promissory notes of the Company in the aggregate original principal
amount of $10,000,000 (collectively, the "1996 Notes"). Capitalized terms
used and not otherwise defined herein shall have the meanings ascribed
thereto in each Agreement.
The Company has advised the Purchasers that the Company is at present in
default under Section 5.16 of each of the Agreements, which defaults the
Company hereby acknowledges. The Company has further advised the Purchasers
that the Company is likely to continue to be so in default under Section 5.16
of each of the Agreements in the near future. The Company has accordingly
requested certain waivers and amendments relating to Section 5.16 of each of
the Agreements.
In consideration of the premises herein set forth and the satisfaction
of the Condition hereinafter described, the Company and the Purchasers hereby
agree, effective upon the satisfaction of the Condition, as follows:
1. The Purchasers hereby waive the defaults existing as of the date
hereof under Section 5.16 of each of the Agreements, and each Event of
Default arising directly therefrom.
1
<PAGE>
1 Section 5.7 (g)(v) of each of the Agreements is hereby amended
and restated in its entirety as follows:
(v) at no time shall the aggregate amount then remaining unpaid
on Debt secured by such Liens and Liens permitted by Section
5.7(e) exceed the lesser of (i) $8,000,000 or (ii) an amount
equal to 11.5% of Consolidated Net Tangible Assets.
3. Section 5.16 of each of the Agreements is hereby amended and restated
in its entirety as follows:
The Company shall maintain, as of the close of each month,
Net Income Available for Fixed Charges for the immediately
preceding twelve-month period of at least the following
percentages of Fixed Charges for such twelve-month period:
100% as of the close of each month on and prior to
March 31, 1998;
115% as of the close of each month on and prior to June
30, 1998;
140% as of the close of each month on or prior to
September 30, 1998;
190% as of the close of each month on and prior to
December 31, 1998;
200% as of the close of each month thereafter.
4. Section 5 of each of the Agreements is hereby amended by adding the
following new sections 5.19 and 5.20 thereto:
-2-
<PAGE>
A. EXISTING BANK INDEBTEDNESS. If the Company shall
modify any term or condition of the Existing Bank
Indebtedness Documents, the Company agrees to give
written notice of such modification to all Holders
promptly, but in any event within five days of the
date on which such modification is effected.
A. GUARANTY FROM FUTURE SUBSIDIARIES. In addition to
causing the existing Subsidiaries to execute and
deliver the Guaranty, the Company will promptly
secure the execution and delivery of a guaranty
substantially in the form of the Guaranty from
each Subsidiary as may hereafter be formed and
organized.
1 Section 6.1 of each of the Agreements is hereby amended (a)
by changing the reference to "5.18" in the third line of
subsection 6.1(c) to "5.19", and (b) by changing the
parenthetical statement "(individually or in the aggregate")
in the sixth and seventh lines of subsection 6.1(e) to
"(individually or in the aggregate, and including without
limitation the Existing Bank Indebtedness)".
1 Section 8.1 of each of the Agreements is hereby amended by
adding thereto the following new definitions:
"Existing Bank Indebtedness" shall mean the portion of the Debt
of the Company incurred under or pursuant to the Existing Credit
Agreement.
"Existing Bank Indebtedness Documents" shall mean the Existing
Credit Agreement, together with all instruments and documents
related thereto, given to secure or evidence the Existing Bank
Indebtedness, or otherwise executed in connection therewith.
"Existing Credit Agreement" shall mean that certain Credit
Agreement dated as of October 23, 1996 among the Company, The
First National Bank of Boston, as Agent, and the other parties
thereto, as the same may from time to time be amended or
otherwise modified. Reference herein to the amendment or other
modification of the Existing Credit Agreement is not intended to
waive or modify in any respect the covenant of the Company
contained in Section 5.19 regarding the modification of the
Existing Bank Indebtedness Documents.
"Guaranty" shall mean the Guaranty of the Subsidiaries, the form
of which is appended as Exhibit A to that certain Waiver and
Amendment dated as of December 31, 1997, by and among the
Company and the Purchasers.
3
<PAGE>
This Waiver and Amendment shall become effective only upon the execution and
delivery by each of the Subsidiaries of a Guaranty (the "Guaranty"),
substantially in the form of Exhibit A hereto (the "Condition").
Except as specifically amended hereby, all terms and conditions of each
of the Agreements shall remain in full force and effect. This Waiver and
Agreement may be executed simultaneously in two or more counterparts, each of
which shall be an original, but all of which constitute but one agreement.
This Waiver and Amendment shall be governed by, and enforced in accordance
with Minnesota law.
The Company represents and warrants to the Purchasers that (i) except as
disclosed herein, no Default or Event of Default has occurred and is
continuing, (ii) this Waiver and Amendment has been duly authorized, executed
and delivered by the Company and each Agreement, as amended by this Waiver
and Amendment, constitutes a legal, valid and binding obligation of the
Company, and the Guaranty has been duly authorized, executed and delivered by
each Subsidiary and constitutes a legal, valid and binding obligation of each
Subsidiary, and (iii) there is no provision in the Articles of Incorporation
of the Company or in its bylaws or in any indenture, contract or agreement to
which the Company is a party or by which it is bound nor any provision of law
or any order of any court or governmental authority which prohibits the
execution and delivery by the Company of this Waiver and Amendment, the
performance or observance by the Company of the terms and conditions of this
Waiver and Amendment, or the performance or observance by the Company of the
terms and conditions of the Agreements, as modified by the amendments set
forth in this Waiver and Amendment, and there is no provision in the Articles
of Incorporation or bylaws or partnership agreement, as the case may be, of
any Subsidiary or in any indenture, contract, or agreement to which any
Subsidiary is a party or by which any Subsidiary is bound nor any provision
of law or any order of any court or governmental authority which prohibits
the execution and delivery by any Subsidiary of the Guaranty or the
performance or observance by any Subsidiary of the terms and conditions of
the Guaranty. All representations and warranties contained herein or made in
writing by the Company in connection herewith shall survive the execution and
delivery hereof. It shall be deemed to be an Event of Default under each
Agreement if any of such representations or warranties proves to be false in
any material respect as of the date hereof.
If you are in agreement with the foregoing, please so indicate by
executing the form of acknowledgment set forth below. In accordance with
Section 7.1 of each of the Agreements, this Waiver and Amendment shall become
a binding agreement between you and the Company with respect to each
Agreement, and the amendments set forth herein shall take effect as of the
date hereof with respect to such Agreement, upon the execution of the form of
acknowledgement set forth below by the holders of at least 66 2/3% in the
aggregate principal amount of the outstanding Notes (as defined in such
Agreement) issued pursuant to such Agreement (the percentage of the aggregate
principal amount of the outstanding Notes held by each of you being set forth
on Schedule I hereof).
<PAGE>
Very truly yours
THE ROTTLUND COMPANY, INC.
By
---------------------------------
Its
--------------------------------
Agreed to as of the date first above written.
AS TO THE 1994 AGREEMENT AND THE 1996 AGREEMENT:
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
By
-----------------------------------
Its
----------------------------------
And
----------------------------------
Its
----------------------------------
AS TO THE 1994 AGREEMENT:
NORTHERN LIFE INSURANCE COMPANY
By
-----------------------------------
Its
----------------------------------
<PAGE>
MODERN WOODMEN OF AMERICA
By
-----------------------------------
Its
----------------------------------
And
----------------------------------
Its
----------------------------------
ROYAL NEIGHBORS OF AMERICA
By
-----------------------------------
Its
----------------------------------
And
----------------------------------
Its
----------------------------------
AS TO THE 1996 AGREEMENT:
RELIASTAR LIFE INSURANCE COMPANY
OF NEW YORK, successor by merger to
Relia Star Bankers Life Insurance Company,
f/k/a Bankers Security Life Insurance Society
By
-----------------------------------
Its
----------------------------------
RELIASTAR UNITED SERVICES
LIFE INSURANCE COMPANY
By
-----------------------------------
Its
----------------------------------
<PAGE>
SCHEDULE I
1994 AGREEMENT
<TABLE>
<CAPTION>
Percentage of Principal Amount
Holder Of Outstanding Notes
------ --------------------
<S> <C>
Principal Mutual Life Insurance 64%
Company
Northern Life Insurance Company 20%
Modern Woodmen of America 12%
Royal Neighbors of America 4%
----
100%
</TABLE>
1996 AGREEMENT
<TABLE>
<CAPTION>
Percentagee of Principal Amount
Holder Of Outstanding Notes
------ --------------------
<S> <C>
Principal Mutual Life Insurance 70%
Company
Siglar & Co., as nominee for 10%
Bankers Security Life
Insurance Society (n/k/a
ReliaStar Life Insurance
Company of New York)
Siglar & Co., as nominee for 20%
---
United Services Life Insurance
<PAGE>
Company (n/k/a ReliaStar
United Services Life Insurance
Company)
100%
</TABLE>
<PAGE>
EXHIBIT A
FORM OF GUARANTY
[TO COME]
<PAGE>
Dated as of March 31, 1998
WAIVER AND AMENDMENT
Principal Life Insurance Company, f/k/a
Principal Mutual Life Insurance Company
Northern Life Insurance Company
Modern Woodmen of America
Royal Neighbors of America
ReliaStar Life Insurance Company of New York
ReliaStar United Services Life Insurance Company
Ladies and Gentlemen:
Reference is made to (i) the Note Agreement dated as of December 2, 1994
(as amended by that certain Letter Amendment dated as of February 15, 1996,
that certain Letter Amendment dated as of December 30, 1996, that certain
Waiver and Amendment dated as of March 31, 1997, and that certain Waiver and
Amendment dated as of December 31, 1997, the "1994 Agreement") among
Principal Mutual Life Insurance Company, n/k/a Principal Life Insurance
Company ("Principal"), Northern Life Insurance Company ("Northern"), Modern
Woodmen of America ("MWA") and Royal Neighbors of America ("RNA", and
together with Principal, Northern and MWA, collectively the "1994
Purchasers") and The Rottlund Company, Inc., a Minnesota corporation (the
"Company"), pursuant to which the 1994 Purchasers purchased promissory notes
of the Company in the aggregate original principal amount of $25,000,000
(collectively, the "1994 Notes") and (ii) the Note Agreement dated as of
February 15, 1996 (as amended by that certain Letter Amendment dated as of
December 30, 1996, that certain Waiver and Amendment dated as of March 31,
1997, and that certain Waiver and Amendment dated as of December 31, 1997,
the "1996 Agreement", and together with the 1994 Agreement, collectively the
"Agreements" and each individually an "Agreement") among Principal, Bankers
Security Life Insurance Society, n/k/a ReliaStar Life Insurance Company of
New York ("Bankers") and United Services Life Insurance Company, n/k/a
ReliaStar United Services Life Insurance Company ("United", and together with
Principal and Bankers, collectively the "1996 Purchasers", and, together with
the 1994 Purchasers, collectively the "Purchasers"), pursuant to which the
1996 Purchasers purchased promissory notes of the Company in the aggregate
original principal amount of $10,000,000 (collectively, the "1996 Notes", and
together with the 1994 Notes, collectively the "Notes" and each individually
a "Note"). Capitalized terms used and not otherwise defined herein shall
have the meanings ascribed thereto in each Agreement.
Reference is further made to the Waiver and Amendment dated as of March
31, 1997 (the "March 1997 Amendment") among the Purchasers and the Company
pursuant to which, among other things, the Company agreed that, under certain
circumstances, the 1994 Notes would bear interest at a rate of 12.61% per
annum and the 1996 Notes would bear interest at the rate of 9.92% per annum
(such interest rate with respect to each Note being herein referred to as the
"Amended Interest Rate" for such Note). The Company acknowledges that each
Note currently bears interest at the Amended Interest Rate applicable to such
Note, and that the references to "12.11%" and "14.11%" in the second
paragraph of Section 1.1 of the 1994 Agreement and in the 1994 Notes are
currently deemed to be "12.61%" and "14.61%", respectively, and the
references to "9.42%" and "11.42%" in the second paragraph of Section 1.1 of
the 1996 Agreement and in the 1996 Notes are currently deemed to be "9.92"
and "11.92%", respectively.
WAIVER
The Company has advised the Purchasers that the Company is at
present in default under Section 5.16 of each of the Agreements, which
defaults the Company hereby acknowledges. The Company hereby requests that
the Purchasers waive such defaults. The Purchasers each hereby waive the
defaults existing as of the date hereof under Section 5.16 of each of the
Agreements, and each Event of
<PAGE>
Default arising directly therefrom. The foregoing waiver shall not extend to
any obligation of the Company not expressly so waived or impair any right of
the Purchasers consequent thereon.
AMENDMENTS
The parties have, in addition, agreed to amend certain other
provisions in each of the Agreements as follows:
1 The parties have agreed that in addition to each of the required
monthly prepayments of the Notes currently required by Section
2.1 of each of the Agreements, the Company shall, commencing with
the required monthly prepayment payable August 1, 1998 and
continuing with each such required monthly prepayment until
payment in full of the Notes, prepay the principal amount of the
Notes in an additional aggregate amount of $100,000 with each
such required monthly prepayment, such additional prepayment
amount to be applied pro rata to all Notes outstanding under both
Agreements. To facilitate the payment of such additional
required monthly prepayment together with the payment of the
required monthly prepayments currently required by Section 2.1 of
each of the Agreements, a revised amortization schedule for each
Agreement, attached as Exhibits A and B hereto, has been
prepared, based on the aggregate oustanding principal amount of
the 1994 Notes or the 1996 Notes, as the case may be, following
receipt of the required monthly prepayments currently required by
Section 2.1 of each of the Agreements through and including July
1, 1998. The parties agree that Exhibits A and B hereto are
subject to review for accuracy and verification by the Consultant
(as hereinafter defined) and to conversion by the Consultant for
consistency to a format indicating amounts expressed therein as
per $1,000,000 of original principal (as is the case with the
original amortization schedule attached as Schedule III to each
of the Agreements). The parties further agree that following
such review, verification, and conversion, new Exhibits A and B
hereto shall be forwarded to each Purchaser and to the Company
and thereby be deemed adopted in substitution for the Exhibits A
and B attached hereto. In addition, to further facilitate the
foregoing arrangements, Section 2.1 of each of the Agreements is
hereby amended and restated in its entirety as follows:
2.1 REQUIRED MONTHLY PREPAYMENT. The Company agrees that
on the first day of each month, on the dates indicated
on the Revised Amortization Schedule, it will prepay
the principal indebtedness evidenced by the Notes in
the amount specified for such date in the Revised
Amortization Schedule, subject to adjustment as
provided in Sections 2.2, 2.4. 2.5 and 2.7 hereof. No
premium shall be payable in connection with any
required prepayment made pursuant to this Section 2.1.
For purposes of this Section 2.1, any prepayment shall
be applied pro rata to all Notes then outstanding, and
any prepayment of less than all of the outstanding
principal amount of the Notes pursuant to Sections 2.2,
2.4, 2.5 or 2.7 hereof shall be deemed to be applied to
the amount of scheduled principal prepayments in
inverse order of their maturity.
1 Each of the Agreements is hereby amended to add thereto the following
new Section 2.7:
1.1 OTHER REQUIRED PREPAYMENTS. In the event the Company shall
propose to make a payment to effect a permanent reduction
in the Bank Indebtedness or a reduction of the aggregate
<PAGE>
principal amount of loans, advances and other financial
accommodations available to the Company under the Bank
Indebtedness Documents, or in the event the Company
shall propose to permit or suffer to occur a set off in
payment or satisfaction of the Bank Indebtedness or any
portion thereof, the Company shall, on the date of such
payment or set off, effect a prepayment of the
principal amount of the Notes then outstanding, such
prepayment to be in an aggregate amount equal to such
outstanding principal amount of the Notes multiplied by
a fraction, the numerator of which shall be the amount
of the payment or set off to be made with respect to
the Bank Indebtedness and the denominator of which
shall be the principal amount of the Bank Indebtedness
outstanding immediately prior to the payment or set
off, together with accrued interest on the principal
amount to be so prepaid to the date of such prepayment,
and the Make-Whole Premium, if any. Contemporaneously
with such prepayment, the Company shall provide each
Holder written notice by facsimile transmission stating
whether any Make-Whole Premium is payable in connection
with such prepayment, and containing a reasonably
detailed computation of any such Make-Whole Premium or
the basis for determining that no such Make-Whole
Premium is payable.
1 Section 5.4 of each of the Agreements is hereby amended by adding the
following new sentence as the second sentence thereof:
So long as the Notes bear interest at the Amended
Interest Rate, neither the Company nor any Subsidiary
will engage in business in any location or area other
than a location or area in the States of Florida,
Indiana, Iowa, Minnesota or New Jersey.
1 Section 5.5 of each of the Agreements is amended and restated in its
entirety as follows:
1.1 CONSOLIDATED TANGIBLE NET WORTH. The Company shall
at all times maintain Consolidated Tangible Net Worth in
the amount not less than (i) the sum of $24,750,000 PLUS
70% of the positive Consolidated Net Income, if any, for
each Fiscal Quarter commencing on or after April 1, 1997,
LESS (ii) the aggregate amount of net losses, net of
applicable tax effect, realized in any sales of real
property referred to in and permitted by Section 5.9(e)
hereof, but only to the extent such net losses do not
exceed $1,000,000 in the aggregate.
1 The proviso at the end of Section 5.6 of each of the Agreements is
hereby amended by adding the following new sentences at the end
thereof:
For purposes of determining whether the Company and its
Subsidiaries are in compliance with the foregoing
clause (i), with respect to determining the amount of
Consolidated Current Debt as of the last day of any
Fiscal Quarter, the aggregate amount of Bank
Indebtedness outstanding on the first Business Day of
the next Fiscal Quarter shall be deemed the aggregate
amount of Bank Indebtedness outstanding as of the last
day of such preceding Fiscal Quarter. The Company
shall provide such documentation as any Holder may
reasonably request confirming the amount of Bank
Indebtedness which, in accordance with the foregoing
sentence, is deemed to be outstanding as of the last
day of any Fiscal Quarter.
<PAGE>
1 Section 5.9 of each of the Agreements is hereby amended (i) by
deleting the word "and" at the end of subsection (c), (ii) by adding
the word "and" at the end of subsection (d), and (iii) by adding
thereto the following new subsection (e):
a the Company may sell all or any portion of the real
property it owns in Inver Grove Heights,
Minnesota, which real property is described in
Schedule V hereto and which the Company refers to
as "Arbor Pointe", for a purchase price of not
less than the appraised value of the portion
proposed to be sold, such purchase price to be
payable in connection with a sale consummated
pursuant to and in accordance with the terms of
that certain Purchase Agreement dated as of April
1, 1998 between the Company as the seller and Ryan
Companies US, Inc. as the purchaser.
1
Section 5.13(i) of each of the Agreements is hereby amended and
restated in its entirety as follows:
i LEVERAGE RATIO CERTIFICATES. As soon as available and
in any event within 15 days after the close of any
Fiscal Quarter, a Leverage Ratio Certificate,
correctly setting forth whether the Company and
the Subsidiary have met each of the Rate
Adjustment Financial Tests and setting forth
computations (in sufficient detail) required to
establish whether the Rate Adjustment Financial
Tests have been so met, all in reasonable detail
and certified as complete and correct by a
financial officer of the Company;
<PAGE>
1 Section 5.13 of each of the Agreements is hereby amended (i) by
changing the lettering of subsection (j) to (k), and (ii) by adding
thereto the following new subsection (j):
a MEETINGS WITH HOLDERS. So long as the Notes bear
interest at the Amended Interest Rate, the Company, at
such times as any Holder may reasonably request (but no
more frequently than once each Fiscal Quarter with
respect to such Holder), will at its expense arrange
for a meeting of a representative of such Holder with
David Rotter, Bernard Rotter and such other members of
the Company's senior management as such Holder may
reasonably request to discuss the finances and affairs
of the Company and its Subsidiaries. This covenant is
in addition to, and not in substitution for, other
covenants in the Sections 5.13 with respect to the
provision by the Company of information, visits and
inspections, and other similar matters.
1 Section 5.16 of each of the Agreements is hereby amended and restated
in its entirety as follows:
5.16 FIXED CHARGES. The Company shall maintain, as of the
close of each month, Net Income Available for Fixed
Charges for the immediately preceding twelve-month
period of at least the following percentages of Fixed
Charges for such twelve-month period:
75% as of the close of each month on and prior to June 30, 1998;
100% as of the close of each month on or prior to
September 30, 1998;
150% as of the close of each month on and prior to
December 31, 1998; and
200% as of the close of each month thereafter.
1 Section 5.19 of each of the Agreements is hereby amended and restated
in its entirety as follows:
5.19 BANK INDEBTEDNESS DOCUMENTS. In addition to the
financial covenants set forth in this Agreement,
the financial covenants set forth in the Bank
Indebtedness Documents (the "Incorporated
Covenants") are incorporated by reference into
this Agreement as if stated herein in full,
together with all defined terms used therein,
PROVIDED, however, that (i) such Incorporated
Covenants, as incorporated herein, shall run in
favor of the Holders, rather than to the parties
set forth in the Bank Indebtedness Documents, and
(ii) any amendments to, waivers as to, or
expiration or cancellation of (by cancellation,
amendment or termination of the Bank Indebtedness
Documents or otherwise) such Incorporated
Covenants and defined terms used therein shall be
deemed to amend, waive compliance with, or
terminate, as the case may be, such Incorporated
Covenants, as incorporated herein, only if
approved or consented to by the Holders; and
PROVIDED FURTHER that if the Bank Indebtedness
Documents are (i) amended to add additional
covenants or modify existing covenants providing
greater protection under the Bank Indebtedness
Documents, or (ii) renewed or replaced by
financing on terms that
<PAGE>
contain covenants affording protection to the Holders
substantially equivalent to, or greater than, the
protection provided by the Incorporated Covenants,
such new or amended covenants shall be deemed
incorporated herein as Incorporated Covenants. So
long as the Notes bear interest at the Amended
Interest Rate, the Company shall not pay any
additional consideration (including, without
limitation, any increase in interest rate or
increase or imposition of any fee) under the Bank
Indebtedness Documents in respect of any financial
accommodation required to be made by any lender
thereunder without making a proportionate payment to
the Holders based upon the relative principal
amounts of the Notes then outstanding (provided,
however, that no such payment shall be required to
be made to the Holders with respect to any fee
payable in connection with the amendment,
contemporaneously with the execution and delivery of
the March 1998 Amendment, of the Existing Credit
Agreement). In addition, if the Company shall
renew, extend, substitute, refinance or replace any
Bank Indebtedness or if the Company shall modify any
term or condition of any Bank Indebtedness
Documents, the Company shall give written notice
thereof, together with copies of the Bank
Indebtedness Documents relevant thereto, to all
Holders promptly, but in any event within five days
of the date on which such renewal, extension,
substitution, refinancing, replacement or
modification is effected.
1 Section 5.20 of each of the Agreements is hereby amended and restated
in its entirety as follows:
A. GUARANTIES. In addition to causing the existing
Subsidiaries to execute and deliver the Guaranty, the
Company (i) will promptly secure the execution and
delivery of a guaranty substantially in the form of the
Guaranty from each Subsidiary as may hereafter be
formed and organized, and (ii) will not permit the Bank
Indebtedness to be guaranteed by any other person or
entity unless the obligations of the Company under the
Notes and this Agreement shall be guaranteed by such
person or entity on substantially the same terms and
conditions.
1 Section 6.1 of each of the Agreements is hereby amended (i) by
changing the reference to "5.19" in the third line thereof to "5.20",
and (ii) by changing the parenthetical statement "(individually or in
the aggregate, and including without limitation the Existing Bank
Indebtedness)" to "(individually or in the aggregate, and including
without limitation the Bank Indebtedness)."
<PAGE>
1 The definition of "Make-Whole Premium" in Section 8.1 of each of the
Agreements is hereby amended and restated as follows:
"Make-Whole Premium" shall mean, with respect to a
prepayment of the Notes prior to maturity or an acceleration
of the maturity thereof, the excess, if any, of (i) the
Calculated Amount (as hereinafter defined), over (ii) the
principal amount of the Notes to be prepaid or accelerated
(the "Prepaid Principal"). In no event shall the Make-Whole
Premium be less than zero. For purposes hereof, the
"Calculated Amount" shall mean an amount determined by (1)
calculating, as of the date of determination, the present
value of all payments of principal and interest, as
scheduled on the Original Amortization Schedule and
reflecting the Original Interest Rate, which would have been
avoided by any such prepayment or acceleration if payments
had theretofore been made in accordance with the Original
Amortization Schedule and reflecting the Original Interest
Rate (such payments, the present value of which are being
determined, being herein referred to as the "Pro Forma
Payments"), such present value to be determined by
discounting the Pro Forma Payments from the scheduled
payment date to the date of the prepayment or acceleration
at a rate equal to the Formula Yield (such present value
being herein referred to as the "Pro Forma Present Value
Amount"), (2) calculating, as of the date of determination,
the aggregate amount of principal payments included in such
Pro Forma Payments (such amount being herein referred to as
the "Pro Forma Principal Amount"), (3) dividing the Pro
Forma Present Value Amount by the Pro Forma Principal
Amount, rounding the resulting number to five decimal places
(such resulting number being herein referred to as the
"Price"), and (4) multiplying the amount of Prepaid
Principal by the Price.
1 Section 8.1 of each of the Agreements is hereby amended by adding
thereto the following new definitions:
"Amended Interest Rate" with respect to any Note shall mean
the Amended Interest Rate with respect to such Note as
defined in the March 1998 Amendment.
"Bank Indebtedness" shall mean the Existing Bank
Indebtedness and any renewal, extension, substitution,
refinancing, or replacement thereof.
"Bank Indebtedness Documents" shall mean all documents
governing Bank Indebtedness and all other instruments and
documents related thereto given to secure or evidence the
Bank Indebtedness or otherwise executed in connection
therewith, including without limitation the Existing Bank
Indebtedness Documents.
"March 1998 Amendment" shall mean that certain Waiver and
Amendment dated as of March 31, 1998, by and among the
Company and the Purchasers.
"Original Amortization Schedule" shall mean the original
amortization schedule attached to this Agreement as Schedule
III.
"Original Interest Rate" with respect to any Note shall mean
the Original Interest Rate with respect to such Note as
defined in the March 1998 Amendment.
"Rate Adjustment Financial Tests" shall mean the Rate
Adjustment Financial Tests as defined in the March 1998
Amendment.
<PAGE>
"Revised Amortization Schedule" shall mean the revised
amortization schedule attached to this Agreement as Schedule
IV.
1 Exhibit A hereto is hereby adopted as "Schedule IV" to the 1994
Agreement, and Exhibit B hereto is hereby adopted as "Schedule IV" to
the 1996 Agreement. Exhibit C hereto is hereby adopted as "Schedule
V" to each of the Agreements.
OTHER AGREEMENTS
As an inducement to and in consideration of the agreement by the Purchasers to
waive the existing defaults under and to amend certain provisions of the
Agreements as set forth herein, the Company hereby agrees with the Purchasers as
follows:
INTEREST RATES. Notwithstanding anything in the Agreements, the Notes, or
the March 1997 Amendment to the contrary:
i if as of the close of any Fiscal Quarter commencing on or
after April 1, 1998 the Company and its Subsidiaries shall
fail to meet any of the financial tests set forth in
Schedule I hereto (collectively, the "Rate Adjustment
Financial Tests") as disclosed in the Leverage Ratio
Certificate referred to in Section 5.13(i) of each of the
Agreements (each a "Leverage Ratio Certificate") for such
Fiscal Quarter, or if the Company fails to deliver the
Leverage Ratio Certificate for such Fiscal Quarter to the
Holders in accordance with Section 5.13(i) of each of the
Agreements (and, in such event, in addition to any other
rights the Holders may exercise under Section 6 of each
Agreement), then, effective as of the first day of and
during the Fiscal Quarter immediately following the Fiscal
Quarter to which the Leverage Ratio Certificate applies
(where the Company delivers such Leverage Ratio Certificate)
or would apply (where the Company fails to do so), as the
case may be, each Note shall bear interest at the Amended
Interest Rate for such Note, and, in connection therewith,
the references to "12.11%" and "14.11%" in the second
paragraph of Section 1.1 of the 1994 Agreement and in the
1994 Notes shall accordingly be deemed to be "12.61% and
"14.61%", respectively, and the references to "9.42%" and
"11.42%" in the second paragraph of Section 1.1 of the 1996
Agreement and in the 1996 Notes shall accordingly be deemed
to be "9.92%" and "11.92%," respectively; and
i if as of the close of any Fiscal Quarter commencing on or
after April 1, 1998, the Company and its Subsidiaries shall
meet each of the Rate Adjustment Financial Tests as
disclosed in the Leverage Ratio Certificate for such Fiscal
Quarter, and if no Default or Event of Default then exists
under the Agreement, then effective as of the first day of
and during the Fiscal Quarter immediately following the
Fiscal Quarter to which the Leverage Ratio Certificate
applies, the 1994 Notes shall bear interest at the rate of
12.11% per annum, and the 1996 Notes shall bear interest at
the rate of 9.42% per annum (such interest rate with respect
to each Note being herein referred to as the "Original
Interest Rate" for
<PAGE>
such Note), and, in connection therewith, the references to
"12.11% and "14.11%" in the second paragraph of Section 1.1 of
the 1994 Agreement and in the 1994 Notes and the references to
"9.42%" and "11.42%" in the second paragraph of Section 1.1 of
the 1996 Agreement and in the 1996 Notes shall be deemed
unchanged.
In connection therewith, the Company hereby confirms and agrees that the
amount of each combined installment of principal and interest payable on the
Notes has been (and, following any change in interest rates in accordance
with the foregoing provisions, shall be) adjusted to reflect the foregoing
arrangements, but the portion of each such combined installment allocable to
principal shall remain unchanged, and that default in the payment of
interest, as calculated in accordance with the foregoing arrangements, shall
constitute an Event of Default under Section 6.1 of each of the Agreements.
The Company further agrees to execute, at the request of the Holders or any
of them, addenda to the Notes evidencing the foregoing arrangements.
CONSULTANT REVIEW. The Company acknowledges that the Purchasers intend
to retain a consultant (the "Consultant") to conduct an operational and
management review and to review the Company's budget for the Fiscal Year
ending March 31, 1999, as well as pro forma financial statements and
projections prepared by the Company for the Fiscal Year ending March 31 of
each 1999, 2000 and 2001 (the "Review"), such Review to be conducted solely
for the benefit and at the sole discretion of the Purchasers. The Purchasers
shall choose and retain such Consultant, subject to such Consultant being
reasonably acceptable to the Company (provided, however, that (i) unless the
Purchasers shall have received notice from the Company of its rejection of
such Consultant within five Business Days of the Company's receipt of notice
of the intention of the Purchasers to retain such Consultant, such Consultant
shall be deemed acceptable to the Company, and (ii) if the Company shall
reject the Consultant initially so chosen by the Purchasers, the Purchasers
shall have the right, in their sole discretion and without submitting such
choice to the Company for approval, to choose and retain another Consultant).
The Company shall pay any retainer required by such Consultant
contemporaneously with the retention of such Consultant. The Company shall
pay promptly, and in any event within 30 days of receipt of an invoice
therefor or upon demand, all reasonable costs and expenses, not to exceed
$50,000 in the aggregate, incurred or expended by the Purchasers with respect
to the retention of and the services provided by such Consultant (it being
understood and agreed, however, that such $50,000 limitation shall neither
apply to nor affect the Company's obligation to so pay additional costs and
expenses so incurred as a result of the Company's failure to cooperate with
such Consultant as contemplated by this provision, the Company's failure to
provide promptly any information reasonably requested by such Consultant, or
the failure of such Consultant to complete its inquiries in one visit to the
Company by the Consultant's representatives). The Company shall cooperate
with such Consultant in connection with the Review, and, without limiting the
generality of the foregoing, shall make its management available for
consultations with such Consultant and allow such Consultant free access to
the Company's books and records, in each case at any reasonable time during
regular business hours. The Purchasers shall make available to the Company
a report, to be prepared by the Consultant, of the results of the Review.
AMENDMENT FEE. The Company shall pay to the Purchasers an amendment fee
in the aggregate amount of $226,020.00 (the "Amendment Fee") payable in six
equal monthly installments of $37,670.00 each on the first day of each month
commencing August 1, 1998 through and including January 1, 1999. Each such
installment of such Amendment Fee shall be paid to the Purchasers pro rata in
accordance with the respective unpaid principal amounts of the Notes they
hold. Any default in the payment of any such installment of the Amendment
Fee shall constitute an Event of Default under Section 6.1 of each of the
Agreements.
<PAGE>
EXPENSES. The Company hereby confirms its obligations under Section 9.6
of each of the Agreements to pay promptly, and in any event within 30 days of
receipt of an invoice therefor or upon demand, all out-of-pocket expenses of
the Holders in connection with this Waiver and Amendment and the matters
covered hereby (including, without limitation, the reasonable fees and
expenses of counsel to the Holders and travel expenses of representatives of
the Holders incurred in connection with the negotiation of this Waiver and
Amendment).
SURVIVAL OF OBLIGATIONS, ETC.. The obligations of the Company to make
the payments contemplated by the foregoing provisions shall survive payment
of the Notes and the termination of the Agreements. In addition to any
payment default specifically referred to in the foregoing provisions, any
default by the Company in the performance or observance or breach by the
Company of any of the foregoing provisions shall constitute an Event of
Default under Section 6.1 of each of the Agreements.
REPRESENTATIONS AND WARRANTIES
The Company represents and warrants to the Purchasers that (i) except as
disclosed herein, no Default or Event of Default has occurred and is
continuing, (ii) this Waiver and Amendment has been duly authorized, executed
and delivered by the Company and each of this Waiver and Amendment and each
Agreement, as amended by this Waiver and Amendment, constitutes a legal,
valid and binding obligation of the Company, and (iii) there is no provision
in the Articles of Incorporation of the Company or in its bylaws or in any
indenture, contract or agreement to which the Company is a party or by which
it is bound nor any provision of law or any order of any court or
governmental authority which prohibits the execution and delivery by the
Company of this Waiver and Amendment, the performance or observance by the
Company of the terms and conditions of this Waiver and Amendment, or the
performance or observance by the Company of the terms and conditions of the
Agreements, as modified by the amendments set forth in this Waiver and
Amendment. All representations and warranties contained herein or made in
writing by the Company in connection herewith shall survive the execution and
delivery hereof. It shall be deemed to be an Event of Default under each
Agreement if any of such representations or warranties proves to be false in
any material respect as of the date hereof.
MISCELLANEOUS
Except as specifically amended hereby, all terms and conditions of each
of the Agreements shall remain in full force and effect. This Waiver and
Agreement may be executed simultaneously in two or more counterparts, each of
which shall be an original, but all of which constitute but one agreement.
This Waiver and Amendment shall be governed by and enforced in accordance
with Minnesota law.
If you are in agreement with the foregoing, please so indicate by
executing the form of acknowledgment set forth below, whereupon this Waiver
and Amendment shall become a binding agreement among you and the Company.
Very truly yours
THE ROTTLUND COMPANY, INC.
By
-----------------------------------------
Its
----------------------------------------
<PAGE>
Agreed to as of the date first above written.
As to the 1994 Agreement and the 1996 Agreement:
PRINCIPAL LIFE INSURANCE COMPANY
By
--------------------------------
Its
-----------------------------
And
--------------------------------
Its
-----------------------------
As to the 1994 Agreement:
NORTHERN LIFE INSURANCE COMPANY
By
---------------------------------
Its
------------------------------
MODERN WOODMEN OF AMERICA
By
---------------------------------
Its
------------------------------
And
--------------------------------
Its
-----------------------------
<PAGE>
ROYAL NEIGHBORS OF AMERICA
By
---------------------------------
Its
------------------------------
And
--------------------------------
Its
----------------------------
As to the 1996 Agreement:
RELIASTAR LIFE INSURANCE COMPANY
OF NEW YORK, successor by merger to
ReliaStar Bankers Life Insurance Company,
f/k/a Bankers Security Life Insurance Society
By
---------------------------------
Its
------------------------------
RELIASTAR UNITED SERVICES
LIFE INSURANCE COMPANY
By
--------------------------------
Its
------------------------------
<PAGE>
ACKNOWLEDGMENT
Each of the undersigned, as a guarantor under the Guaranty (as defined
in each of the Agreements), hereby acknowledges all modifications, amendments
and waivers of provisions of the Agreements set forth in the foregoing Waiver
and Amendment, and confirms and agrees that such modifications, amendments
and waivers do not discharge, affect, reduce or impair its liability under
the Guaranty, including its liability thereunder for payment of the Notes and
the performance of all covenants contained in the Agreements.
Each of the undersigned represents that all such modifications, amendments
and waivers, together with the foregoing Waiver and Amendment, have been duly
executed by a duly authorized officer of the Company, and are valid
obligations of the Company legally binding upon the Company in accordance
with their respective terms.
NORTH COAST MORTGAGE, INC.
By:
-----------------------------------
Lawrence B. Shapiro,
Chief Financial Officer
ROTTLUND HOMES OF FLORIDA, INC.
By:
-----------------------------------
Lawrence B. Shapiro, Vice President
ROTTLUND HOMES OF INDIANA, INC.
By:
-----------------------------------
Lawrence B. Shapiro, Vice President
ROTTLUND HOMES OF INDIANA
LIMITED PARTNERSHIP
By Rottlund Homes of Indiana, Inc.,
Its General Partner,
By:
-----------------------------------
Lawrence B. Shapiro, Vice President
ROTTLUND HOMES OF IOWA, INC.
By:
-----------------------------------
Lawrence B. Shapiro,
Chief Financial Officer
ROTTLAND HOMES OF NEW JERSEY, INC.
By:
-----------------------------------
Lawrence B. Shapiro,
Executive Vice President
<PAGE>
SCHEDULE I
RATE ADJUSTMENT FINANCIAL TESTS
CONSOLIDATED TANGIBLE NET WORTH. Consolidated Tangible Net Worth in an
amount not less than $24,103,922 plus 70% of the positive Consolidated Net
Income, if any, for each Fiscal Quarter commencing on or after January 1,
1996.
LEVERAGE RATIO. Ratio of (i) the sum of Consolidated Current Debt and
Consolidated Funded Debt to (ii) Consolidated Tangible Assets in excess of
62% on and prior to December 31, 1998 and 57% thereafter.
FIXED CHARGES. Net Income Available for Fixed Charges for the
immediately preceding twelve-month period of at least 200% of Fixed Charges
for such twelve-month period.
<PAGE>
EXHIBIT A
SCHEDULE IV TO 1994 AGREEMENT
(Amounts expressed are aggregate amounts with respect to all 1994 Notes
outstanding)
[SEE ATTACHED]
<PAGE>
EXHIBIT B
SCHEDULE IV TO 1996 AGREEMENT
(Amounts expressed are aggregate amounts with respect to all 1996 Notes
outstanding)
[SEE ATTACHED]
<PAGE>
EXHIBIT C
DESCRIPTIONS
OF
ARBOR POINTE REAL PROPERTY
[SEE ATTACHED]
<PAGE>
FIRST MODIFICATION
OF
CREDIT AGREEMENT
This First Modification of Credit Agreement ("Agreement") is made this
19th day of November, 1996, among THE ROTTLUND COMPANY, INC., a Minnesota
corporation ("Borrower"), THE FIRST NATIONAL BANK OF BOSTON, a national
banking association having its principal place of business at 100 Federal
Street, Boston, Massachusetts 02110, ("FNBB") and THE FIRST NATIONAL BANK
OF BOSTON, as Agent (the "Agent") for itself and the other lending
institutions which are or may become parties to the Credit Agreement (as
hereinafter defined).
W I T N E S S E T H:
IN CONSIDERATION OF TEN AND NO/100 DOLLARS ($10.00) and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the undersigned Borrower and FNBB hereby covenant and agree
and follows:
. RECITALS. The following Recitals are true and correct as of the
date of this Agreement:
() The Borrower, FNBB and the Agent entered into a Credit
Agreement, dated as of October 23, 1996 ("Credit Agreement").
() The parties to the Credit Agreement wish to amend and modify
the Credit Agreement.
() All terms not otherwise defined herein shall have the same
meaning as in the Credit Agreement.
. The Credit Agreement is hereby modified as follows:
() The following definition shall be added to Section 1 of the
Credit Agreement:
"ADDITIONAL REVOLVING CREDIT NOTE. The Revolving Credit
Note in the amount of $4,000,000.00 dated November 19, 1996
made by the Borrower to the order of FNBB."
() By adding the following at the end of the definition of
Revolving Credit Note(s): ",including the Additional Revolving Credit
Note."
(c) By adding the following section to the Credit Agreement:
"Section 1.2 TEMPORARY NUMERICAL SUBSTITUTION.
Beginning on November 19, 1996 and continuing until
January 31, 1997, all references in the Credit Agreement to
$18,000,000.00 shall be deleted and replaced with
$22,000,000.00. From and after January 31, 1997, all such
references will revert to $18,000,000.00."
(d) The second sentence of Section 2.1 shall be deleted in its
entirety.
<PAGE>
(e) The following shall be added at the end of Section 2.1 of
the Credit Agreement:
"The portion of the Obligations evidenced by the
Additional Revolving Credit Note including all accrued
and unpaid interest thereon shall be due and payable,
however, on January 31, 1997."
(f) By deleting the following clause from the first sentence of
Section 2.3: ", dated as of the Effective Date."
3. Except as modified hereby, the undersigned hereby ratify and
reaffirm the terms and conditions of the Credit Agreement.
4. Borrower shall pay a fee in the amount of $20,000.00 to FNBB
contemporaneous with the execution hereof.
5. This Agreement may be executed in any number of counterparts each
of which shall be deemed an original.
IN WITNESS WHEREOF, the undersigned Borrower and Agent hereunto cause
this instrument to be executed by its duly authorized corporate officers
and its seal to be affixed hereto as of the day and year first above
written.
THE ROTTLUND COMPANY, INC., a Minnesota
corporation
By:________________________________
Title:_____________________________
THE FIRST NATIONAL BANK
OF BOSTON, a national banking association
By:________________________________
KEVIN C. HAKE, Director
<PAGE>
SECOND MODIFICATION
OF
CREDIT AGREEMENT
This Second Modification of Credit Agreement ("Agreement") is made this
____ day of December, 1996, among THE ROTTLUND COMPANY, INC., a Minnesota
corporation ("Borrower"), THE FIRST NATIONAL BANK OF BOSTON, a national
banking association having its principal place of business at 100 Federal
Street, Boston, Massachusetts 02110, ("FNBB") and THE FIRST NATIONAL BANK OF
BOSTON, as Agent (the "Agent") for itself and the other lending institutions
which are or may become parties to the Credit Agreement (as hereinafter
defined).
W I T N E S S E T H:
--------------------
IN CONSIDERATION OF TEN AND NO/100 DOLLARS ($10.00) and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the undersigned Borrower and FNBB hereby covenant and agree as
follows:
. RECITALS. The following Recitals are true and correct as of the
date of this Agreement:
() The Borrower, FNBB and the Agent entered into that certain
Credit Agreement dated as of October 23, 1996, and that certain First
Modification of Credit Agreement dated November 19 1996, (the foregoing
Credit Agreement, as modified, is referred to herein as "Credit Agreement").
() The parties to the Credit Agreement wish to amend and modify
the Credit Agreement.
() All terms not otherwise defined herein shall have the same
meaning as in the Credit Agreement.
. The Credit Agreement is hereby modified as follows:
() By deleting in its entirety the portion of the definition of
Borrowing Base set forth at Section 1 BORROWING BASE (A) (i) and by
substituting in lieu thereof the following:
"(i) 75% of Lot Book Value of Developed Lots; PLUS"
(b) By substituting "95%" for "90%" in subsection (ii) of this
definition.
(c) By deleting Section 10.4 (b) in its entirety and by
substituting in lieu thereof the following:
"(b) Unit Costs of Unsold Units shall not exceed 70% of
Tangible Net Worth during the term of this Agreement provided that for
purposes of the calculation made on each December 31 during the term of this
Agreement, the applicable percentage shall be 80% rather than 70%;
3. Except as modified hereby, the undersigned hereby ratify and
reaffirm the terms and conditions of the Credit Agreement.
<PAGE>
4. This Agreement may be executed in any number of counterparts each
of which shall be deemed an original.
IN WITNESS WHEREOF, the undersigned Borrower and Agent have hereunto
caused this instrument to be executed by their duly authorized corporate
officers and their seal to be affixed hereto as of the day and year first
above written.
THE ROTTLUND COMPANY, INC., a Minnesota
corporation
By:
------------------------------------
Title:
---------------------------------
THE FIRST NATIONAL BANK OF BOSTON,
a national banking association
By:
------------------------------------
KEVIN C. HAKE, Director
The undersigned guarantors hereby agree to all modifications of the
Credit Agreement and hereby ratify and reaffirm their respective Subsidiary
Guaranty dated as of October 23, 1996.
NORTHCOAST MORTGAGE, INC.
By:
------------------------------------
Its:
-----------------------------------
ROTTLUND HOMES OF FLORIDA, INC.
By:
------------------------------------
Its:
-----------------------------------
ROTTLUND HOMES OF INDIANA, INC.
By:
------------------------------------
<PAGE>
Its:
-----------------------------------
ROTTLUND HOMES OF INDIANA LIMITED
PARTNERSHIP
By:
------------------------------------
Its:
-----------------------------------
ROTTLUND HOMES OF IOWA, INC.
By:
------------------------------------
Its:
-----------------------------------
ROTTLUND HOMES OF NEW JERSEY
By:
------------------------------------
Its:
-----------------------------------
<PAGE>
THIRD MODIFICATION
OF
CREDIT AGREEMENT
This Third Modification of Credit Agreement ("Agreement") is made this
____ day of January, 1997, among THE ROTTLUND COMPANY, INC., a Minnesota
corporation ("Borrower"), THE FIRST NATIONAL BANK OF BOSTON, a national
banking association having its principal place of business at 100 Federal
Street, Boston, Massachusetts 02110, ("FNBB") and THE FIRST NATIONAL BANK OF
BOSTON, as Agent (the "Agent") for itself and the other lending institutions
which are or may become parties to the Credit Agreement (as hereinafter
defined).
W I T N E S S E T H:
--------------------
IN CONSIDERATION OF TEN AND NO/100 DOLLARS ($10.00) and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the undersigned Borrower and FNBB hereby covenant and agree as
follows:
. RECITALS. The following Recitals are true and correct as of the
date of this Agreement:
() The Borrower, FNBB and the Agent entered into that certain
Credit Agreement dated as of October 23, 1996, and that certain First
Modification of Credit Agreement dated November 19 1996, and Second
Modification of Credit Agreement dated December 24, 1996 (the foregoing
Credit Agreement, as modified, is referred to herein as "Credit Agreement").
() The parties to the Credit Agreement wish to further amend and
modify the Credit Agreement.
() All terms not otherwise defined herein shall have the same
meaning as in the Credit Agreement.
. The Credit Agreement is hereby modified as follows:
() By adding the following after "(iii) Interest Expense" in the
definition of EBITDA in Section 1 "or Interest Incurred (without double
counting), to the extent that Interest Expense cannot be accurately
determined because of the inability of the Borrower to determine the interest
component of cost of sales for any period for reasons other than the
Borrower's negligence";
(b) By deleting the provisions of (vi) in its entirety from the
definition of TANGIBLE NET WORTH and by substituting in lieu thereof "(vi)
deferred charges";
(c) By substituting $24,800,000" for "$25,380,150" in Section
10.1; and
(d) By substituting "1.75" for "2" in Section 10.3.
<PAGE>
3. The Effective Date of this Third Amendment shall be as of October 23,
1996 so that, without limitation, compliance with all covenants contained
in the Credit Agreement shall be determined from modifications contained
herein.
4. Except as modified hereby, the terms and conditions of the Credit
Agreement shall remain in full force and effect and the Borrower hereby
ratifies the terms and conditions thereof.
5. This Agreement may be executed in any number of counterparts each
of which shall be deemed an original.
IN WITNESS WHEREOF, the undersigned Borrower and Agent have hereunto
caused this instrument to be executed by their duly authorized corporate
officers and their seal to be affixed hereto as of the day and year first
above written.
THE ROTTLUND COMPANY, INC., a Minnesota
corporation
THE ROTTLUND COMPANY, INC., a Minnesota
corporation
By:
------------------------------------
Title:
---------------------------------
THE FIRST NATIONAL BANK OF BOSTON,
a national banking association
By:
------------------------------------
KEVIN C. HAKE, Director
The undersigned guarantors hereby agree to all modifications of the
Credit Agreement and hereby ratify and reaffirm their respective Subsidiary
Guaranty dated as of October 23, 1996.
NORTHCOAST MORTGAGE, INC.
By:
------------------------------------
Its:
-----------------------------------
ROTTLUND HOMES OF FLORIDA, INC.
By:
------------------------------------
Its:
-----------------------------------
<PAGE>
ROTTLUND HOMES OF INDIANA, INC.
By:
------------------------------------
Its:
-----------------------------------
ROTTLUND HOMES OF INDIANA LIMITED
PARTNERSHIP
By:
------------------------------------
Its:
-----------------------------------
ROTTLUND HOMES OF IOWA, INC.
By:
------------------------------------
Its:
-----------------------------------
ROTTLUND HOMES OF NEW JERSEY
By:
------------------------------------
Its:
-----------------------------------
<PAGE>
FOURTH MODIFICATION
OF
CREDIT AGREEMENT
This Fourth Modification of Credit Agreement ("Agreement") is made
this ____ day of June, 1997, among THE ROTTLUND COMPANY, INC., a Minnesota
corporation ("Borrower"), THE FIRST NATIONAL BANK OF BOSTON, a national
banking association having its principal place of business at 100 Federal
Street, Boston, Massachusetts 02110, ("FNBB") and THE FIRST NATIONAL BANK
OF BOSTON, as Agent (the "Agent") for itself and the other lending
institutions which are or may become parties to the Credit Agreement (as
hereinafter defined).
W I T N E S S E T H:
IN CONSIDERATION OF TEN AND NO/100 DOLLARS ($10.00) and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the undersigned Borrower and FNBB hereby covenant and agree
as follows:
. RECITALS. The following Recitals are true and correct as of the
date of this Agreement:
() The Borrower, FNBB and the Agent entered into that certain
Credit Agreement dated as of October 23, 1996, and that certain First
Modification of Credit Agreement dated November 19 1996, Second
Modification of Credit Agreement dated December 24, 1996 and Third
Modification of Credit Agreement dated January __, 1997 (the foregoing
Credit Agreement, as modified, is referred to herein as "Credit
Agreement").
() The parties to the Credit Agreement wish to further amend
and modify the Credit Agreement.
() All terms not otherwise defined herein shall have the same
meaning as in the Credit Agreement.
. The Credit Agreement is hereby modified as follows:
by substituting "$23,850,000" for "$24,800,000" in Section 10.1.
. The Effective Date of this Fourth Modification shall be as of
March 31, 1997 so that, without limitation, compliance with all covenants
contained in the Credit Agreement shall be determined from modifications
contained herein.
. Except as modified hereby, the
terms and conditions of the Credit Agreement shall remain in full force
and effect and the Borrower hereby ratifies the terms and conditions
thereof.
. This Agreement may be executed in any number of counterparts each
of which shall be deemed an original.
IN WITNESS WHEREOF, the undersigned Borrower and Agent have hereunto
caused this instrument to be executed by their duly authorized corporate
officers and their seal to be affixed hereto as of the day and year first
above written.
<PAGE>
THE ROTTLUND COMPANY, INC., a Minnesota
corporation
By:________________________________
Title:_____________________________
THE FIRST
NATIONAL BANK OF BOSTON, a national
banking association
By:________________________________
KEVIN C. HAKE, Director
The undersigned guarantors hereby agree to all modifications of the
Credit Agreement and hereby ratify and reaffirm their respective Subsidiary
Guaranty dated as of the day and year first above written.
NORTHCOAST MORTGAGE, INC.
By:_______________________________
Its:______________________________
ROTTLUND HOMES OF FLORIDA, INC.
By:_______________________________
Its:______________________________
ROTTLUND HOMES OF INDIANA, INC.
By:_______________________________
Its:______________________________
ROTTLUND
HOMES OF INDIANA LIMITED PARTNERSHIP
By:_______________________________
Its:______________________________
<PAGE>
ROTTLUND HOMES OF IOWA, INC.
By:_______________________________
Its:______________________________
ROTTLUND HOMES OF NEW JERSEY
By:_______________________________
Its:______________________________
<PAGE>
FIFTH MODIFICATION
OF
CREDIT AGREEMENT
This Fifth Modification of Credit Agreement ("Agreement") is made this
day of January, 1998, among THE ROTTLUND COMPANY, INC., a Minnesota
corporation ("Borrower"), BANKBOSTON, N.A. (formerly known as THE FIRST
NATIONAL BANK OF BOSTON), having its principal place of business at 100
Federal Street, Boston, Massachusetts 02110 ("BKB") and BANKBOSTON, N.A.,
as Agent ("Agent") for itself and the other lending institutions which are
or may become parties to the Credit Agreement (as hereinafter defined).
W I T N E S S E T H:
IN CONSIDERATION OF TEN AND NO/100 DOLLARS ($10.00) and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the undersigned Borrower and BKB hereby covenant and agree as
follows:
. RECITALS. The following Recitals are true and correct as of the
date of this Agreement:
() The Borrower, BKB and the Agent entered into that certain
Credit Agreement dated as of October 23, 1996, and that certain First
Modification of Credit Agreement dated November 19 1996, Second
Modification of Credit Agreement dated December 24, 1996, Third
Modification of Credit Agreement dated January 28, 1997, and Fourth
Modification of Credit Agreement dated June 25, 1997 (the foregoing Credit
Agreement, as modified, is referred to herein as "Credit Agreement").
() The parties to the Credit Agreement wish to further amend
and modify the Credit Agreement.
() All terms not otherwise defined herein shall have the same
meaning as in the Credit Agreement.
. The Credit Agreement is hereby modified as follows:
. By substituting "$23,000,000.00" for "$18,000,000" in:
() the definition of Commitment Amount in Section 1;
() the definition of Maximum Revolver Amount in Section 1;
() Section 2.1;
() Schedule 3.3(i); and
() Schedule 1.
. By adding the following definition to Section 1:
<PAGE>
"FIFTH MODIFICATION EFFECTIVE DATE. December
31, 1997."
. By adding the following sentence after the first sentence in
Section 2.3:
"As of the Fifth Modification Effective Date,
the Revolving Credit Note has been amended and restated,
therefore, all references herein to the Revolving Credit
Note shall mean the Revolving Credit Note as amended and
restated."
. By deleting Section 10.3 in its entirety and replacing it
with the following:
"Section 10.3 EBITDA TO INTEREST EXPENSE. The Borrower
will not permit the ratio of (a) EBITDA to (b) Interest
Incurred, determined on a date described in the table set
forth below, to exceed the ratio set forth below:
PERIOD PERMITTED RATIO
October 1, 1997 to December 31, 1997 1.10:1
January 1, 1998 to March 31, 1998 1.10:1
April 1, 1998 to June 30, 1998 1.25:1
July 1, 1998 to September 30, 1998 1.50:1
October 1, 1998 to December 31, 1998 2.00:1
January 1, 1999 to March 31, 1999 2.00:1"
. By changing all references to First National Bank of Boston
to BankBoston, N.A.
. The Effective Date of this Fifth Modification shall be as of
December 31, 1997 so that, without limitation, compliance with all
covenants contained in the Credit Agreement shall be determined from
modifications contained herein.
. Except as modified hereby, the
terms and conditions of the Credit Agreement shall remain in full force
and effect and the Borrower hereby ratifies the terms and conditions
thereof.
. This Agreement may be executed in any number of counterparts each
of which shall be deemed an original.
[SIGNATURES BEGIN ON THE FOLLOWING PAGE]
<PAGE>
IN WITNESS WHEREOF, the undersigned Borrower and Agent have hereunto
caused this instrument to be executed by their duly authorized corporate
officers and their seal to be affixed hereto as of the day and year first
above written.
THE ROTTLUND COMPANY, INC., a Minnesota
corporation
By:______
Title:___
BANKBOSTON, N.A.
By:______
Title:___
The undersigned guarantors hereby agree to all modifications of the
Credit Agreement and hereby ratify and reaffirm their respective Subsidiary
Guaranty dated as of the day and year first above written.
NORTHCOAST MORTGAGE, INC.
By:_______________________________
Its:______________________________
ROTTLUND HOMES OF FLORIDA, INC.
By:_______________________________
Its:______________________________
ROTTLUND HOMES OF INDIANA, INC.
By:_______________________________
Its:______________________________
ROTTLUND
HOMES OF INDIANA LIMITED PARTNERSHIP
<PAGE>
By:_______________________________
Its:______________________________
ROTTLUND HOMES OF IOWA, INC.
By:_______________________________
Its:______________________________
ROTTLUND HOMES OF NEW JERSEY
By:_______________________________
Its:______________________________
<PAGE>
SIXTH MODIFICATION
OF
CREDIT AGREEMENT
This Sixth Modification of Credit Agreement ("Agreement") is made
this 10th day of July, 1998, among THE ROTTLUND COMPANY, INC., a
Minnesota corporation ("Borrower"), BANKBOSTON, N.A., formerly known
as THE FIRST NATIONAL BANK OF BOSTON, a national bank association
having its principal place of business at 100 Federal Street, Boston,
Massachusetts 02110 ("BKB"), and BANKBOSTON N.A., as Agent (the
"Agent") for itself and the other lending institutions which are or
may become parties to the Credit Agreement (as hereinafter defined).
W I T N E S S E T H:
IN CONSIDERATION OF TEN AND NO/100 DOLLARS ($10.00) and other
good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the undersigned Borrower and BKB hereby
covenant and agree as follows:
1. RECITALS. The following Recitals are true and correct as of
the date of this Agreement.
(a) The Borrower, BKB and the Agent entered into that
certain Credit Agreement dated as of October 23, 1996, and that
certain First Modification of Credit Agreement dated November 19,
1996, that certain Second Modification of Credit Agreement dated
December 24, 1996, that certain Third Modification of Credit Agreement
dated January 28, 1997, that certain Fourth Modification of Credit
Agreement dated June 25, 1997, and that certain Fifth Modification of
Credit Agreement dated January 15, 1998 (the foregoing Credit
Agreement, as modified, is referred to herein as "Credit Agreement").
(b) The parties to the Credit Agreement wish to further
amend and modify the Credit Agreement.
(c) All terms not otherwise defined herein shall have the
same meaning as in the Credit Agreement.
2. The Credit Agreement is hereby modified as follows:
(a) By substituting "$25,000,000"for "$23,850,000" in
Section 10.1;
(b) By substituting "March 31, 1998" for "June 30, 1996" in
Section 10.1; and
<PAGE>
(c) By deleting the provisions of Section 10.3 in their
entirety and by substituting in lieu thereof "EBITDA TO INTEREST
EXPENSE. The Borrower will not permit the ratio of (a) EBITDA for any
fiscal quarter to (b) Interest Incurred for such period to be less
than the ratio set forth below:
PERIOD PERMITTED RATIO
Quarter ending March 31, 1998 Waived
Quarter ending June 30, 1998 1.30:1
Quarter ending September 30, 1998 2.10:1
Quarter ending December 31, 1998 2.30:1
For the quarter ending March 31, 1999 and continuing to Maturity
Date such ratio shall be tested for each period of four consecutive
fixed quarters and shall be no less than 2.00:1."
3. The Effective Date of this Sixth Modification shall be as of
March 31, 1998 so that, without limitation, compliance with all
covenants contained in the Credit Agreement shall be determined from
modifications contained herein.
4. BKB waives the covenants contained in Section 10.2 of the
Credit Agreement for the period June 30, 1998, through September 30,
1998. The parties hereto acknowledge and agree that the waiver
provided in the preceding sentence will terminate and, beginning on
October 1, 1998, the covenants contained in Section 10.2 of the Credit
Agreement shall be maintained and enforced.
5. Except as modified hereby, the terms and conditions of the
Credit Agreement shall remain in full force and effect and the
Borrower hereby ratifies the terms and conditions thereof.
6. By its execution hereof, Borrower warrants and represents
that there does not, as of the date hereof, exist a default, event of
default or event or circumstance with which the passage of time or
giving of notice, or both, would constitute a default or event of
default under any of the Loan Documents. By its execution hereof,
Borrower reaffirms, as of the date hereof, all of the representations,
warranties and indemnities contained in the Loan Documents except to
the extent any of the representations or warranties speak to a
specific earlier date, or the facts on which any of them were based
have been changed by transactions contemplated or permitted by the
Loan Documents. As of the date hereof, Borrower has no defense,
offset or counterclaim against the indebtedness evidenced or secured
by any of the Loan Documents, as amended, or against the Agent or the
Banks.
<PAGE>
7. This Agreement may be executed in any number of counterparts
each of which shall be deemed an original.
IN WITNESS WHEREOF, the undersigned Borrower and Agent have
hereunto caused this instrument to be executed by their duly
authorized corporate officers and their seal to be affixed hereto as
of the day and year first above written.
THE ROTTLUND COMPANY, INC., a
Minnesota corporation
By: ______________________________
Title: _____________________________
BANKBOSTON, N.A.
By: ______________________________
The undersigned guarantors hereby agree to all modifications of
the Credit Agreement and hereby ratify and reaffirm their respective
Subsidiary Guaranty dated as of the day and year first above written.
NORTHCOAST MORTGAGE, INC.
By: ______________________________
Its: ______________________________
ROTTLUND HOMES OF FLORIDA, INC.
By: ________________________________
Its: ________________________________
<PAGE>
ROTTLUND HOMES OF INDIANA, INC.
By: Rottlund Homes of Indiana, Inc.,
Its General Partner
By: ____________________________
Its: ____________________________
ROTTLUND HOMES OF INDIANA
LIMITED PARTNERSHIP
By: ________________________________
Its: ________________________________
ROTTLUND HOMES OF IOWA, INC.
By: ________________________________
Its. ________________________________
ROTTLUND HOMES OF NEW JERSEY
By: ________________________________
Its: ________________________________
<PAGE>
COMPUTATION OF PER SHARE EARNINGS
Income per common share amounts are computed by dividing net income by the
weighted average number of common shares outstanding. Common stock
equivalents related to stock options which would have a dilutive effect based
upon the initial public offering price or current market prices had no
material effect on net income per share in each of the years presented in the
Company's Consolidated Statements of Operations and, accordingly, this
exhibit is not applicable to the Company.
<PAGE>
SUBSIDIARIES OF THE ROTTLUND COMPANY, INC.
North Coast Mortgage, Inc.
Rottlund Homes of Florida, Inc.
Rottlund Homes of Iowa, Inc.
Rottlund Homes of Indiana, Inc.
Rottlund Homes of New Jersey, Inc.
Rottlund Homes of Indiana Limited Partnership
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report dated May 15, 1998 included in this Form 10-K, into the Company's
previously filed Registration Statements File Nos. 33-54862 and 333-31589.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
July 10, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 4,247,000
<SECURITIES> 0
<RECEIVABLES> 2,520,000
<ALLOWANCES> 0
<INVENTORY> 74,379,000
<CURRENT-ASSETS> 81,146,000
<PP&E> 2,031,000
<DEPRECIATION> 780,000
<TOTAL-ASSETS> 88,281,000
<CURRENT-LIABILITIES> 31,041,000
<BONDS> 30,925,000
0
0
<COMMON> 141,000
<OTHER-SE> 26,174,000
<TOTAL-LIABILITY-AND-EQUITY> 88,281,000
<SALES> 160,830,000
<TOTAL-REVENUES> 160,830,000
<CGS> 139,284,000
<TOTAL-COSTS> 139,284,000
<OTHER-EXPENSES> 20,541,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,018,000
<INCOME-PRETAX> (1,013,000)
<INCOME-TAX> (415,000)
<INCOME-CONTINUING> (598,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (598,000)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
