<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
---------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-21378
INCO HOMES CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 33-0534734
------------------------------ -------------------
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1282 WEST ARROW HIGHWAY
UPLAND, CALIFORNIA 91786
- ---------------------------------------- ----------
(Address of principal executive offices) (zip code)
(909) 981-8989
----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
---------------------------------------------------
(Former name, former address and former fiscal year
if changed since last report)
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock June 30, 1996
--------------------- -------------
$.01 par value 8,622,573
- ------------------------------------------------------------------------------
<PAGE> 2
INCO HOMES CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1996 and
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the Three
Months and Six Months Ended June 30, 1996 and 1995 . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . 8
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
</TABLE>
2
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INCO HOMES CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) JUNE 30, DECEMBER 31,
1996 1995
-------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS $ 703 $ 420
RECEIVABLE FROM SALE OF DIVISIONS 20 1,722
REAL ESTATE INVENTORIES - NET OF ALLOWANCES OF
$17,947 AND $19,425 FOR 1996 AND 1995,
RESPECTIVELY 39,198 40,535
DEFERRED TAX ASSET - NET OF VALUATION ALLOWANCES
OF $8,480 AND $7,759 FOR 1996 AND 1995,
RESPECTIVELY 2,200 2,200
OTHER ASSETS 555 897
-------- --------
TOTAL ASSETS $ 42,676 $ 45,774
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES $ 6,167 $ 8,742
NOTES PAYABLE SECURED BY REAL ESTATE 15,891 16,660
LINES OF CREDIT 4,427 4,840
MINORITY PARTNERS' INVESTMENT IN CONSOLIDATED PARTNERSHIPS 1,934 -
-------- --------
TOTAL LIABILITIES 28,419 30,242
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
COMMON STOCK - $.01 PAR VALUE; 20,000,000 SHARES
AUTHORIZED, 8,622,573 AND 8,077,308 SHARES ISSUED
AND OUTSTANDING FOR 1996 AND 1995, RESPECTIVELY 86 81
ADDITIONAL PAID IN CAPITAL 41,199 40,676
DEFICIT (27,028) (25,225)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 14,257 15,532
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 42,676 $ 45,774
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
3
<PAGE> 4
INCO HOMES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------- ---------------------------------
1996 1995 1996 1995
------------ --------------- ----------- -------------
<S> <C> <C> <C> <C>
REVENUE FROM HOME SALES $ 2,972 $ 21,209 $ 6,618 $ 41,842
COST OF HOMES SOLD 2,827 17,884 6,170 35,141
---------- ---------- ---------- ----------
GROSS PROFIT 145 3,325 448 6,701
---------- ---------- ---------- ----------
SELLING AND MARKETING EXPENSES 507 2,224 1,184 4,422
GENERAL AND ADMINISTRATIVE EXPENSES 538 1,063 1,140 2,161
---------- ---------- ---------- ----------
1,045 3,287 2,324 6,583
---------- ---------- ---------- ----------
OPERATING INCOME (LOSS) (900) 38 (1,876) 118
OTHER INCOME 41 41 71 108
MORTGAGE BROKERAGE LOSS - NET - (56) - (163)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE MINORITY
PARTNERS' SHARE AND PROVISION
(BENEFIT) FOR INCOME TAXES (859) 23 (1,805) 63
MINORITY PARTNERS' SHARE OF LOSS 2 - 2 -
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE PROVISION
(BENEFIT) FOR INCOME TAXES (857) 23 (1,803) 63
PROVISION (BENEFIT) FOR INCOME TAXES - 9 - 25
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (857) $ 14 $ (1,803) $ 38
========== ========== ========== ==========
NET INCOME (LOSS) PER COMMON SHARE $ (0.10) $ 0.002 $ (0.21) $ 0.005
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 8,552,353 8,057,021 8,389,682 8,021,209
========== ========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
4
<PAGE> 5
INCO HOMES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
1996 1995
---------- ---------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $(1,803) $ 38
ADJUSTMENT TO RECONCILE NET INCOME (LOSS) TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
MINORITY PARTNERS' SHARE 2 -
(INCREASE) DECREASE IN RECEIVABLE FROM SALE OF DIVISIONS 1,702 -
(INCREASE) DECREASE IN REAL ESTATE INVENTORIES (148) 2,836
(INCREASE) DECREASE IN INCOME TAXES RECEIVABLE - 2,227
(INCREASE) DECREASE IN DEFERRED TAX ASSET - 27
(INCREASE) DECREASE IN OTHER ASSETS 342 (380)
INCREASE (DECREASE) IN ACCOUNTS PAYABLE AND
ACCRUED LIABILITIES (2,022) (1,837)
------- --------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES (1,927) 2,911
------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
PROCEEDS FROM NOTES PAYABLE SECURED BY REAL ESTATE 8,410 32,992
REPAYMENTS ON NOTES PAYABLE SECURED BY REAL ESTATE (7,719) (35,179)
PROCEEDS FROM LINES OF CREDIT - 5,500
REPAYMENTS ON LINES OF CREDIT (413) (5,500)
CONTRIBUTIONS FROM MINORITY PARTNERS 1,932 -
INCREASE (DECREASE) IN COMMON STOCK - 1
INCREASE (DECREASE) IN ADDITIONAL PAID IN CAPITAL - 149
------- --------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 2,210 (2,037)
------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 283 874
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 420 747
------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 703 $ 1,621
======= ========
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES
[1] IN THE SIX MONTHS ENDED JUNE 30, 1996, THE COMPANY ISSUED
545,265 SHARES OF COMMON STOCK TO CREDITORS IN EXCHANGE FOR
RELIEVING THE COMPANY OF $539,000 OF ACCOUNTS PAYABLE.
[2] IN THE SIX MONTHS ENDED JUNE 30, 1996, THE COMPANY DEEDED BACK
PROPERTY WITH A BOOK COST BASIS OF $1.5 MILLION TO LAND SELLERS
IN SATISFACTION OF $1.5 MILLION IN INDEBTEDNESS.
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
5
<PAGE> 6
INCO HOMES CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
NOTE 1 - GENERAL
The accompanying unaudited consolidated financial statements of Inco
Homes Corporation, subsidiaries and affiliates ("Inco" or "Company")
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (including normal recurring
accruals) considered necessary for a fair presentation have been
included.
The accompanying unaudited consolidated financial statements should be
read in conjunction with the financial statements and related notes
thereto contained in the Company's Annual Report on Form 10-K for the
year ended December 31, 1995. The accompanying consolidated financial
statements include the accounts of the Company and all wholly-owned
subsidiaries, the Company's general partnership interests in Palmdale
Vistas Housing Developments, Ltd. ("Palmdale Vistas"), Spirit Corona
77, L.P. ("Spirit Corona 77") and Freedom -- Eagle Ranch Housing
Partners ("FERHP") and the Company's participation note agreement with
ALG 1996-1 ("ALG"). All significant intercompany transactions have
been eliminated.
In 1994 the Company expanded into Phoenix, Arizona and Las Vegas,
Nevada. In December 1995 the Company sold its Phoenix and Las Vegas
divisions, including its Phoenix mortgage operations, to an unrelated
third party. The sales price was $14.5 million, of which the
purchaser assumed $12.0 million of bank indebtedness, and accounts
payable and accrued liabilities. As a result, the Company's sole
market is in Southern California and it is substantially dependent on
local economic factors.
The Company has experienced, and expects to continue to experience,
significant variability in quarterly results of operations. The
results of any interim period are not necessarily indicative of
results that can be expected for the entire year.
NOTE 2 - RELATED PARTY TRANSACTIONS
For the three months ended June 30, 1996 and 1995, the Company
incurred $10,000 and $0, respectively, in model home design fees and
reimbursements for the cost of the model home furnishings with Nancy
Orman Interiors. For the six months ended June 30, 1996 and 1995, the
Company incurred $25,000 and $43,600, respectively, in fees and costs
with Nancy Orman interiors. Nancy Orman Interiors is affiliated with
Ira C. Norris.
For the three months ended June 30, 1996 and 1995, the Company
incurred rental expense for the use of office space of $26,500 and
$40,400, respectively, with Inco Plaza Ltd., an affiliated
partnership. For the six months ended June 30, 1996 and 1995, the
Company incurred rental expense of $53,000 and $80,500, respectively,
with Inco Plaza, Ltd.
Included in other assets as of December 31, 1995 is an unsecured
non-interest bearing advance in the amount of $293,000 from Victor
Valley Commercial Properties, an affiliated partnership. During the
three months ended June 30, 1996, this advance was assigned by the
Company to Ira C. Norris in exchange for a cash payment of $293,000.
6
<PAGE> 7
NOTE 3 - UNAUDITED NET INCOME PER COMMON SHARE
The primary and fully diluted weighted average number of common shares
was 8,552,353 and 8,057,021 for the three months ended June 30, 1996
and 1995, respectively, and 8,389,682 and 8,021,209 for the six months
ended June 30, 1996 and 1995, respectively. Common share equivalents
include dilutive stock options and warrants using the treasury stock
method. There were no dilutive stock equivalents, options or warrants
for any of the periods covered.
NOTE 4 - STOCKHOLDERS' EQUITY
The decrease in stockholders' equity from December 31, 1995 to June
30, 1996, is reconciled as follows:
Dollars in thousands
<TABLE>
<CAPTION>
Common Stock
Number and Additional
of Shares Paid in Capital Deficit Total
--------- --------------- -------- -------
<S> <C> <C> <C> <C>
Balance - December 31, 1995 8,077,308 $40,757 $(25,225) $15,532
Common Stock Issued 545,265 528 -- 528
Net Loss -- -- (1,803) (1,803)
--------- ------- -------- -------
Balance - June 30, 1996 8,622,573 $41,285 $(27,028) $14,257
========= ======= ======== =======
</TABLE>
Common stock was issued in the six months ended June 30, 1996 to
certain subcontractors, suppliers and other creditors in satisfaction
of debt owed by the Company. See -- Liquidity and Capital Resources.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
The Company, in its normal course of business, makes commitments to
purchase land for residential development and has various outstanding
performance bonds.
As of June 30, 1996, the Company had made a deposit of $10,000 for the
potential purchase of land for future residential development in the
amount of $632,000.
As a result of the limited amount of available working capital, the
Company has not paid all of its subcontractors and suppliers on a
current basis. Certain of these subcontractors and suppliers have
filed liens, a few of which are pursuing further legal action,
including the filing of complaints. Additionally, the Company is
presently involved in litigation regarding alleged construction
defects at one of its projects. See Part II -- Other Information,
Item 1. Legal Proceedings.
7
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for historical information contained herein, the matters
discussed in this report contain forward-looking statements that involve risks
and uncertainties that could cause results to differ materially, including the
land valuation write-downs, changing market conditions, and other risks
detailed in this report, the Company's Annual Report on Form 10-K, and other
documents filed by the Company with the Securities and Exchange Commission from
time to time.
OVERVIEW
The Company's results of operations for the periods presented reflect the
cyclical nature of the homebuilding industry and the Company's historical focus
on the Southern California housing market. The most recent peak in the
industry cycle occurred in 1988 and 1989, which was followed by a downturn in
1990, coinciding with the general national recession and the depressed economic
and real estate conditions in California. These conditions continued in 1996
and have had an adverse impact on the Company's results of operations.
The Company's financial results have been adversely affected by the weakness in
the Southern California new home market. In response to declining overall home
sales in this market, during 1994 the Company substantially increased its
overall marketing programs and provided homebuyers with price discounts and
other sales incentives in order to remain competitive. In 1995 and 1996 the
Company reduced its marketing expenditures. However, price discounts and other
sales incentives continued. This action has resulted in reduced profitability
on the homes that the Company has sold.
In 1994 the Company entered the Phoenix and Las Vegas markets, and expanded its
operations in Riverside County of Southern California. Additionally, in 1994
the Company implemented cost reduction measures including (i) consolidation of
its High Desert Division with its Inland Division and (ii) closing or reducing
the scope of several communities in the high desert region. These cost
reduction efforts have continued in 1995 and 1996. In 1995 the Company closed
an additional underperforming project in the high desert region and reduced the
current scope of development of a project in Riverside County. Accordingly, in
1995 the Company accelerated the write-off of previously capitalized costs
associated with both of these projects.
During the third quarter of 1995, the Company further consolidated all of its
Southern California operations and personnel in one location, closing its
Inland Division operating office and relocating the division into office space
at the Company's headquarters in Upland. The Company also sold its insurance
services operations to an unrelated third party and transferred the California
and Las Vegas operations of its mortgage brokerage subsidiary to an unrelated
third party.
In December 1995 the Company sold its Phoenix and Las Vegas operations,
including its Phoenix mortgage operations, to an unrelated third party. The
sales price was $14.5 million, of which the purchaser assumed $12.0 million of
bank indebtedness, and accounts payable and accrued liabilities. This sale was
consummated as a result of the Company's continuing efforts to raise needed
capital, and will enable the Company to focus its efforts and capital on its
historical core business in Southern California. However, the sale initially
has resulted in a reduced level of closings and revenues, and has had an
adverse effect on earnings.
In 1995 the Company commenced negotiations with six land sellers from whom the
Company purchased land in the high desert. The Company owned these properties
subject to seller loans that had current or approaching maturity dates.
Continuing negotiations may result either in extensions of maturity dates
and/or other adjustments to the seller notes, or deedbacks of some or all of
the properties to the sellers in full satisfaction of the indebtedness. As of
December 31, 1995, if all such deedbacks had occurred, it would have resulted
in a reduction of real estate inventories of $3.1 million (net of a reserve in
the amount of $5.3 million that had been established as of December 31, 1995)
and a reduction of debt obligations of $3.1 million. Additionally, based on
the Company's evaluation of the net realizable value of its remaining other
properties, write-downs of real estate totaling $5.8 million were
8
<PAGE> 9
recorded as of December 31, 1995, of which $4.4 million related to properties
in the high desert and $1.4 million related to properties in Riverside County.
Continuing uncertainties remain regarding the timing of the realization of the
total deferred tax asset. These uncertainties are attributable to the impact
of the sale of the Phoenix and Las Vegas operations on future earnings, the
land deed backs and write-downs, and current business operations. Therefore,
pursuant to Statement of Financial Accounting Standards No. 109 ("SFAS No.
109") "Accounting for Income Taxes", for both the three months and six months
ended June 30, 1996 the Company did not record an additional net deferred tax
asset for the operating losses incurred. No assurances can be given that the
Company will not have to record a further valuation allowance against future
tax benefits.
RESULTS OF OPERATIONS
Revenue from Home Sales
Revenue from home sales decreased significantly to $3.0 million during the
three months ended June 30, 1996, from $21.2 million during the three months
ended June 30, 1995, representing a decrease of $18.2 million or 86.0%. The
Company closed 22 homes at an average sales price of $135,100 during the three
months ended June 30, 1996 compared to 171 homes closed at an average sales
price of $124,000 during the three months ended June 30, 1995, an 87.1%
decrease in closings and a 9.0% increase in average sales price. The decrease
in California closings was 72.5%.
Revenue from home sales also decreased significantly to $6.6 million during the
six months ended June 30, 1996, from $41.8 million during the six months ended
June 30, 1995, representing a decrease of $35.2 million or 84.2%. The Company
closed 50 homes at an average sales price of $132,400 during the six months
ended June 30, 1996 compared to 329 homes closed at an average sales price of
$127,200 during the six months ended June 30, 1995, an 84.8% decrease in
closings and a 4.1% increase in average sales price. The decrease in
California closings was 71.3%. The decrease in revenue and number of homes
closed during both the three months and six months ended June 30, 1996 is
attributable to the close-out of two successful subdivisions in Riverside
County in 1995, the sale of the Phoenix and Las Vegas divisions and a decrease
in demand combined with declining inventory available for sale in California.
The increased average sales price is attributable to a change in the mix of
homes offered for sale.
The following table sets forth, for the periods indicated, the number of homes
closed by the Company's three operating divisions:
<TABLE>
<CAPTION>
Homes Closed for the Homes Closed for the
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Southern California Division
High Desert 11 44 29 77
Riverside County 11 36 21 97
Phoenix Division (1) -- 58 -- 96
Las Vegas Division (1) -- 33 -- 59
-- --- -- ---
Total 22 171 50 329
== === == ===
</TABLE>
- -----------------
(1) In December 1995 the Company sold its Phoenix and Las Vegas home
building divisions to an unrelated third party.
Cost of Homes Sold
Cost of homes sold includes land acquisition, development, construction, direct
and indirect costs, job-site supervision, customer service, warranty costs,
capitalized interest, property taxes and other capitalized indirect costs.
9
<PAGE> 10
Cost of homes sold for the three months ended June 30, 1996 was $2.8 million, a
decrease of $15.1 million, or 84.2%, from $17.9 million during the three months
ended June 30, 1995. Cost of homes sold as a percentage of revenue increased
to 95.1% for the three months ended June 30, 1996 from 84.3% for the same
period in 1995. Cost of homes sold for the six months ended June 30, 1996 was
$6.2 million, a decrease of $29.0 million, or 82.4% from $35.1 million during
the six months ended June 30, 1995. Cost of homes sold as a percentage of
revenue increased to 93.2% for the six months ended June 30, 1996 from 84.0%
for the same period in 1995.
The increase in cost of homes sold as a percentage of revenue for both the
three months and six months ended June 30, 1996 is the result of a number of
factors including price discounts and other sales incentives due to continuing
competitive pressures, the close out of certain high desert communities and
certain fixed costs included in cost of homes sold.
The Company believes that, since the prices of lumber, other building materials
and related services are subject to fluctuation, its gross margins in future
periods may be significantly affected by changes in prevailing prices.
Selling and Marketing Expenses
Selling expenses include loan discount points, internal and third party sales
commissions, escrow fees, title insurance fees and other closing costs.
Selling expenses were $271,000 and $1.0 million for the three months ended June
30, 1996 and 1995, respectively, a decrease of 72.2%. Selling expenses as a
percentage of revenue were 9.1% and 4.6% for the three months ended June 30,
1996 and 1995, respectively. Selling expenses were $569,000 and $1.9 million
for the six months ended June 30, 1996 and 1995, respectively, a decrease of
69.3%. Selling expenses as a percentage of revenue were 8.6% and 4.4% for the
six months ended June 30, 1996 and 1995, respectively.
The decrease in selling expenses was a result of the sale of the Phoenix and
Las Vegas divisions, a fewer number of active projects in Southern California
and the implementation of cost reduction measures to further reduce selling
expenses. The increase in selling expenses as a percentage of revenue is
primarily due to the greater proportion of homes closed using outside brokers,
a change in the commission structure, financing incentives granted to
homebuyers as a result of the recent increase in interest rates, and the low
level of closing revenues.
Marketing expenses include advertising and promotion costs associated with
maintaining model homes and sales offices. Marketing expenses in any given
period may be significantly influenced by the number of grand openings and the
number of projects that are being actively marketed during the period.
Marketing costs associated with items such as establishing sales offices and
upgrading standard homes to model homes are capitalized when incurred and are
expensed as revenue is earned, while other marketing costs are expensed as
incurred.
Marketing expenses were $236,000 and $1.2 million for the three months ended
June 30, 1996 and 1995, respectively, representing a decrease of 81.1%. As a
percentage of revenue, marketing expenses were 7.9% and 5.9% for the three
months ended June 30, 1996 and 1995, respectively. Marketing expenses were
$615,000 and $2.6 million for the six months ended June 30, 1996 and 1995,
respectively, representing a decrease of 76.1%. As a percentage of revenue,
marketing expenses were 9.3% and 6.1% for the six months ended June 30, 1996
and 1995, respectively.
The decrease in marketing costs was a result of the sale of the Phoenix and Las
Vegas divisions, a fewer number of active projects in Southern California and
the implementation of cost reduction measures to further reduce marketing
expenses. The increase in marketing costs as a percentage of revenues is due
to the low level of closing revenues.
During the second quarter of 1996 and 1995, the Company was actively selling
homes in seven and twelve projects, respectively. In the first six months of
1996 the Company had no grand openings. In 1995, marketing costs were incurred
related to two grand openings in the first quarter and two grand openings in
the second quarter.
10
<PAGE> 11
General and Administrative Expenses
General and administrative expenses include payroll and related benefits,
insurance, financial reporting, general office expense and other corporate and
division level expenses.
General and administrative expenses were $538,000 and $1.1 million for the
three months ended June 30, 1996 and 1995, respectively, a decrease of 49.4%.
As a percentage of revenue, general and administrative expenses were 18.1% and
5.0% for the three months ended June 30, 1996 and 1995, respectively. General
and administrative expenses were $1.1 million and $2.2 million for the six
months ended June 30, 1996 and 1995, respectively, a decrease of 47.2%. As a
percentage of revenue, general and administrative expenses were 17.2% and 5.2%
for the six months ended June 30, 1996 and 1995, respectively.
The decrease in the dollar amount of general and administrative expenses
primarily reflects the sale of the Phoenix and Las Vegas divisions and the
Company's continuing cost reduction measures. The increase as a percentage of
revenues is due to the low level of closing revenues.
Other Income
Other income includes interest earned on cash balances related to certain
projects, miscellaneous income and income from the Company's insurance services
operations. Other income was $41,000 for both the three months ended June 30,
1996 and 1995, respectively, and $71,000 and $108,000 for the six months ended
June 30, 1996 and 1995, respectively. The decrease was primarily related to
the sale of the insurance services operations in the third quarter of 1995 to
an unrelated third party.
Mortgage Brokerage Loss - Net
Mortgage brokerage loss - net of Freedom Mortgage, Inc. ("Freedom"), the
Company's former wholly-owned mortgage brokerage business, reflects revenue
earned from loan origination, discount and servicing release fees, net of
costs.
In the third quarter of 1995, the Company transferred the California and Las
Vegas operations of Freedom to an unrelated third party, and in December 1995
the Company transferred its Phoenix operations in conjunction with the sale of
its Phoenix division.
Freedom generated a net loss of $56,000 for the three months ended June 30,
1995 and a net loss of $163,000 for the six months ended June 30, 1995. The
net loss was attributable to Freedom's low capture rate and the high general
and administrative costs associated with these operations.
Minority Partners' Share
Minority partners' share represents the interest of affiliated limited partners
in partnerships included in the Company's financial statements. In January
1996 the Company formed Spirit Corona 77 and in May 1996 the Company formed
FERHP. In June 1996 the Company entered into a participation note agreement
with ALG.
The minority partners' share of losses was $2,000 for the three months and six
months ended June 30, 1996 and $0 for the three months and six months ended
June 30, 1995.
Provision (Benefit) for Income Taxes
Provision (benefit) for income taxes represents federal income taxes based on
net income (loss) computed at the effective federal tax rate plus state income
taxes computed at the effective tax rate, net of federal tax benefit, as
adjusted for regulations affecting net operating losses.
11
<PAGE> 12
For the three months ended June 30, 1996, the Company increased its valuation
allowance by $343,000 and for the six months ended June 30, 1996, the Company
increased its valuation allowance by $721,000. Both of these increases in the
valuation allowance were in an amount equal to the deferred tax benefit that
would have otherwise been recorded. Provision for income taxes was $9,000 for
the three months ended June 30, 1995 and $25,000 for the six months ended June
30, 1995. As of December 31, 1995, the Company had net operating loss
carryforwards for federal income tax purposes of $10.4 million that are
available to offset future federal taxable income. Of these federal net
operating losses, $3.7 million and $6.7 million expire in the years 2009 and
2010, respectively.
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes ("SFAS 109") requires, among other things, the recognition of deferred
tax assets for the estimated future tax effects attributable to net deductible
temporary differences and net operating loss carryforwards. SFAS 109 further
requires the reduction of deferred tax assets by a valuation allowance if,
based on the weight of available evidence, it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The future
realization of the deferred tax assets must be evaluated along with the
accumulated differences caused by other tax and book basis differences.
Uncertainties exist due to the reduced level of closings, revenues and earnings
resulting from the sale of the Company's Phoenix and Las Vegas divisions, the
need to raise capital for new land acquisitions and current business
operations. Accordingly, the Company has provided an $8.5 million valuation
allowance to reserve against the deferred tax asset as a result of these
uncertainties. At such time as it becomes more likely than not that portions
of the additional tax asset will be realized in the future, the valuation
allowance can be adjusted. The Company believes that during the time period in
which the deferred tax asset can be utilized it will generate sufficient income
to realize the net deferred tax asset. It is difficult to assess the ultimate
timing of the realization of the deferred tax asset. Additionally, no
assurances can be given regarding the realization of the deferred tax asset or
that the Company will not have to record a further valuation allowance against
future tax benefits.
BACKLOG
The Company's homes are offered for sale in advance of their construction.
Historically, the Company has entered into standard sales contracts for a
majority of the homes to be built in a phase of a project before construction
commences. Such sales contracts are usually subject to certain contingencies
such as the buyer's ability to qualify for financing and/or the sale of an
existing home. The Company does not recognize revenue on homes covered by such
contracts until the escrows are closed and title is transferred to the buyer.
Homes covered by such sales contracts are considered by the Company as its
backlog. The following table sets forth the Company's backlog by region at the
dates indicated:
<TABLE>
<CAPTION>
Backlog at June 30,
-------------------------------
1996 1995
----------- -----------
<S> <C> <C>
Southern California Division
High Desert 63 53
Riverside County 40 40
Phoenix Division (1) -- 108
Las Vegas Division (1) -- 88
----------- -----------
Number of Homes 103 289
=========== ===========
Aggregate Sales Value $13,490,000 $31,931,000
=========== ===========
Average Sales Price $131,000 $110,500
=========== ===========
</TABLE>
- -----------------
(1) In December 1995 the Company sold its Phoenix and Las Vegas home building
divisions to an unrelated third party.
The Company's backlog at any particular date is subject to substantial
variation and is dependent upon several factors including the number of homes
then available for sale, prevailing market conditions and the length of time
necessary to complete the closing of home sales subject to pending contracts.
The Company has generally experienced a rapid increase in backlog during
periods in which it holds a grand opening for one of its projects. In
12
<PAGE> 13
the first six months of 1996 the Company had no grand openings, compared to
four grand openings in the first six months of 1995.
The Company's backlog decreased 64.4% to 103 homes at June 30, 1996 from 289
homes at June 30, 1995. This decrease is due to the sale of the Phoenix and
Las Vegas divisions, a fewer number of grand openings and active projects, and
declining inventory available for sale. However, the number of California
homes in backlog increased by 10.8%. The aggregate sales value of the units in
backlog decreased by $18.4 million or 57.8%, due to the decrease in number of
homes under sales contracts. The average sales price of homes in backlog
increased by $20,500 or 18.6% due to a change in the mix of homes offered for
sale.
No assurances can be given that homes in backlog will result in actual closings
because cancellations vary from period to period. The Company believes that
cancellations have been relatively high in recent periods, reflecting the weak
economic conditions that exist in the Southern California markets, increased
competition, rising interest rates and the inability of certain potential
homebuyers to qualify for mortgage financing.
NET ORDERS
Net orders represents the number of homes for which the Company has received
signed sales contracts and purchase deposits during the period, net of
cancellations. The following table sets forth the Company's net orders by
region for the dates indicated:
<TABLE>
<CAPTION>
Net Orders for the Net Orders for the
Three Months Six Months
Ended June 30, Ended June 30,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Southern California Division
High Desert 22 28 47 61
Riverside County 13 28 29 54
Phoenix Division (1) -- 66 -- 116
Las Vegas Division (1) -- 63 -- 114
--- ---- --- ----
Total 35 185 76 345
=== ==== === ====
</TABLE>
- ---------------------
(1) In December 1995 the Company sold its Phoenix and Las Vegas home building
divisions to an unrelated third party.
Net new orders declined to 35 homes from 185 homes for the three months ended
June 30, 1996 and 1995, respectively, a decrease of 81.1%. Net new orders
declined to 76 homes from 345 homes for the six months ended June 30, 1996 and
1995, respectively, a decrease of 78.0%. The decrease in California net orders
was 21 homes or 37.5% in the three months ended June 30, 1996 and 39 homes or
33.9% in the six months ended June 30, 1996. The decrease in California net
orders is attributable to market weakness, as well as fewer subdivisions and
declining inventory available for sale.
VARIABILITY IN QUARTERLY RESULTS
The Company has experienced, and expects to continue to experience, significant
variability in its operating results. This variability may cause the Company's
overall results of operations to fluctuate significantly on a period-to-period
basis, and revenues anticipated to occur in a fiscal period may not be earned
until subsequent fiscal periods. Many factors contribute to this variability,
including: (i) the timing and mix of home deliveries; (ii) the Company's
ability to continue to acquire additional land on favorable terms for future
developments; (iii) the condition of the real estate markets and the economy in
general; (iv) the cyclical nature of the home building industry and changes in
prevailing interest rates; (v) cost and availability of materials and labor;
and (vi) delays in construction schedules caused by timing of inspections and
approvals by regulatory agencies, strikes at subcontractors and adverse weather
conditions. The Company's historical financial results are not necessarily a
meaningful indicator of future results and, in general, the Company expects its
financial results to vary from project to project. The Company's revenue and
net income may also vary substantially as a result of variations in the number
of projects at which the Company is closing the sale of homes
13
<PAGE> 14
at any one time. In addition, the recent sale of operations in Phoenix and Las
Vegas has resulted in a reduction in the level of closings and revenues, and
has had an adverse effect on earnings.
INFLATION
The Company, as well as the homebuilding industry in general, may be adversely
affected during periods of high inflation, primarily because of higher land
acquisition, land development, construction and interest costs. In addition,
higher interest rates may significantly affect the affordability of permanent
mortgage financing to prospective purchasers and the cost of financing the
Company's land acquisition, development of real estate and construction of
homes. The Company believes that higher mortgage interest rates during much of
1995, that increased again in the second quarter of 1996 has had a negative
impact on home sales, particularly on entry-level buyers. Inflation also
increases the Company's interest cost and the cost of labor and materials. The
Company attempts to pass any such increases in costs to its buyers through
increased selling prices of its homes. However, there is no assurance that
inflation will not have a material adverse impact on the Company's future
results of operations.
ADOPTION OF ACCOUNTING STANDARDS
In March 1995 the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of". SFAS
121 is effective for financial statements for fiscal years beginning after
December 15, 1995, with earlier application encouraged. SFAS 121 requires that
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. If the sum of the expected future undiscounted cash flows from an
asset to be held and used is less than the carrying amount of the asset, an
impairment loss must be recognized in the amount of the difference between the
carrying amount and fair value less the costs to sell. Assets to be disposed
of must be valued at the lower of the carrying amount or fair value less costs
to sell. The Company did not adopt SFAS No. 121 as of December 31, 1995,
continuing to state its real estate inventories at lower of cost or net
realizable value. The Company's adoption of SFAS No. 121 did not have a
material impact on the Company's consolidated financial statements.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." The statement encourages entities to adopt a fair value method
of accounting for employee stock compensation plans. Entities that choose not
to adopt the new fair value accounting rules must disclose pro forma net income
and earnings per share under the new method. The statement is effective for
fiscal years beginning after December 15, 1995. The Company has adopted the
disclosure requirements of SFAS No. 123.
There were no other new accounting pronouncements that could have a significant
effect on the Company's financial statements for any period presented.
LIQUIDITY AND CAPITAL RESOURCES
The homebuilding industry is capital intensive and often involves high leverage
and significant up-front expenditures to acquire land and begin development.
Accordingly, the Company incurs substantial indebtedness to finance its
homebuilding activities and its business and earnings are substantially
dependent on its ability to obtain bank or other debt financing on acceptable
terms. The financial statements set forth herein have been prepared assuming
the Company will continue as a going concern. In addition, the Company's
business plan calls for substantial future expenditures relating to the
acquisition and construction of new projects. No assurances can be given that
the cash flow from operations and the Company's ability to borrow from various
lenders will be sufficient to fund most of its planned expenditures. The
Company currently is attempting to raise additional capital needed for both
ongoing working capital and the acquisition of land for future projects in
Southern California. If the Company is not successful in obtaining sufficient
capital in 1996 to fund its planned expenditures, some or all of its projects
may be significantly delayed or abandoned. Any such delay or abandonment could
result in cost increases and have a material adverse effect on the Company's
business, financial condition and results of operations The Company is unable
to predict whether it will be successful in raising such capital, nor can any
assurances be given that, if successful, the capital will be raised on terms
favorable to the Company. Accordingly, absent raising
14
<PAGE> 15
additional capital, the Company's ability to finance the acquisition of
additional land for the delivery of future homes will be impaired.
Additionally, as a result of the limited amount of available working capital,
the Company has not paid all of its subcontractors and suppliers on a current
basis. A number of these subcontractors and suppliers have filed liens, a few
of which are pursuing further legal action, including the filing of complaints.
In the first quarter of 1996 the Company entered into common stock purchase
agreements for 545,265 shares of common stock with certain subcontractors,
suppliers and other creditors, including a director and former directors of the
Company. The Company issued 332,265 shares of common stock in the three months
ended March 31, 1996 and issued an additional 213,000 shares of common stock in
the three months ended June 30, 1996 upon conversion of a convertible note
issued under a convertible note purchase agreement. These shares were issued
in exchange for relieving the Company of debt owed to the respective creditors
in the aggregate amount of $539,000. In March 1996, the Company filed a
Registration Statement on Form S-3 in accordance with the terms of the common
stock purchase agreement that granted registration rights to these
stockholders. The Registration Statement was declared effective by the
Securities and Exchange Commission in April 1996. None of the proceeds from
the sale of the shares by the selling stockholders under that Registration
Statement will be received by the Company. The Company agreed to bear all
expenses (other than underwriting discounts and commissions) in connection with
the registration. Subsequent to June 30, 1996 the Company entered into a
common stock purchase agreement with a subcontractor to issue 4,896 shares of
common stock in payment of $4,896 of accounts payable. There was no commitment
to file a registration statement relating to these shares.
In March 1996, the Company entered into a letter of intent with an unaffiliated
third party to sell 2,000,000 shares of the Company's Common Stock to the third
party in a private transaction. The letter of intent provides for the parties
to proceed towards entering into a formal agreement. The letter of intent also
provides that the price per share would be based on an average closing price of
the Common Stock for a ten-day period, such price not to exceed $1.10 per share
nor to be less than $0.95 per share. It is anticipated that the definitive
agreement, if any, would provide for the granting of certain registration
rights to the investor or investors and also result in the issuance of warrants
to purchase the Company's Common Stock. No assurances can be given whether the
Company and the third party will enter into a definitive purchase agreement, or
if entered into, what the precise terms of the transaction will be and whether
any conditions to the consummation of such a transaction will be satisfied.
In April 1996, the Company entered into a letter of intent with an unaffiliated
privately held home builder primarily doing business in Southern California
relating to a potential combination of the Company and the home builder and
certain of the home builder's affiliates. Subsequent to conducting due
diligence relating to the proposed combination, negotiations have been mutually
terminated.
In May 1996, the Company assigned its $293,000 receivable from Victor Valley
Commercial Properties, an affiliated partnership, to Ira C. Norris in exchange
for a cash payment of $293,000. Additionally, in May 1996, Mr. Norris
committed, subject to certain conditions, to advance up to $750,000 to the
Company in exchange for a secured promissory note. It is anticipated that this
advance would be used to facilitate the extension of $6.6 million of loans with
a commercial bank that have matured. Any such advance would be on terms no
less favorable to the Company than could be obtained from an unaffiliated third
party. A term sheet regarding the extension and modification of these loans
was executed by both parties late in the second quarter; however, no assurances
can be given that this transaction will be consummated. Both of these
transactions were unanimously approved by the disinterested members of the
Company's board of directors.
In the second quarter of 1996, the Company formed two joint ventures, one of
those structured as a participating note agreement, for projects to be built on
Company-owned land, and is in the process of forming two additional joint
ventures for new land acquisitions. The Company believes that the two new
projects will generate sales in the second half of 1996. No assurances can be
given whether the company will enter into definitive agreements with respect to
the two additional transactions, or if entered into, whether these transactions
will be consummated.
The Company has historically financed its operations from a combination of
limited partner capital contributions, cash generated from operations, land
seller financing, borrowings from various banking institutions and the net
proceeds
15
<PAGE> 16
from the Company's initial public offering. The Company received an income tax
refund of $2.2 million in the first quarter of 1995 from the carryback of its
1994 net operating loss to prior years.
The Company often acquires land with an initial down payment, with the balance
financed by seller non-recourse notes. The notes typically include partial
reconveyance provisions, that allow the Company to obtain the necessary
development financing on a phased basis. The Company also occasionally uses
options to acquire property. At June 30, 1996 and December 31, 1995, the
Company had outstanding land seller indebtedness of $3.9 million and $5.5
million, respectively.
In the second quarter of 1996 the Company concluded that it would proceed to
deed back a portion of a parcel of land in Riverside County to the land seller
in full satisfaction of the outstanding seller debt. A reserve in the amount
of $256,000 was recorded in 1995 relating to this property. When this deedback
occurs, it will result in a reduction of real estate inventories of $390,000 in
satisfaction of $390,000 of indebtedness outstanding as of June 30, 1996.
In 1995 the Company commenced negotiations with six land sellers from whom the
Company purchased land in the high desert. The Company owned these properties
subject to seller loans that had current or approaching maturity dates.
Continuing negotiations may result either in extensions of maturity dates
and/or other adjustments to the seller notes, or deedbacks of some or all of
the properties to the sellers in full satisfaction of the indebtedness. One of
these properties was deeded back to the land seller in the first quarter of
1996 in satisfaction of $1.0 million of indebtedness, and one of these
properties was deeded back to the land seller in the second quarter of 1996 in
satisfaction of $0.5 million indebtedness. If all four remaining deedbacks
occur, it would result in a reduction of real estate inventories of $1.6
million (net of a reserve in the amount of $4.1 million as of June 30, 1996),
in satisfaction of $1.6 million of indebtedness outstanding at June 30, 1996.
Additionally, based on the Company's evaluation of the net realizable value of
its remaining other properties, write-downs of real estate totaling $5.8
million were recorded as of December 31, 1995, of which $4.4 million related to
properties in the high desert and $1.4 million related to properties in
Riverside County.
In 1994, the Company commenced the process of deeding property back to nine
other land sellers. The Company recorded a charge to operations in 1994 of
approximately $4.1 million, and as the deedbacks occur will ultimately reduce
its real estate inventories and debt obligations by $3.2 million, $1.4 million
of which was recorded in 1995. As of June 30, 1996, the Company is still in
the process of deeding back land to five of these land sellers that will result
in a further reduction of real estate inventories of $1.8 million in
satisfaction of $1.8 million of indebtedness outstanding at June 30, 1996.
The Company typically obtains its infrastructure, development and construction
funding from commercial banks. Lenders generally provided interim construction
loans for each phase of homes within the project for a term of up to 12 months,
with extension provisions. The development loans typically are repaid with
proceeds from these interim construction loans. Interest rates on construction
loans ranged from the prime rate plus 1.0% to the prime rate plus 2.25% and
interest rates on development loans ranged from the prime rate plus 1.0% to the
prime rate plus 3.0%. The loan agreements include customary representations
and covenants. All outstanding indebtedness under these facilities is secured
by a lien on the project real property. At June 30, 1996, aggregate borrowings
of approximately $12.0 million were outstanding under these facilities ($6.6
million of which has matured) and approximately $7.5 million was available for
further qualified project finance borrowing.
The Company also has revolving lines of credit with two banks. The first is a
$3.0 million line that bears annual interest at the prime rate plus 1.0%,
matures December 1999, and provides for quarterly principal payments of $500
for each home closed, commencing with the fourth quarter of 1995 and scheduled
principal payments of $400,000, $500,000 and $600,000 in calendar years 1997,
1998 and 1999, respectively. In connection with the extension and modification
of this line of credit, the Company issued a warrant to purchase 250,000 shares
of the Company's common stock at $1.00 per share that expires June 30, 2000.
The second is a $1.5 million line that bears interest at the prime rate plus
2.5% that matured March 1996, is now payable on demand, and the Company is
negotiating the terms of an extension. The outstanding balance under these
lines of credit at June 30, 1996 totaled $4.4 million.
16
<PAGE> 17
At June 30, 1996, the Company did not satisfy certain financial covenants with
two lenders, one a bank and one a development lender, related to minimum
liquidity and minimum net worth levels at quarter end. The Company has
received appropriate waivers from both of the affected lenders. An additional
bank eliminated all financial covenants as part of a loan extension and
modification. Based on the anticipated results for the balance of 1996 and the
need for additional working capital, the Company will likely be in violation of
certain financial covenants under its existing loan agreements for future
quarters. Although the Company believes these covenants will be appropriately
modified or waived, the Company can give no assurance that such modifications
or waivers will be obtained.
The availability of borrowed funds for homebuilders, especially for land
acquisition and construction financing is variable, and at times has been
severely restricted and in some cases eliminated entirely. Currently such
financings are generally available.
In late 1992 and throughout 1993, the Company encountered a significant
increase in the price of lumber purchased for use in its homes. In response,
the Company in the fourth quarter of 1993 entered into a lumber purchase
contract for 600 homes in 1994 at specified pre-established prices. The
Company purchased lumber for approximately 100 homes under the contract. In
February 1995, the Company reached an agreement with the lumber company to
settle its outstanding lumber purchase commitment for $800,000, $645,000 of
which was paid during 1995 and the remaining balance of $155,000 was paid
during the six months ended June 30, 1996.
17
<PAGE> 18
INCO HOMES CORPORATION
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in routine litigation arising in the ordinary
course of business. Such matters, if decided adversely to the Company,
would not, in the opinion of management, have a material adverse
effect on the financial condition of the Company. In addition, from
time to time, the Company could be involved in litigation in
connection with claims of development or construction defects, which
matters, if decided adversely to the Company, could have a material
adverse effect on the financial condition of the Company.
As a result of the limited amount of available working capital, the
Company has not paid all of its subcontractors and suppliers on a
current basis. Certain of these subcontractors and suppliers have
filed liens, a few of which are pursuing further legal action,
including the filing of complaints.
In May 1994, the owners of 11 homes sold by the Company at its
201-home Northfork project located in Murrieta, California filed a
complaint against Inco Development Corporation, a wholly-owned
subsidiary of the Company ("Inco Development"), in the Superior Court
of California in Riverside County. In June 1994, the owners of six
additional homes filed a separate complaint. These two complaints
were consolidated into one action. Subsequent to the consolidation,
one of the homeowners dismissed the lawsuit due to the Company's
repair of the alleged defects. In August 1994, one additional
homeowner filed a complaint. The complaints each allege, among other
things, negligence, nuisance, strict liability, breach of warranty,
negligent infliction of emotional distress and fraud based on alleged
design and construction defects and inadequate soils conditions. The
plaintiffs are seeking general, special, and punitive damages in an
unspecified amount, and attorney fees. The causes of action for fraud
were dismissed by the court in 1994 with respect to the complaints
filed in 1994, and accordingly, there are no claims for punitive
damages. Additionally, the court has indicated that there could be no
claim or recovery for alleged negligent infliction of emotional
distress. The Company believes that the claims made against it are
without merit and intends to continue to vigorously defend itself in
this action. The Company believes that this litigation will not have
a material adverse effect on the Company's business.
ITEMS 2 AND 3. Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
(a) The Company held its Annual Meeting of Stockholders on May 14,
1996.
(b) The following director was elected at the Annual Meeting of
Stockholders:
Ira C. Norris
The following are additional directors whose term of office
continued after the meeting:
Robert H. Daskal
Thomas E. Gibbs, Jr.
Ronald L. Neeley
John F. Seymour, Jr.
18
<PAGE> 19
(c) At the Annual Meeting of Stockholders, the following matters
were voted upon:
(1) A proposal to elect a director as follows:
<TABLE>
<CAPTION>
Ira C. Norris
<S> <C>
Affirmative votes: 7,511,032
Negative votes: 0
Abstentions: 19,335
Not voted: 879,206
</TABLE>
(2) A proposal to ratify the selection of Ernst & Young
LLP as independent public accountants for the Company
for the fiscal year ending December 31, 1996.
<TABLE>
<S> <C>
Affirmative votes: 7,416,784
Negative votes: 106,068
Abstentions: 7,515
Not voted: 879,206
</TABLE>
ITEM 5. Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 Limited Partnership Agreement of Spirit Corona 77, L.P. by and
between ORA A&D Associates, L.P., a California Limited
Partnership and Inco Homes Corporation, a Delaware corporation,
dated January 11, 1996.
10.2 Limited Partnership Agreement of Freedom -- Eagle Ranch Housing
Partners by and between Julia Construction Inc., a California
corporation, Fred E. Liao and Bob C. Chang, and Inco Homes
Corporation, a Delaware corporation, dated May 1, 1996.
10.3 Secured Participation Note by and between ALG-1996-1, a
California Limited Partnership and Inco Homes Corporation, a
Delaware corporation, dated June 26, 1996.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K. The Company filed a current report on
Form 8-K dated April 11, 1996 regarding a letter of intent
entered into with an unaffiliated privately held home builder
relating to a potential combination of the Company and the
home builder. No financial statements were filed as a part of
the report.
19
<PAGE> 20
INCO HOMES CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INCO HOMES CORPORATION
Date: August 8, 1996 By: /s/ Ira C. Norris
------------------------------
IRA C. NORRIS
Chairman of the Board, President
and Chief Executive Officer
Date: August 8, 1996 By: /s/ Robert H. Daskal
------------------------------
ROBERT H. DASKAL
Executive Vice President and
Chief Financial Officer
20
<PAGE> 21
INCO HOMES CORPORATION
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ------------
<S> <C> <C>
10.1 Limited Partnership Agreement of Spirit Corona 77, L.P. by and
between ORA A&D Associates, L.P., a California Limited
Partnership and Inco Homes Corporation, a Delaware corporation,
dated January 11, 1996.
10.2 Limited Partnership Agreement of Freedom -- Eagle Ranch Housing
Partners by and between Julia Construction Inc., a California
corporation, Fred E. Liao and Bob C. Chang, and Inco Homes
Corporation, a Delaware corporation, dated May 1, 1996.
10.3 Secured Participation Note by and between ALG-1996-1, a
California Limited Partnership and Inco Homes Corporation, a
Delaware corporation, dated June 26, 1996.
27.1 Financial Data Schedule.
</TABLE>
21
<PAGE> 1
EXHIBIT 10.1
LIMITED PARTNERSHIP AGREEMENT
OF
SPIRIT CORONA 77, L.P.
THIS LIMITED PARTNERSHIP AGREEMENT ("Agreement") is made and entered into
as of January 11, 1996, by and between INCO HOMES CORPORATION, a Delaware
corporation ("Inco"), as the sole general partner, and ORA A&D ASSOCIATES,
L.P., a California limited partnership ("ORAAD"), as the sole limited partner.
Inco and its permitted successors and assigns as a general partner in the
Partnership is sometimes hereinafter referred to as the "General Partner".
ORAAD and its permitted successors and assigns as the limited partner in the
Partnership is sometimes hereinafter referred to as the "Limited Partner". The
General Partner, the Limited Partner and their respective permitted successors
and assigns as partners in the Partnership are sometimes herein together
referred to as the "Partners" and each as a "Partner".
ARTICLE I
ORGANIZATIONAL MATTERS
1.1 Formation. The parties hereby enter into a limited partnership (the
"Partnership") pursuant to the provisions of the Delaware Revised Uniform
Limited Partnership Act (the "Act"), upon the terms and conditions contained in
this Agreement. The Partners agree to execute all documents and to undertake
all other acts, as reasonably may be deemed necessary by the General Partner,
in order to comply with the requirements of the laws of the State of Delaware
(and all other applicable jurisdictions) for the formation, continuation and
operation of a limited partnership in accordance with and subject to this
Agreement.
1.2 Name. The business of the Partnership shall be conducted under the name of
"Spirit Corona 77, L.P."
1.3 Term. The term ("Term") of the Partnership shall commence on the date that
the Property is conveyed to the Partnership, and shall continue (unless the
Partnership is sooner dissolved as provided herein) until the earlier of (A)
December 31, 2025, or (B) one year after the sale of the Project or, if the
Project is sold in phases, the sale of the final phase of the Project.
1.4 Business Purpose. The purpose of the Partnership is to purchase, improve,
develop, sell and otherwise use the Property as finished lots as contemplated
by the Current Budget and Plan for profit and to engage in all activities
related thereto.
1.5 Addresses of Partners. The addresses of the Partners are set forth in
Section 17.1.
1.6 Principal Place of Business. The principal place of business of the
Partnership shall be located at 1282 West Arrow Highway, Upland, California
91786, which is the business address of General Partner, or such other location
in the State of California hereafter determined by the General Partner.
General Partner shall notify Limited Partner in writing of any change in the
principal place of business of the Partnership.
1.7 Office and Agent. (a) For purposes of Section 17-104(a)(1) of the Act, the
registered office of the Partnership is Inco Homes Corporation, c/o Paracorp
Incorporated, 15 North East Street, Dover, Delaware 19901. The General Partner
may change the registered office of the Partnership from time to time as
permitted under the Act provided that it has given Limited Partner prior
written notice of each such change. (b) For purposes of Section 17-104(a)(2)
of the Act, the Partnership's registered agent for service of process is Inco
Homes Corporation, c/o Paracorp Incorporated, whose address is 15 North East
Street, Dover, Delaware 19901. The General Partner may, upon prior written
notice of the same to the Limited Partner, change the Partnership's registered
agent from time to time as permitted under the Act.
-1-
<PAGE> 2
1.8 Definitions. Except as otherwise defined herein, all capitalized
terms shall have the meanings ascribed to them in Article XVI below. All
capitalized terms not defined in Article XVI of this Agreement shall have the
meanings ascribed to them in the text of this Agreement.
ARTICLE II
MANAGEMENT AND OPERATION
2.1 Managing Partner. Subject to the restrictions set forth in this Agreement,
the Managing Partner shall faithfully, competently and prudently manage and
administer the day-to-day business and affairs of the Partnership to implement
the Current Budget and Plan. General Partner shall be the "Managing Sections
4.5 and 12.3, in which event, the Replacement Managing Partner shall be the
Managing Partner of the Partnership. The Managing Partner shall at all times
perform its duties and responsibilities in compliance with all Laws, the
Current Budget and Plan, this Agreement, and in an efficient, thorough,
businesslike manner, devoting sufficient time, efforts and managerial resources
to the business of the Partnership, and performing such acts as the Limited
Partner shall reasonably request, in order to achieve the projections set forth
in the Current Budget and Plan. General Partner shall not withdraw or retire
as Managing Partner hereunder without the prior written consent of the Limited
Partner.
2.2 Certain Duties of Managing Partner. Without limiting the application of
any other provision of this Agreement, the Managing Partner shall faithfully
discharge the following duties and obligations: (a) Obtain and comply with all
necessary governmental or quasi-governmental approvals, consents or permits and
cause the Partnership to meet its obligations and preserve its rights pursuant
to the Purchase Agreement and all instruments referenced therein; (b) Retain
all architects, engineers and other design or development/construction
professionals and cause the preparation of all plans, specifications, designs,
studies, maps, schematics, graphics or other documents or materials necessary
or appropriate for the development of the Project; (c) Negotiate the terms of
and obtain all acquisition and development financing required for the
development and sale of the Property pursuant to the Current Budget and Plan;
(d) When contracting with third parties, ensure that all representations and
warranties made by the Partnership are not breached by reason of any facts that
on or before the date of such contract are or should be within the knowledge of
the Managing Partner; (e) Cause the Project to be diligently and continuously
developed in a lien free condition pursuant to applicable Laws, the Current
Budget and Plan and the Construction Criteria using first class workmanship and
materials. As used in this Section 2.2(e), (1) the Project shall be considered
to be "in a lien free condition" so long as General Partner in good faith
contests such lien, is diligently and continuously performing all acts
necessary to remove such lien, indemnifies the Property and the Partnership
from such lien, and as to all liens in excess of $25,000 posts a surety bond
equal to 150% of the lien amount or obtains a title endorsement in form and
substance satisfactory to the Limited Partner insuring over such lien; and (2)
"first class workmanship and materials" shall be interpreted relative to the
type and price of improvements being developed on the Project. The premium for
the surety bond set forth in Section 2.2(e)(1) shall be a Partnership expense
unless the Limited Partner reasonably determines that the lien which is being
so bonded could have been avoided by General Partner in the prudent exercise of
its duties under this Agreement; (f) Continuously maintain adequate safety
procedures and protections as to the Property and all persons thereon to
preserve the same from damage, injury or loss, including without limitation,
compliance with all Laws, including without limitation, those relating to
hazardous materials and/or substances, the environment or human health; (g)
Establish adequate quality control procedures and complete in a timely manner
all required "punch-list" or other warranty work in connection with the
improvements developed on the Property; (h) If required by Limited Partner
pursuant to Section 5.3(a) below, develop and implement sales and marketing
programs to sell the Project in a manner best calculated to achieve the revenue
projections and/or to maximize the profit projections, all as contained in the
Current Budget and Plan; (i) Update the Current Budget and Plan for the Limited
Partner's approval on a monthly or other regular periodic basis as approved by
the Limited Partner; (j) Provide to the Limited Partner for its approval notice
of the nature and extent of any significant work on on-site or off-site
improvements not contemplated by the Current Budget and Plan, at least fifteen
(15) days prior to the commencement of such work; (k) Enter into all indemnity
and/or reimbursement agreements and otherwise provide all credit enhancements
necessary to obtain all required surety, completion and/or performance bonds in
connection with the development of the Project; (l) Ensure that the
development of and the reporting systems for the Project comply with the
guidelines promulgated by the System for (1) responsible contractors, and (2)
minority business enterprises, women business enterprises and service-disabled
veterans business enterprises (the form used to monitor
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such compliance is attached hereto as Exhibit "A"); and (m) Take such other
actions as are necessary or appropriate to protect, preserve and further the
interests of the Partnership or the Project.
2.3 Major Decisions. Subject to Section 12.3, it is hereby understood and
agreed by the Partners that the Managing Partner shall not take any of the
following actions (in each case the taking of which shall be hereinafter
referred to as a "Major Decision") without first obtaining the written consent
of the Limited Partner: (a) Deviate in any material respect from or amend
the Current Budget and Plan; (b) Sell, convey, exchange, lease, hypothecate,
pledge, encumber or otherwise transfer any portion of or any interest in the
Property, other than as expressly permitted in Section 2.8; (c) Construct, or
cause to be constructed, any improvement on the Property or otherwise take any
action to develop or improve the Property, or purchase or sell any interest in
real property except substantially in accordance with the Current Budget and
Plan and this Agreement; (d) Except as expressly provided in Sections 7.6,
12.3(c) and 12.4(c), incur any indebtedness on behalf of the Partnership;
except as provided in Section 2.2(e), make, execute, or deliver on behalf of
the Partnership any indemnity bond or surety bond (provided, however, the
Managing Partner need not obtain the consent of the Limited Partner for any
subdivision, construction or regulatory bond or other surety normally required
for the development of the Property pursuant to the Current Budget and Plan as
provided in Section 2.2(k)); lend funds belonging to the Partnership to the
other Partner or to any third party, or extend any person, firm, or
corporation, credit on behalf of the Partnership; obligate the Partnership or
the other Partner as a surety, guarantor, or accommodation party to any
obligation, other than as provided above in this Section 2.3(d) or by endorsing
checks for deposit to the Partnership's accounts in the ordinary course of
business; grant any lien or encumbrance on the Property; (e) Possess, assign,
or use funds or other property of the Partnership for other than a Partnership
purpose; (f) Make, execute or deliver on behalf of the Partnership an
assignment for the benefit of creditors; cause the Partnership, a Partner's
Partnership Interest or the Property or any part thereof or interest therein to
be subject to the authority of any trustee, custodian or receiver or to be
subject to any proceeding for bankruptcy, insolvency, reorganization,
arrangement, readjustment of debt, relief of debtors, dissolution or
liquidation or similar proceedings; (g) Partition all or any portion of the
Property, or file any complaint or institute any proceeding at law or in equity
seeking such partition; (h) Submit proposals to, or enter into agreements with,
government officials relating to zoning, subdivision, environmental or other
land use or entitlement matters (provided, however, the foregoing only applies
to governmental approvals or agreements that are discretionary and not
ministerial in nature); (i) Select any architect, engineer, broker or marketing
consultant for the Project or the Partnership or enter into a contract with any
construction general contractor to construct improvements on the Property;
provided, however, the Partners acknowledge and agree that the architects,
engineers, brokers, marketing consultants, and other contractors identified on
Exhibit "B" (the "Pre-approved Contractors") shall be deemed to be pre-approved
by the Partners, it being understood, however, that notwithstanding such
pre-approval, Limited Partner makes no warranty or representation as to the
ability or competence of any architect, engineer, broker, marketing consultant
or other contractor (whether or not a Pre-approved Contractor) to perform the
services for which it has been retained; (j) Except as set forth on Exhibit "C"
attached hereto, employ or contract with any Affiliate of Managing Partner or
any other person or entity in which Managing Partner has a direct or indirect
financial interest in connection with the Project; (k) Purchase any automobiles
or vehicular equipment on behalf of or in the name of the Partnership; purchase
any fixed assets on behalf of or in the name of the Partnership, other than
assets to be used in the development and construction of the improvements to
the extent the costs therefore are included in the Current Budget and Plan; (l)
Give any material consent or approval on behalf of the Partnership under any
agreement to which the Partnership is a party or is bound to enter into,
terminate, accept the surrender of, modify, amend or supplement any material
agreement to which the Partnership is a party or is bound (and the foregoing
shall include, without limitation, all instruments or agreements referenced in
the Purchase Agreement) (collectively, a "Material Modification"); provided,
however, that a Material Modification shall not include any action with respect
to an agreement which (i) is consistent with and in furtherance of the Current
Budget and Plan, (ii) does not obligate the Partnership to make a single
expenditure or incur a single liability ("Single Transaction") of more than
$10,000, or 5% of the original expenditure or liability provided in such
agreement, which ever is greater, or cause the aggregate of all Single
Transactions to exceed $50,000, and (iii) does not result in a settlement,
release or compromise (collectively, "Single Release") of any amount in
controversy or of any obligation to the Partnership provided in such agreement
in excess of $10,000 or cause the aggregate of all Single Releases to exceed
$50,000; (m) Determine from time to time (including without limitation prior to
offering or advertising any price lists or price concessions to the public) the
price list at which the Partnership will sell all or any portion of the
Project; (n) Obligate the Partnership to pay for any goods or services unless
the funds to pay for the same are reasonably expected to be available from
capital contributions or loans (which contributions or loans have been approved
as required under this Agreement prior to the date that the Partnership becomes
obligated with respect to such
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goods or services) or from funds generated by the operations of the
Partnership; (o) Commence any significant on-site or off-site improvement work
in the Project except as approved by the Limited Partner in accordance with
this Agreement; (p) Permit at any time the total debt owed by the Partnership,
whether to Partners or to third parties, to exceed 50% of the then Outstanding
Project Costs (the "50% Leverage Limit); (q) Confess a judgment against the
Partnership; settle or adjust any claims against the Partnership; commence,
defend or discontinue any legal actions or proceedings involving the
Partnership; (R) Subject to Section 12.2(c), dissolve, terminate or liquidate
the Partnership prior to the expiration of the Term; (s) Do any act which would
make it impossible to carry on the business of the Partnership; or (t) Take any
other action or make any other decision that this Agreement provides must be
approved or consented to by the Limited Partner or as to which the Act
specifically mandates that the vote or approval of a limited partner is
required.
Any amount expended by General Partner for a Major Decision without first
obtaining the written consent of the Limited Partner shall not be an expense of
the Partnership but shall be borne exclusively by General Partner without any
charge to or reimbursement from the Partnership. Any such payment by General
Partner shall not be deemed capital contributions or loans by General Partner
and shall not increase General Partner's Contributions Account or its interest
in the profits, losses, capital or distributions of the Partnership or entitle
General Partner to the recoupment of, or the payment of any interest, charge or
other consideration for, funds used to make such payments. Without limitation,
any such payment shall not be considered to be an Additional Contribution.
2.4 Partnership Funds. (a) No Partnership funds, assets, credit, or
other resources of any kind or description shall be paid to, or used for, the
benefit of any Partner, except as specifically provided in this Agreement or
after the written approval of the other Partners has been obtained. The
Partnership shall maintain only such checking and savings accounts as the
Limited Partner shall approve in writing. All funds of the Partnership shall
be deposited only in the accounts of the Partnership in the Partnership name,
shall not be commingled with funds of the General Partner, and shall be
withdrawn only upon such signature or signatures as may be designated in
writing from time to time by the General Partner and as such signators are
approved by the Limited Partner. (b) The Managing Partner shall invest all
available funds of the Partnership in order to maximize the interest yield to
the Partnership, taking into account prudent investment practices and the
Partnership's liquidity needs (including without limitation distributions
pursuant to Sections 9.1 and 12.5). Without limiting the generality of the
foregoing, the Managing Partner shall keep the Partnership's funds only in the
investments described on Exhibit "D" attached hereto.
2.5 Employees. The Partnership shall not have employees. The General Partner
shall be solely responsible for all wages, benefits, insurance, and payroll
taxes with respect to any of its employees. The General Partner shall, at any
time and from time to time during the term of the Partnership, provide such
information as the Limited Partner shall reasonably request regarding the
employees of the General Partner who work on the Project. Such information
shall include, but not be limited to, the names, position, experience, job
description, specific duties and responsibilities of such employees. General
Partner shall obtain Limited Partner's approval of a list of all employees of
General Partner who will perform any non-clerical function for the Partnership.
2.6 Regular and Special Meetings. (a) Regular meetings of representatives of
the General Partner and the Limited Partner shall be held at least monthly at
such time and at such place as the General Partner and the Limited Partner
shall determine. Special meetings shall be held on the call of either the
General Partner or the Limited Partner upon at least five (5) days (if the
meeting is to be held in person) or two (2) days (if the meeting is held by
telephone communications) oral or written notice to the other. The Managing
Partner shall prepare a written agenda for all meetings and deliver the same to
the Limited Partner at least one (1) day prior to any such meeting; provided,
however, the Limited Partner shall be entitled to add any matter it elects to
such agenda at or before such meeting. The Managing Partner shall be
responsible for having written minutes taken at each meeting (including each
telephone conference meeting) of the General Partner and the Limited Partner,
which shall be sent to the Limited Partner within three (3) business days
following such meeting for approval. Upon the execution and delivery of such
minutes by both the General Partner and the Limited Partner (but not before),
such minutes shall become binding on the Partnership. (b) Neither the Managing
Partner nor the Partnership shall take any action that constitutes a Major
Decision as reflected in such minutes until such time as such minutes have
become binding on the Partnership in accordance with this Section 2.6. The
foregoing notwithstanding, whenever in this Agreement the consent or approval
of a Partner is required, such consent or approval may be given without a
meeting if the same is evidenced by a writing signed by the General Partner
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and the Limited Partner. (c) In addition to meetings held pursuant to this
Section 2.6, General Partner shall cause its project manager and the Limited
Partner shall cause one of its employees or agents to meet, or confer by
telephone, as often as is requested by the Limited Partner (but not more
frequently than daily) to review and discuss the progress of the Project,
affairs of the Partnership and compliance with the Current Budget and Plan.
2.7 Partner Representatives. Each Partner shall designate in a writing to the
other Partner a representative who shall be authorized to act under this
Agreement for and on behalf of such Partner. Each Partner shall also designate
an alternate representative or representatives to act for it if its primary
representative is unavailable. Any written act, approval, consent or vote of a
representative or alternate so designated shall be deemed to be the act,
approval, consent or vote of the Partner which designated such representative
and alternate and neither the Partnership nor any other Partner shall be
required to inquire into the authority of such representative or alternate as
to such written act, approval, consent or vote on behalf of the Partner which
designated such representative and alternate. Any such representative or
alternate may be replaced by a successor representative or alternate by written
notice to the Partners and designation of a substitute for such representative
or alternate. Until further notice, the designated representatives and
alternates of the Partners shall be:
General Partner:
Representative: Ira C. Norris
Alternate: Robert H. Daskal
Limited Partner:
Representative: Melvin T. Andrews
Alternate: Ronald W. Lee
Each Partner agrees to indemnify, hold harmless and defend the other Partner
from any liability whatsoever arising out of such other Partner's relying on
the written act, approval, consent or vote of the indemnifying Partner's
designated representative or alternate, regardless of whether such other
Partner has actual knowledge that another person or entity associated with such
indemnifying Partner objects to said action. If any Partner relies on any act,
approval, consent or vote of any other person or entity associated with the
other Partner other than a designated representative or alternate hereunder,
such relying Partner assumes the risk that such act, approval, consent or vote
has not been duly authorized by the Partner allegedly taking or giving such
act, approval, consent or vote, and shall not be entitled to rely on any such
person's or entity's apparent or implied authority to perform or give any such
act, approval, consent or vote on behalf of the Partner allegedly performing or
giving the same.
2.8 Execution of Partnership Documents. (a) The Managing Partner acting alone
shall have the authority to execute and deliver on behalf of the Partnership
all agreements, instruments or other documents to which the Partnership will be
a party or bound, provided that the prior approval of the Limited Partner shall
be required for the same which (1) are not consistent with and in furtherance
of the Current Budget and Plan, (2) constitute a Major Decision, or (3) are not
within the ordinary course of business of the Partnership. (b) Without limiting
the generality of the foregoing, the Managing Partner, acting alone, shall have
no authority, to execute and deliver, on behalf of the Partnership, deeds,
purchase and sales contracts or escrow instructions in accordance with the sale
pursuant hereto of all or any portion of the Project whether or not to an
Approved Buyer. Nothing in this Section 2.8(b) shall be construed to limit or
restrict, in any way, General Partner's obligations under the Takedown
Agreement.
2.9 Buyer Qualifications. Except as provided in Section 12.2(c) below, neither
the whole nor any part of the Property shall be conveyed other than to an
Approved Buyer. For purposes of this Agreement, the term "Approved Buyer"
shall mean General Partner as a purchaser acting in accordance with its
obligations under the Takedown Agreement; provided, however, in the event
General Partner defaults under the Takedown Agreement, then the term "Approved
Buyer" shall be deemed to be such persons or entities approved by Limited
Partner, in its sole and absolute discretion, to purchase all or any portion of
the Project.
2.10 General Partner Affiliates. Without limiting Section 2.3(j) or any
other applicable provision of this Agreement, the Limited Partner acting alone
shall have the right on behalf of the Partnership to send any appropriate
notice of default or termination, to institute legal proceedings and/or to take
such other action as may be necessary or appropriate to enforce
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<PAGE> 6
the rights and protect the interests of the Partnership pursuant to the
Purchase Agreement, the Ancillary Agreements, or any other agreement now or
hereafter entered into between the Partnership and General Partner or any
Affiliate of General Partner or with respect to any other rights or remedies of
the Partnership running against or in connection with General Partner or any
Affiliate of General Partner.
2.11 Affiliates of Limited Partner. (a) The Limited Partner or its
Affiliates may request that the Managing Partner contract with certain
Affiliates of the Limited Partner to provide certain services to the
Partnership. General Partner acknowledges that the Partnership is not required
to engage such services and that if the Managing Partner elects to engage an
Affiliate of the Limited Partner for such services, it should do so in the best
interests of the Partnership alone pursuant to arm's length market rate terms
and conditions. (b) In addition to any ORAAD Loan, the Limited Partner or
certain Affiliates of the Limited Partner may make acquisition and development
or other loans available to the Partnership but shall not be under any
obligation to do so. General Partner acknowledges that the Partnership is
under no compulsion to accept such loans and that the terms and conditions of
any loan between the Partnership and the Limited Partner and/or an Affiliate of
the Limited Partner will be made on terms mutually satisfactory to the Managing
Partner and the Limited Partner or its Affiliate, which terms shall be
negotiated without respect to any fiduciary duty owed among the Partners.
Without limiting the generality of the foregoing, it is expressly understood
that neither the Limited Partner, the general partner of the Limited Partner
nor any Affiliate thereof shall be obligated to provide mortgage loans to
Approved Buyers. (c) Other than the initial acquisition and development loan
for the Project, General Partner shall give Limited Partner at least ninety
(90) days prior notice before General Partner obtains any other acquisition and
development loan for the Project and shall grant Limited Partner the right of
first offer to provide such loan on then prevailing market rates and terms. The
foregoing shall not require General Partner to utilize Limited Partner or its
Affiliates for any such financing.
ARTICLE III
GENERAL CONTRACTOR
3.1 Appointment of General Contractor. General Partner hereby represents and
warrants to the Partnership and the Limited Partner that it is a licensed
contractor experienced in projects similar to the Project. General Partner is
hereby appointed as general contractor for the Project. As general contractor,
General Partner shall be held accountable to the customary standards in the
industry and shall be responsible for coordinating, supervising, inspecting and
expediting the completion of development and construction of the Project in
accordance with the Current Budget and Plan and this Agreement, including
without limitation the "Construction Criteria" attached hereto as Exhibit "E".
3.2 Construction Contracts and Documentation. General Partner shall enter into
a construction contract ("Construction Contract") with the Partnership,
prepared on the form attached hereto as Exhibit "F". General Partner shall
execute in its sole capacity as general contractor appropriate written
contracts with all contractors, subcontractors, architects, materialmen or
other parties providing development and construction-related services to the
Project and nothing herein or in the Construction Contract shall create any
contractual relationship between the Limited Partner, the System or the
Partnership and such parties. General Partner shall ensure that all
contractors and subcontractors perform work substantially in accordance with
the designations on their respective contractor's licenses and pursuant to the
relevant contract. If requested by any Partner, General Partner shall deliver
to such Partner copies of all such contracts and any and all amendments,
modifications, addenda and supplements thereto. As general contractor, General
Partner shall obtain competitive bids from at least three (3) qualified
subcontractors for each subcontract in excess of $25,000. All subcontracts
with the same subcontractor and its Affiliates shall be considered a single
subcontract for purposes of the $25,000 limit. The execution of the
Construction Contract is not intended to modify or supersede the terms of this
Agreement in any manner, and in the event of any conflict between the terms of
this Agreement and the Construction Contract, the terms of this Agreement shall
govern. Any general contractor's fee payable to said general contractor by the
Partnership shall be paid solely out of the Management Fee payable to General
Partner; provided, however, if Limited Partner takes control of the Partnership
pursuant to Section 12.3 but the Replacement Managing Partner does not
terminate the Construction Contract, the Partnership shall continue to pay
General Partner a general contractor fee as set forth under the Construction
Contract until the same is terminated or expires according to its terms.
ARTICLE IV
LIMITED PARTNER RIGHTS AND OBLIGATIONS
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4.1 Limitation of Liability. Subject to the provisions of Section 17-502 of
the Act, no Limited Partner shall have any personal liability for the expenses,
liabilities or obligations of the Partnership, nor shall any Limited Partner be
required to return any distribution made to it.
4.2 Status of Limited Partner's Interests. The interest of the Limited Partner
in the Partnership shall be fully paid and nonassessable.
4.3 Limited Partner Shall Not Participate in Control. Except to the extent
expressly provided in this Agreement or required by applicable Laws, neither
the Limited Partner, nor any assignee or assignee of record of the Limited
Partner, shall take part in or interfere in any manner with the control,
conduct, or operation of the Partnership, nor shall such party have any right
or authority to act for or bind the Partnership, including during the
winding-up period after dissolution of the Partnership, except that the Limited
Partner may act for and bind the Partnership during the winding-up period when
the General Partner has been removed.
4.4 Admission of New General Partner Where No Existing General Partner. If
there is no remaining General Partner, a new General Partner may be admitted or
an election to continue the business of the Partnership may be made only upon
the affirmative act of the Limited Partner.
4.5 Admission of New General Partner Upon Completion of Project. At any time
and from time to time following the earlier of (A) completion of development
and construction of the Project in accordance with the Current Budget and Plan
and this Agreement (as reasonably determined by Limited Partner) or (B) after
August 31, 1996, Limited Partner shall have the sole and absolute right, but
not the obligation, to elect, by giving written notice to the General Partner,
(1) to become a general partner in the Partnership and assume the role of
Managing Partner of the Partnership, or (2) to designate any entity or
individual (which may be an Affiliate of the Limited Partner) to become a
general partner in the Partnership and assume the role of Managing Partner of
the Partnership. The Limited Partner or any entity or individual which is
appointed as the replacement general partner pursuant to this Section 4.5 shall
be referred to as the "Replacement GP". If the Limited Partner exercises its
right to appoint a Replacement GP under this Section 4.5, (a) the Replacement
GP shall be deemed a Replacement Managing Partner with all rights of a
Replacement Managing Partner under Section 12.3 of this Agreement, (b) the
General Partner shall nonetheless remain fully liable pursuant to the terms of
any acquisition and development or other loan documents executed by General
Partner as General Partner of the Partnership and on any payment, completion or
other guaranties executed in connection therewith in favor of the lender or
lenders under such loans, (c) the Limited Partner shall hold General Partner
harmless from any loss, claim or damage, including reasonable attorneys fees,
to the extent the same arises out of the gross negligence or willful misconduct
of the Replacement GP, (d) effective upon the Limited Partner's exercise of its
right to appoint the Replacement GP pursuant to this Section 4.5, (i) the
Partnership Interest of General Partner shall be automatically converted into
an interest as a limited partner in the Partnership having the same interest in
"Net Income", "Net Losses" (as such terms are defined in the Tax Supplement
attached hereto), and distributions as it had held as the General Partner and
only those voting rights which limited partners are required to have under the
Act, and (ii) an appropriate amendment to this Agreement, the "Certificate" (as
defined below) and the Partnership's LP-5 filing in California shall be
promptly executed and/or filed with the appropriate state authorities, and each
Partner hereby grants to the Limited Partner its irrevocable power of attorney
to do the same, which power of attorney shall be deemed to be a power coupled
with an interest which may not be revoked until the termination and winding up
of the Partnership, and (e) all bank accounts, contracts, deposits, accounts or
other evidences of any rights of the Partnership shall be transferred to the
name or control of the Replacement GP as the Replacement GP shall direct and
General Partner shall promptly execute such instruments and take such actions
as the Replacement GP may request to effect such transfer. Each Partner hereby
consents to the admission of the Replacement GP as a general partner of the
Partnership and, in accordance with Section 17-401(b) of the Act, no further
consent of any Partner to such admission shall be required. In addition, the
Limited Partner may transfer all or any part of its Partnership Interest to any
entity or individual designated by the Limited Partner to become the
Replacement GP, and no approval or consent of any Partner shall be required to
effect such transfer. The provisions of this Section 4.5 shall take precedence
over any provision to the contrary set forth in this Agreement.
4.6 Execution of Documents. In the event an amendment to this Agreement shall
have been approved pursuant to Section 17.2 hereof, the Managing Partner shall
execute such amendment, certificate and other documents as may be reasonably
required for the purpose of effectuating the same.
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ARTICLE V
COMPENSATION AND REIMBURSEMENTS
5.1 Sole Right to Compensation For Services. Except as provided in this
Article V, no Partner shall receive compensation for services rendered to the
Partnership or for overhead expenses of any kind whatsoever. The foregoing
shall not, however, prevent the Managing Partner from drawing under an
acquisition and development loan for on-site and infrastructure construction
supervision costs for the Project if such costs are reflected in the Current
Budget and Plan. All payments to the Partners pursuant to this Article V shall
be considered to be Section 707(c) Payments.
5.2 Management Fee. The Managing Partner, in consideration of undertaking and
performing its responsibilities described herein, shall receive a management
fee from the Partnership equal to $30,000 (the "Management Fee"), which shall
be paid to the Managing Partner in four (4) equal monthly installment of $7,500
commencing on the first day of the first full month immediately following the
"Close of Escrow" (as such term is defined in the Purchase Agreement), and
continuing for the following three (3) consecutive months.
5.3 Closing Costs. (a) General Partner has committed to purchase the Project
from the Partnership pursuant to the Takedown Agreement. Accordingly, the
Partners do not anticipate any need to engage a marketing agent for the
Project, nor shall any sales commissions be payable by the Partnership with
respect thereto. If, however, General Partner fails to purchase the Project
(or portion thereof) as required under the Takedown Agreement, Limited Partner
shall be entitled, in its sole and absolute discretion, to either require
General Partner or engage an outside service provider to act as the marketing
agent for the Project, in either case, at the sole cost and expense of the
General Partner. In furtherance thereof, Limited Partner reserves the right,
in its sole and absolute discretion, to engage on behalf of the Partnership
such outside service providers to market and sell the Project as contemplated
by the Limited Partner and General Partner shall be solely responsible to pay
all costs, fees or commissions in connection with the engagement of such
service providers. Any advertising, promotional material or news releases
issued concerning the Project shall be prepared in accordance with all
applicable Laws and prudent business practices, subject to the consent of
Limited Partner, which consent may be granted or withheld in Limited Partner's
sole discretion. In no event shall such material include any reference to the
name or participation of Limited Partner, the general partner of the Limited
Partner, the System or any of their respective Affiliates. (b) The Partnership
shall pay customary third party closing costs as required by the Takedown
Agreement ("Closing Costs") upon the closing of the sale pursuant thereto of
the Project. In no event shall the General Partner or any Affiliate thereof
engaged by General Partner on behalf of the Partnership, be entitled to receive
any sales commissions or Closing Costs in connection with the sale of the
Project, whether in one or more sales. Notwithstanding the foregoing, Closing
Costs incurred by the Partnership by the General Partner are not to exceed
competitive rates being experienced for similar projects, and in no event shall
total Closing Costs exceed 1% of the gross sales prices of the entire Project,
whether in one or more sales. It is expressly agreed that Closing Costs
incurred under the Takedown Agreement do not include sales commissions or
prorations for real estate taxes or other similar prorations. (c) If the
General Partner fails to purchase the Project in accordance with the Takedown
Agreement, the Limited Partner shall have the right to cause the Partnership to
change to such other service provider or providers as designated by the Limited
Partner in its sole and absolute discretion and the Limited Partner shall be
entitled, in its sole and absolute discretion, to incur such Closing Costs and
commissions for the sale of all or any portion of the Project, which Closing
Costs and sales commissions shall be at the sole cost and expense of General
Partner.
5.4 Origination Fee. Upon the Close of Escrow, the Limited Partner, in
consideration of the internal costs it will incur with respect to the progress
of the Project and in consulting with the Managing Partner, shall receive a fee
(the "Origination Fee") from the Partnership. The Origination Fee payable to
the Limited Partner shall be $51,150.
5.5 Payment Out of Available Funds. In no event shall any Partner be required
to make Additional Contributions in order to enable the Partnership to pay any
portion of the Management Fee, the Origination Fee or the Closing Costs, such
amounts being payable solely out of available funds of the Partnership (i.e.,
out of acquisition and development or other Partnership loans approved in
accordance herewith, Initial Contributions, or cash income generated by the
Project). Any portion of the Management Fee that is not paid due to the
unavailability of Partnership funds shall cumulate without interest until
Partnership funds become available for the payment of the same. For purposes
of this Section 5.5, "Closing Costs" shall mean only that portion of Closing
Costs payable to the General Partner and shall not be deemed to apply to the
General Partner's obligations to pay sales commissions and closing costs as
described in this Article V following its
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failure to acquire all or any portion of the Project pursuant to the Takedown
Agreement. All such payments by the General Partner shall be treated in the
same manner as Guaranteed Cost Overrun payments under Section 7.5(c) hereof
5.6 Rights Upon Default. No payments in respect of the Management Fee shall be
made to Managing Partner at such times as an uncured default exists as to
Managing Partner (including, if applicable, Managing Partner in its capacity as
General Partner or general contractor for the Project) or, with respect to
General Partner, an uncured default exists under any Ancillary Agreement.
5.7 Reimbursement of Certain Expenses. Certain legal and other due diligence
costs as described in this Section shall be expenses of the Partnership. On
the date hereof, (A) the Limited Partner shall be paid by the Partnership its
actual third party out-of-pocket costs for legal and other expenses incurred
prior to the commencement of the Partnership which relate generally to the
formation of the Partnership and the Limited Partner's due diligence
investigation of the Project, and (B) the General Partner shall be paid by the
Partnership its reasonable and necessary third party legal fees incurred in
connection with the negotiation of this Agreement and any ORAAD Loan Documents
executed concurrently or substantially concurrently with this Agreement, but in
no event shall the payment under this Section 5.7(B) exceed $15,000. In
addition, all of Limited Partner's on-site construction supervision costs for
the Project shall be an expense of the Partnership.
ARTICLE VI
INSURANCE
6.1 Partnership Policies. The Managing Partner shall purchase and maintain on
behalf of, and at the expense of the Partnership, the policies of insurance
described in Exhibit "G".
6.2 Contractors' Insurance Obligations. The Managing Partner shall require the
Project's general contractor and all subcontractors to obtain and maintain at
all times during performance of work for the Partnership an occurrence form
commercial general liability policy on a primary and non-contributing basis
with a minimum of $1 million per-occurrence/$2 million annual aggregate, on
which the Partnership is named as an additional insured. In addition, the
Managing Partner shall require that the Project's general contractor and all
subcontractors carry workers compensation coverage as required by law. The
provisions of this Section 6.2 with respect to the commercial general liability
policy to be carried by the Project's general contractor shall be deemed
fulfilled if the general contractor is General Partner and the provisions of
Exhibit "G" are complied with by General Partner.
6.3 Post-termination Insurance. General Partner shall maintain commercial
general liability policies, including products/completed operations and
commercial excess liability policies, as described in this Article VI with the
Partners as named insureds thereon for at least ten (10) years after the date
on which the Term ends. Such obligations shall survive the termination of the
Partnership notwithstanding anything to the contrary in this Agreement.
6.4 Maintenance and Evidence of Insurance. Immediately on execution of this
Agreement, at all times during the term of the Partnership, and following the
termination of the Partnership, the Managing Partner shall maintain and provide
to the Limited Partner current certificates of insurance evidencing current
policies of insurance to be in place for all insurance required to be carried
under this Agreement. The certificates of insurance shall provide for thirty
(30) days' advance direct written notice to the Limited Partner prior to
cancellation, termination or material change in coverage. The Managing Partner
shall immediately notify the Limited Partner in writing if it receives a notice
of cancellation under any policy of insurance called for herein. The Managing
Partner shall provide certified copies to the Limited Partner on request of all
insurance policies called for hereunder.
ARTICLE VII
CAPITAL CONTRIBUTIONS AND FUNDING OF PROJECT COSTS
7.1 Initial Capital Contributions. On or before the Close of Escrow, the
Limited Partner will have contributed to the Partnership cash in the amount of
$1,420,000 and General Partner will have contributed (or be deemed to have
contributed pursuant to the terms of the Purchase Agreement) cash in the amount
of $355,000. The foregoing capital contributions made by a Partner shall be
referred to herein as such Partner's "Initial Contribution".
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7.2 Additional Capital Contributions.
(a) Except as provided in this Section 7.2 or in Sections 7.5(b), 7.6(b),
12.4(b)(2), 12.4(b)(3) and Section 4.1 of the Tax Supplement, no Partner shall
be required or permitted to contribute additional capital to the Partnership in
excess of its Initial Contribution unless all Partners have hereafter consented
to such additional capital contributions in writing, which consent may be
granted or withheld in the sole and absolute discretion of each Partner. Such
additional capital contributions, whether made pursuant to this Section 7.2
(with the consent of all of the Partners, if applicable) or pursuant to
Sections 7.5(b), 7.6(b), 12.4(b)(2), 12.4(b)(3) or Section 4.1 of the Tax
Supplement, shall herein be referred to as "Additional Contributions". (b)
Limited Partner shall not be required to make any Additional Contributions. (c)
Commencing with the first full calendar month immediately following the Close
of Escrow, and on the first of each calendar month thereafter, General Partner
shall make Additional Contributions equal to the excess of (1) 10% of the then
Outstanding Project Costs over (2) amounts contributed previous to the
applicable date of determination by General Partner to its Contribution
Account. Except as provided in Sections 9.1 and 12.5, any capital contributed
to the Partnership by General Partner pursuant to this Section 7.2(c) shall not
be returned to General Partner if subsequent to such contribution General
Partner's Contribution Account exceeds at any time the amount calculated
pursuant to subsection (1) of this Section 7.2(c). As used herein,
"Outstanding Project Costs" shall mean the total hard and soft costs
(including, without limitation, the Management Fee, the Origination Fee, and
all closing costs incurred in connection with the formation of the Partnership
and the acquisition of the Property) expended by the Partnership at the
relevant date of determination in the acquisition, development and management
of the Project other than the Preferred Return of the Partners, net of all net
proceeds received by the Partnership from the sale of all or any portion of the
Project. The obligation of the General Partner to fund Additional Contributions
pursuant to this Section 7.2(c) shall be based upon the Outstanding Project
Costs exclusive of those hard costs which the General Partner is required to
fund under Section 7.5 as Guaranteed Cost Overruns. (d) In addition to the
Additional Contributions required pursuant to Sections 7.2(c), 7.5(b) and
7.6(b), General Partner may make Additional Contributions as needed for the
Partnership to make interest payments to the Project's acquisition and
development lender after exhaustion of the interest line item in the budget for
such loan.
7.3 Acquisition and Development Loans and Guarantees. (a) As a condition to the
release of the Initial Contributions to the Partnership, at the Close of Escrow
all of the ORAAD Loan Documents shall have been duly executed and delivered to
the Limited Partner, and all of the conditions precedent to the effectiveness
of the ORAAD Loan Documents and the making of the ORAAD Loan shall be fully
satisfied prior to or concurrently with the release of the Initial
Contributions. (b) In addition, the General Partner on behalf of the
Partnership shall from time to time diligently pursue obtaining sufficient
financing by borrowing from banks, savings and loan associations and similar
financial institutions on terms and conditions suitable to the Limited Partner
(the "Approved Financing") to ensure that the anticipated costs of developing
and completing the Project (as reflected in the Current Budget and Plan) in
excess of the Initial Contributions and the ORAAD Loan will be paid in full and
in a timely manner. General Partner shall provide any and all guarantees of
completion or payment as may be required by any lender. In this regard,
General Partner acknowledges and agrees that the ORAAD Loan may only pay a
portion of the anticipated costs of developing and completing the Project and,
therefore, in order to develop and complete the balance of the Project in
accordance with the Current Budget and Plan and to repay any outstanding
amounts owing on the ORAAD Loan in accordance with the terms thereof, General
Partner will be required to arrange for and obtain the Approved Financing as
necessary to complete the Project in accordance with the Current Budget and
Plan. Notwithstanding any previous discussions between the parties hereto or
any provision to the contrary contained in this Section 7.3(b) or elsewhere in
this Agreement, the Limited Partner shall have the exclusive right (but not the
obligation), in a capacity entirely separate and independent from its capacity
as a limited partner in the Partnership, to underwrite any acquisition and
development loan(s) to the Partnership to be originated subsequent to the
making of the ORAAD Loan. The Limited Partner may elect to exercise such right
(or not to exercise such right) in its sole discretion based upon circumstances
and factors known to it at such time. Any such loan from Limited Partner shall
be at market rate and terms.
7.4 Contribution Accounts and Preferred Return Accounts. (a) Contribution
Accounts. The Partnership shall maintain for accounting purposes the following
memorandum account ("Contribution Account") for each Partner: the initial
balance of such account shall be such Partner's Initial Contribution; the
balance of such account shall be increased by, and as of the date of, each
Additional Contribution, Default Contribution or Overrun Contribution made by
such Partner. The balance of the Contribution Account of each Partner shall be
decreased by any distributions to such Partner under
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(1) Sections 9.1(b) or 9.1(d), as applicable, (2) Sections 12.5(c) or 12.5(g),
as applicable, or (3) Section 13.2 as any distribution under Section 13.2
relates to return of the Initial Contributions or Additional Contributions. (b)
Preferred Return Account. The Partnership shall maintain for accounting
purposes the following memorandum account ("Preferred Return Account") for each
Partner: the initial balance of such account shall be zero; the balance of such
account shall be increased by the Preferred Return of each Partner. As used
herein, and subject to Section 11.4(b) below, a Partner's "Preferred Return"
for the applicable period means an amount computed on a daily basis at the Base
Rate plus 3.5% per annum (but not to exceed 15% per annum) on the balance, from
time to time, of such Partner's Contribution Account. For the purposes of the
foregoing calculation, the Base Rate in effect as of the first business day of
each calendar month shall be applicable for the entire calendar month. Such
return shall commence as of the funding of a Partner's Initial Contribution
pursuant hereto or to the Purchase Agreement, including a funding to the
"Escrow Agent" (as defined in the Purchase Agreement), shall be cumulative and
shall compound monthly (as of the last day of each calendar month). Further,
the balance of the Preferred Return Account of each Partner (as the same may be
increased by such compounding) shall be decreased by any distributions to such
Partner under (1) Sections 9.1(a) or 9.1(c), as applicable, (2) Sections
12.5(b) or 12.5(f), as applicable, or (3) Section 13.2 as any distribution
under Section 13.2 related to return of the Preferred Return.
7.5 Guaranteed Cost Overruns.
(a) Notwithstanding anything in this Agreement to the contrary, all Guaranteed
Cost Overruns shall be funded as provided in this Section 7.5. At least once
every calendar quarter during the Term, the Partners shall mutually agree on an
updated Current Budget and Plan based on the actual performance of the Project
to the applicable date, together with such other market, cost and such other
facts and circumstances as are known to the Partners at that time. If the
aggregate of the Guaranteed Costs for the Project as shown on any such updated
Current Budget and Plan exceeds the aggregate Guaranteed Costs for the Project
as shown on the Initial Budget and Plan, such excess shall be considered to be
a "Guaranteed Cost Overrun". Guaranteed Cost Overruns will be determined
without reference to any actual or projected cost savings for the Project or
any increase in Project revenues in excess of those shown on the Initial Budget
and Plan. If the Partners are unable to agree upon an updated Current Budget
and Plan for any calendar quarter within ten (10) calendar days of the end of
such quarter, then (1) the updated Current Budget and Plan last proposed by
Limited Partner for such quarter prior to the expiration of such ten (10) day
period shall be used to calculate Guaranteed Cost Overruns pursuant to this
Section 7.5, (2) General Partner shall fund or cause such Guaranteed Cost
Overruns to be funded as set forth in this Section 7.5 based on such proposal
by Limited Partner, but (3) General Partner may, by written demand delivered to
Limited Partner no later than thirty (30) days after the end of such quarter,
cause an Arbitration Proceeding to be commenced for the sole purpose of
determining which of the updated Current Budget and Plans last proposed for
such quarter by General Partner or Limited Partner prior to the expiration of
such ten (10) day period is the more reasonable and accurate update of the
Current Budget and Plan, in which case (4) the update of the Current Budget and
Plan selected by the arbitrator shall be applied for the purposes of this
Section 7.5 and funds provided or caused to be provided by General Partner for
Guaranteed Cost Overruns with respect to such quarterly update shall be
recharacterized as necessary to reflect the same. (b) Except as provided in
Section 7.5(c) below, General Partner shall cause the Partnership to pay for
Guaranteed Cost Overruns for the Project up to an aggregate amount equal to the
Guaranteed Cost Contingency as follows: (i) The General Partner shall fund or
cause the funding of Guaranteed Cost Overruns for the Project up to the
Guaranteed Cost Contingency either through (A) funds available to it from
sources other than loans ("Available Funds"), (B) the Partnership's acquisition
and development loan provided that such advance will not violate the 50%
Leverage Limit and/or (C) from an Additional Contribution by General Partner.
General Partner shall fund any Additional Contribution required under this
Section 7.5(b) within ten (10) days of written demand therefor by Limited
Partner. (ii) For purposes of this Section 7.5(b), if the actual amount of any
Guaranteed Cost item(s) for the Project is less than the amount set forth for
such item(s) in the Initial Budget and Plan, such difference ("Guaranteed Cost
Savings") shall be credited to the Guaranteed Cost Contingency. In determining
the existence of Guaranteed Cost Savings, there shall be taken into account all
cost savings theretofore actually realized with respect to the Project being
considered, but anticipated savings shall not be taken into account until such
savings are actually realized or unless General Partner has obtained Limited
Partner's written approval with respect thereto. The Guaranteed Cost
Contingency, including any Guaranteed Cost Savings credited thereto, may be
utilized in accordance with this Section 7.5(b) to fund Guaranteed Cost
Overruns incurred for the Project. All Guaranteed Cost Overruns funded under
the Guaranteed Cost Contingency shall be considered paid first from Guaranteed
Cost Savings. Any Guaranteed Cost Savings not so utilized may be used by
General Partner in connection with its obligations to purchase the Project as
more fully described in the
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Takedown Agreement. (iii) The use by General Partner of Available Funds and/or
funds from an acquisition and development loan to the Partnership to fund a
Guaranteed Cost Overrun pursuant to this Section 7.5(b) shall in no way limit
General Partner's obligations to make Additional Contributions pursuant to
Section 7.2(c) hereof. (c) Notwithstanding anything in Section 7.5(b) to the
contrary, any Guaranteed Cost Overruns arising out of General Partner's failure
to exercise Due Care in either preparing the Initial Budget and Plan or in
managing the affairs of the Partnership during the Term shall not be funded
under Section 7.5(b) but shall be funded entirely by General Partner using its
own funds under this Section 7.5(c). As used herein "Due Care" shall mean that
standard of care which would be exercised by a prudent lot developer purchasing
the Property and/or managing the Project for its own account. Any Guaranteed
Cost Overruns resulting from the following shall be conclusively deemed to have
been caused by a failure of General Partner to exercise Due Care: cost
projections based on specifications which (i) fail to take into account any
known physical attribute of the Project, or (ii) are inconsistent with the
Construction Criteria, applicable building or other codes or any specific
written agreement of the Partners. In no event shall General Partner be deemed
excused in whole or in part from its responsibility to exercise Due Care
(and/or the consequences of General Partner's failure to exercise Due Care) by
reason of the actual or constructive knowledge of Limited Partner or its
agents, employees or representatives and/or the review or approval by Limited
Partner of the Initial Budget and Plan or any action, matter or event during
the Term (including without limitation the review and/or approval of any
updated Current Budget and Plan). If the Partners dispute whether a Guaranteed
Cost Overrun arises out of General Partner's failure to exercise Due Care as
provided in this Section 7.5(c), and such dispute continues for a period of ten
(10) days or more, either Partner may require that such dispute be resolved by
an Arbitration Proceeding convened solely for such purpose. Pending the
outcome of such Arbitration Proceeding, General Partner shall fund the
Guaranteed Cost Overrun in question from its own funds pursuant to this Section
7.5(c). (d) General Partner shall fund all Guaranteed Cost Overruns for the
Project in excess of the Guaranteed Cost Contingency entirely from its own
funds. (e) Guaranteed Cost Overruns funded by General Partner under Section
7.5(c) and (d) shall not be Partnership expenses and shall not be paid out of
Partnership borrowed funds or any other funds or assets of the Partnership.
The payment by General Partner of any Guaranteed Cost Overruns funded under
Section 7.5(c) and (d) shall not be deemed capital contributions or loans by
General Partner, and shall not increase General Partner's Contribution Account
or its interest in the profits, losses, capital or distributions of the
Partnership or entitle General Partner to the recoupment of, or the payment of
any interest, charge or other consideration for, funds used to make such
payments. Without limiting the generality of the foregoing, a payment made by
General Partner with respect to Guaranteed Cost Overruns funded by General
Partner under Section 7.5(c) or (d) shall not be deemed an Additional
Contribution nor shall such payment be considered a cash contribution to the
Partnership for the purpose of increasing the Contribution Account of General
Partner. (f) General Partner shall cause all Guaranteed Cost Overruns to be
paid as they arise or when the same occur, such that (1) any Guaranteed Cost
Overrun or portion thereof the cost burden of which has been actually incurred
shall be paid immediately as the same comes due, (2) any Guaranteed Cost
Overrun or portion thereof as to which General Partner must supply its own
funds (whether pursuant to Sections 7.5(b), (c) or (d)) and which is projected
to be incurred over the remaining Term shall be paid prorata by General
Partner, as the same comes due, to supplement the acquisition and development
loan proceeds or other Partnership funds earmarked to pay the applicable
Guaranteed Cost rather than exhausting such other Partnership funds before
requiring payment from General Partner under this Section 7.5, and (3) in any
event all funds required of General Partner under this Section 7.5 (whether
pursuant to Section 7.5(b), (c), or (d)) must be provided in a prompt and
prudent manner as appropriate to protect the interests of the Partnership. (g)
Any failure by General Partner to cause a Guaranteed Cost Overrun to be funded
as required by this Section 7.5 shall constitute an Event of Default under
Section 12.1(a). General Partner shall notify Limited Partner concurrently with
(1) the occurrence of any Guaranteed Cost Overrun, and (2) the funding of any
Guaranteed Cost Overrun pursuant to this Section 7.5. (h) It is the intent of
the Partners that increases in Guaranteed Costs resulting from changes in the
scope of the Project or from changes in the specification level or number of
improvements built thereon as any of such changes are mutually approved by the
Partners shall not be funded as Guaranteed Costs Overruns but shall be funded
as mutually agreed by the Partners as such changes are approved.
7.6 Partner Loans and Advances. (a) General Partner shall be entitled to make
one or more loans to the Partnership ("General Partner Gap Loans") as follows:
(1) All General Partner Gap Loans shall be made (i) with respect to expense
categories reflected in the Current Budget and Plan, as to which (ii) General
Partner reasonably projects that a third party acquisition and development loan
will be available within ninety (90) days of such advance to repay the full
amount of such advance; (2) the Project is at the time of such advance
performing substantially in compliance with the Current Budget and Plan; (3) no
General Partner Gap Loan shall be made with respect to any Guaranteed Cost
Overrun except
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with the prior written consent of the Limited Partner, which consent may be
granted or withheld in Limited Partner's sole and absolute discretion; (4)
General Partner shall give Limited Partner prior written notice of any General
Partner Gap Loan; and (5) the total amount of General Partner Gap Loans made
during the Term shall not exceed $100,000; such amount to be determined on the
total cumulative General Partner Gap Loans made by the General Partner during
the Term regardless whether such General Partner Gap Loans (in whole or part)
have been repaid to General Partner or converted to an Additional Contribution
as provided herein. If any General Partner Gap Loan is not retired out of the
proceeds of a third party acquisition and development loan to the Partnership
within ninety (90) days after such General Partner Gap Loan was advanced, such
General Partner Gap Loan shall automatically be converted to an Additional
Contribution from General Partner and such General Partner Gap Loan shall be
deemed paid in full. Each General Partner Gap Loan shall bear interest at the
Base Rate plus 3.5% per annum (but not to be more than 15% per annum). (b)
Except for any ORAAD Loan or as otherwise expressly authorized or required in
this Agreement, no Partner shall be obligated or authorized to lend or advance
money to the Partnership. If, without the prior written consent of the
Partners, a loan or advance not otherwise provided for herein or in any ORAAD
Loan Documents is made to the Partnership by a Partner, no such loan or advance
shall entitle the lending or advancing Partner to any increase in its interest
in Partnership profits, losses or distributions or to the recoupments of, or
the payment of any interest charge or other consideration for the use of such
funds. Except as otherwise provided in this Agreement, only by the mutual
written consent of the General Partner and the Limited Partner at the time that
a loan or advance is made to the Partnership shall any such loan or advance be
made a debt due from the Partnership to such lending or advancing Partner
repayable as to principal or interest out of the Partnership's assets upon such
terms and conditions as shall be approved by the General Partner and the
Limited Partner. (c) The General Partner Gap Loans and any other loan (not
including any ORAAD Loan) by a Partner to the Partnership made pursuant to this
Agreement shall be a non-recourse obligation of the Partnership to the lending
Partner and shall be repayable solely out of available cash as provided in
Sections 9.1 and 13.2 hereof (subject, however, to the provisions of Sections
12.4 and 12.5 hereof). A Default Loan shall have priority of repayment of
principal or interest over any other loan from a Partner to the Partnership,
and all other Partner loans shall be payable pari passu. (d) The provisions of
this Section 7.6(d) shall apply in the event that any ORAAD Loan is made. The
General Partner and each of its constituent partners hereby acknowledge that
the Limited Partner may be or is also the lender making the ORAAD Loan.
General Partner and each of its constituent partners hereby further acknowledge
that the Limited Partner's relationship to the Partnership as the lender making
any ORAAD Loan is entirely separate and independent from its relationship to
the Partnership as a limited partner therein. Specifically, General Partner
and each of its constituent partners agree that: (1) any fiduciary duties which
may be owed by the Limited Partner to the Partnership or the General Partner
arising out of the Limited Partner's status as a limited partner in the
Partnership shall not extend in any way to the separate and independent
relationship of the Limited Partner to the Partnership and the General Partner
as the lender making any ORAAD Loan; and (2) none of the benefits and
protections in favor of the Limited Partner set forth herein shall be
diminished, impaired or affected in any way by virtue of the Limited Partner's
position as the lender making any ORAAD Loan. Without limiting the foregoing,
the Limited Partner: (i) in its capacity as the lender making any ORAAD Loan,
shall be entitled to take any action or refrain from taking any action
permitted under any ORAAD Loan Documents or applicable law as if it were not a
partner in the Partnership; and (ii) in its capacity as a limited partner in
the Partnership, (y) shall be entitled to take any action or refrain from
taking any action permitted under this Agreement or applicable law as if it
were not the lender making the loan in question to the Partnership and (z)
shall not be subject to, and the General Partner's obligations to the Limited
Partner set forth herein will not be limited or excused by, any defenses,
offsets or other remedies of any nature which the General Partner or any of its
constituents partners might have against the Limited Partner in its capacity as
the lender making any ORAAD Loan arising out of any breach by Limited Partner
under any ORAAD Loan Documents or any other act or omission by Limited Partner
made in its capacity as the lender making any ORAAD Loan. The General Partner
and each of its constituent partners unconditionally and irrevocably waive any
right or power to withhold, delay or otherwise limit in any way the performance
of the undertakings of the General Partner to the Limited Partner or the
Partnership set forth herein, notwithstanding any such breach, act or omission
by the Limited Partner in its capacity as the Lender making any ORAAD Loan.
ARTICLE VIII
TAX AND ACCOUNTING MATTERS AND REPORTS.
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8.1 Allocation of Income and Losses. The agreement of the Partners concerning
the maintenance of capital accounts, allocation of income and loss, and other
related tax matters is set forth in Appendix A, attached hereto and made a part
hereof (the "Tax Supplement").
8.2 Books and Records. The Managing Partner shall keep accurate records of all
transactions entered into with respect to the Partnership and shall maintain
full and accurate books and accounts in accordance with federal income tax and
accounting requirements with respect to the management and operation of the
Partnership, which books and accounts shall accurately reflect all income and
expenses of the Partnership on an accrual basis, all payments on any
indebtedness secured by the assets of the Partnership, all payments on other
Partnership indebtedness and all capital expenditures with respect to the
Partnership. Such books and records shall be open to the inspection of the
Partners at any reasonable time after reasonable notice to the Managing
Partner. The Managing Partner shall retain and make available to the Partners,
or cause the preservation and availability to the Partners of, such books and
records for a period of at least seven (7) years following the end of the Term.
8.3 Partnership Interim Reports. Within thirty (30) days of the end of each
calendar month, Managing Partner shall deliver to the Limited Partner the
following reports for the month then ended all in form satisfactory to the
Limited Partner: (a) A budget variance and Guaranteed Cost analysis
substantially in the form attached hereto as Exhibit "H" or such other form
approved in writing by the Limited Partner (the "Job Cost Report") for the
Project; (b) A sales report showing sales opened, sales closed, sales
cancelled and sales prices; (c) A financial statement of the Partnership
including a balance sheet and income statement; (d) An update to the Current
Budget and Plan (which update shall be prepared and provided for informational
purposes only and shall not be deemed a part of the Current Budget and Plan
unless the General Partner and the Limited Partner agree in writing to
incorporate all or any part of such update into the Current Budget and Plan);
(e) A report showing separately as to each Partner the following balances: (1)
Capital Account, (2) Contributions Account, and (3) Preferred Return Account;
and (f) Any other information with respect to the Project required by System.
8.4 Partnership Year End Reports. Within one hundred and five (105) days after
the end of each Fiscal Year, the Managing Partner shall, at the request of
Limited Partner, cause CPA to prepare at the expense of the Partnership audited
financial statements of the Partnership prepared in accordance with generally
accepted accounting principles. Such statements shall be submitted to the
Partners and shall be subject to the review and approval of the General Partner
and the Limited Partner. General Partner agrees that Limited Partner shall be
entitled to submit such statements to the ORAAD Accountant for its review and
approval. The costs of such review by the ORAAD Accountant, and the costs of
any revisions or supplements to such statements or additional reviews or audits
made by CPA as required by the ORAAD Accountant, shall be Partnership expenses.
General Partner shall cause CPA to comply with the requests and requirements of
the ORAAD Accountant. The audited financial statements shall include a balance
sheet, an income statement, statements of cash flow, and such other statements
and reports as the Limited Partner may reasonably request, in form satisfactory
to the Limited Partner and the ORAAD Accountant.
8.5 General Partner Reports. (a) General Partner shall (not later than fifty
(50) days after the end of each of General Partner's fiscal quarters) cause
financial statements for the General Partner to be produced at least quarterly
and to be made available to the Limited Partner. Such quarterly statements
shall include a separate balance sheet for the General Partner, income
statements and statements of cash flow for the General Partner, and separate
statements of the sources and uses of funds for the General Partner, and shall
be certified as true and correct by an officer of General Partner. In
addition, one hundred and five (105) days after the end of each calendar year,
General Partner shall deliver to the Limited Partner the separate financial
statements of the General Partner for such calendar year audited by General
Partner's independent certified public accountants. Such annual financial
statements shall be prepared in accordance with generally accepted accounting
principles consistently applied and shall be certified as true and correct by
an officer of General Partner. The provisions of this Section 8.5(a) shall
also apply to the financial statements of any entity into which the financial
statements of the General Partner are consolidated. (b) In addition to the
financial statements required under Section 8.5(a), General Partner shall (not
later than fifty (50) days after the end of each of General Partner's fiscal
quarters) make available to the Limited Partner (1) an inventory report as to
all of General Partner's projects (including those of all Affiliates), and (2)
a current status report of all construction, land, acquisition or development
loans on its projects (including those of all of its Affiliates) which loan
status reports shall include an
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analysis of remaining interest reserves against projected interest payments for
the life of such loans and a report on percentage of project completion as
compared to remaining available development and construction funds.
8.6 Appraisals. At the request of the Limited Partner, the Managing Partner
shall cause the Property to be appraised at the expense of the Partnership by
an appraiser with the qualifications set forth in Section 12.6(d)(i). Such
appraisal shall be completed within thirty (30) days of such request by the
Limited Partner. The Limited Partner shall have the right to make such request
once every twelve (12) months, or more often if necessary or appropriate to
satisfy the regulatory requirements of the Limited Partners or any of its
partners.
8.7 Warranty Reports. Commencing with the first calendar month after the
calendar month in which the first sale of any portion of the Project closes,
and continuing until one year after the sale of the entire Project, or, if sold
in phases, the sale of the final phase of the Project, Limited Partner shall
have the right to request from General Partner a written report, in form and
substance reasonably acceptable to Limited Partner, as to all third party
warranty and/or defect claims or expenses incurred or brought with respect to
all or any portion of the Project sold. General Partner shall deliver such
report to Limited Partner within ten (10) days of Limited Partners request
therefor. Without limiting any of the foregoing, General Partner shall
promptly notify Limited Partner in writing, without solicitation from Limited
Partner, of any material third party warranty and/or defect claims brought
against the Partnership or of any material defects discovered by or brought to
the attention of General Partner relating to the Project. For purposes of the
foregoing, a warranty claim or defect shall be deemed "material" if it involves
one or more warranty claims or defects, which either individually or in the
aggregate, create an actual or potential liability of the Partnership in excess
$25,000. The obligations of General Partner to report on and notify Limited
Partner of third party warranty and/or defect claims or expenses pursuant to
this Section 8.7 applies to all or any portion of the Project sold and not to
warranty and/or defect claims or expenses relating strictly to the housing
units constructed by General Partner on the Project for its own account after
acquiring the Project (or portions thereof) pursuant to the Takedown Agreement.
8.8 Other Reports. The Managing Partner shall also cause to be prepared and
delivered in a timely manner any and all reports, statements, books, records,
and budgets required to be prepared or delivered by or pursuant to any loan
documents, any other agreements to which the Partnership is a party or bound,
any Law, or any governmental or quasi-governmental body or agency. Such
documents shall be subject to the review and approval of the Limited Partner.
8.9 Tax Returns. Within one hundred and five (105) days after the end of each
Fiscal Year, the Managing Partner shall cause CPA to prepare and submit to the
General Partner and the Limited Partner for their review and approval the
Partnership's federal, state and local tax returns. General Partner agrees
that Limited Partner shall be entitled to submit such tax returns to the ORAAD
Accountant for its review and approval. The costs of such review by the ORAAD
Accountant, and the costs of any revisions or supplements to such tax returns
made by CPA as required by the ORAAD Accountant, shall be Partnership expenses.
General Partner shall not file any such tax return until it has received the
approval of the Limited Partner and the ORAAD Accountant.
8.10 Tax Representations and Covenants of General Partner. General
Partner represents and covenants that it will maintain and operate General
Partner in such a manner that it can serve as the General Partner of the
Partnership in such a manner that it does not jeopardize the Partnership's
status as a partnership for tax purposes under the standards set forth in
Treasury Regulations Sections 301.7701-2 and 301.7701-3.
ARTICLE IX
DISTRIBUTIONS
9.1 Distributions of Available Cash. Subject to the provisions of Sections
12.4 and 12.5 hereof, distributions to the Partners of Available Cash shall be
made at such times as the Managing Partner shall reasonably determine and the
Limited Partner approves. It is the intent of the Partners that all such
Available Cash will be distributed on a monthly basis. Each time distributions
are available to be made pursuant to the foregoing, such distributions shall be
made in the following order of priority (taking into account, as applicable,
the Partners' then existing Preferred Return Account and Contributions Account
balances): (a) First Level. To the Limited Partner until the balance of its
Preferred Return Account is
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reduced to zero; (b) Second Level. To the Limited Partner until the balance of
its Contributions Account is reduced to zero; (c) Third Level. To the General
Partner until the balance of its Preferred Return Account is reduced to zero;
(d) Fourth Level. To the General Partner until the balance of its
Contributions Account is reduced to zero; (e) Fifth Level. To the Partners,
prorata in accordance with their respective Partnership Percentages.
Notwithstanding the foregoing, distributions to the Partners in liquidation of
the Partnership shall be made in accordance with the provisions of Article XIII
below.
If the Limited Partner independently determines that a distribution should be
made pursuant to this Section 9.1, the Limited Partner may deliver a written
notice of such determination to the Managing Partner. The Managing Partner
shall consider such determination in good faith and shall promptly (but in no
event later than five (5) business days after Managing Partner's receipt of
such notice from the Limited Partner) make such distribution or inform the
Limited Partner in writing in reasonable detail as to why Managing Partner has
determined not to make such distribution.
Should a dispute arise between the Managing Partner and the Limited Partner as
to whether or not a distribution should be made under this Section 9.1 or as to
the amount of any such distribution, the Partners shall attempt in good faith
to resolve such dispute for a period of ten (10) days after the date on which
either the Limited Partners disapproves a distribution proposed by the Managing
Partner or the date on which the Managing Partner declines to make a
distribution proposed by the Limited Partner, as applicable. Failing such
resolution, the matter shall be submitted to an Arbitration Proceeding for the
sole purpose of determining whether it is reasonable to make such distribution
and, if so, in what amount; provided, however, if conflicting proposals made by
the Managing Partner and the Limited Partner are both found to be reasonable in
the Arbitration Proceeding, such proceeding shall further determine which
proposal is most beneficial in light of the business objectives of the
Partnership. The proposal selected in the Arbitration Proceeding shall be
implemented by the Partnership within two (2) business days after completion of
such proceeding.
9.2 Withdrawal of Capital. Except as expressly provided in this Agreement or
as otherwise agreed by the Partners, no Partner shall be entitled to withdraw
capital or to receive distributions of or against capital without the prior
written consent of, and upon the terms and conditions agreed upon by, the
Managing Partner and the Limited Partner.
ARTICLE X
OTHER BUSINESS OPPORTUNITIES
10.1 Generally. Subject to the provisions of this Article X, any Partner
may enter into similar, related and competitive business activities to the
activity contemplated by this Agreement without first having offered equity
participation in such activities to any other Partner or the Partnership.
10.2 Competing Projects. Anything herein to the contrary notwithstanding,
neither General Partner nor any Affiliate of General Partner shall, either
directly or indirectly, own, manage, consult on, participate in or otherwise
engage in any other activity with respect to any for sale residential lot
development project (including without limitation, any pre-development,
development, improvement or sales with respect to such project) which involves
or might involve any residential lots with housing units ranging between 2,000
and 3,000 square feet per unit and which is within a two (2) mile radius of the
Property until all of the Property has been sold to Approved Buyers in
accordance with the Takedown Agreement (i.e. the "Close of Escrow" has occurred
with respect to all "Minimum Increments" of "Lots" (as such terms are defined
in the Takedown Agreement)).
ARTICLE XI
TRANSFER AND CERTAIN OTHER RESTRICTIONS
11.1 Transfers and Hypothecations of General Partner's Partnership
Interest. General Partner shall not have the right or power to sell, mortgage,
hypothecate or assign its Partnership Interest, or any portion thereof, other
than to the Limited Partner or its designee pursuant to the Security Agreement,
Section 12.6 or Article XIV, nor shall it have the right to substitute another
person or party in its place or stead without the written consent of the
Limited Partner which consent may be granted or withheld in the Limited
Partner's sole and absolute discretion. Any purported transfer in violation of
the terms hereof shall be null and void.
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11.2 No Changes in Ownership of General Partner. Ira C. Norris shall maintain
stock holdings in General Partner of not less than 2,000,000 shares (the
"Minimum Stock Position"), and shall not cause or permit his stock in General
Partner to be acquired by operation of law or otherwise by any other individual
or entity without the Limited Partner's prior written consent, if such
acquisition would cause his stock in General Partner to be less than the
Minimum Stock Position. The consent of Limited Partner pursuant to this
Section 11.2 may be granted or withheld in the sole and absolute discretion of
the Limited Partner.
11.3 Transfers and Hypothecations of the Limited Partner's Partnership
Interest. (a) Except as provided below in this Section 11.3, the Limited
Partner shall not have the right to transfer or sell its Partnership Interest
or any portion thereof, other than to General Partner pursuant to Section 12.6
or Article XIV, nor (subject to Section 12.3) shall it have the right to
substitute another person or party in its place or stead without the written
consent of General Partner, which consent may be granted or withheld by General
Partner in its sole and absolute discretion. (b) Notwithstanding the provisions
of Section 11.3(a), the Limited Partner shall have the right to freely
transfer, sell or assign all or any portion of its Partner Economic Interest to
an Affiliate of the Limited Partner or to any Affiliate of the partners in
Limited Partner at any time without the need to obtain General Partner's
consent. The Limited Partner shall also have the right to mortgage, pledge,
grant a security interest in, encumber or otherwise hypothecate its Partner
Economic Interest at any time, without the need to obtain General Partner's
consent, to any foreign or domestic bank, savings and loan, insurance company,
pension plan, investment banker or other institutional lender or investor, or
any Affiliate of any of the foregoing. Any successor to the Limited Partner's
Partner Economic Interest by or in lieu of foreclosure or other exercise of a
creditor's rights shall succeed to such Partner Economic Interest without any
requirement to obtain the consent of any Partner. (c) In addition and also
notwithstanding Section 11.3(a), the Limited Partner shall not be required to
obtain General Partner's consent to transfer or sell its Partner Economic
Interest or any portion thereof if prior to transferring or selling its Partner
Economic Interest or portion thereof the Limited Partner first offers the same
to General Partner as follows: Prior to offering its Partner Economic Interest
or any portion thereof to any third party, the Limited Partner shall in writing
specify to General Partner the sales price and other material terms under which
the Limited Partner proposes to sell or transfer its Partner Economic Interest
or portion thereof. General Partner shall have a period of ten (10) days after
receipt of such notice to notify the Limited Partner in writing that General
Partner has elected to purchase the Limited Partner's Partner Economic Interest
(or such portion thereof as was specified in the Limited Partner's notice to
General Partner) under the terms set forth in such notice. General Partner's
failure to so notify the Limited Partner shall be deemed to be General
Partner's declination to purchase the Limited Partner's Partner Economic
Interest or such portion of interest as was specified in the Limited Partner's
notice to General Partner. If General Partner accepts such terms, the Partner
Economic Interest of Limited Partner (or such portion thereof specified in such
notice from the Limited Partner) shall be transferred to General Partner under
the terms set forth in the Limited Partner's notice. If General Partner
declines or is deemed to have declined the Limited Partner's offer, the Limited
Partner shall be free to sell its Partner Economic Interest (or portion thereof
as specified in the Limited Partner's notice to General Partner) to any other
person on whatever terms are negotiated between the Limited Partner and such
other person.
11.4 General Partner's Financial Covenants. (a) General Partner shall, at all
times during the Term comply with the following financial covenants (the
"Financial Covenants"): (i) General Partner's audited net worth as shown on its
annual financial statements prepared by its independent certified public
accountants pursuant to generally accepted accounting principles shall be not
less than $20,000,000; (ii) General Partner shall maintain unrestricted and
unpledged cash or cash equivalents at least equal to $200,000; and (iii)
General Partner shall at all times maintain a ratio of Total Debt to Tangible
Net Worth of not more than 2 to 1, all as computed in accordance with generally
accepted accounting principles consistently applied. For purposes of the
foregoing, "Tangible Net Worth" shall mean the excess of all assets over all
liabilities, as determined and computed in accordance with generally accepted
accounting principles consistently applied, and "Total Debt" shall mean the
total of all secured and unsecured credit lines, and acquisition, development,
and/or construction financing for which General Partner is an obligor,
guarantor, or for which it has provided security. (b) In the event that General
Partner at any time fails to comply with the Financial Covenants, the Limited
Partner, in its sole discretion, may elect to treat such failure as an Event of
Default hereunder and the Limited Partner shall have the right to take any and
all action provided for in this Agreement. In addition to the foregoing, the
Preferred Return of the Limited Partner shall be automatically computed on a
daily basis at the Base Rate plus 5% per annum for the period in which General
Partner fails to be in compliance with the Financial Covenants provided in this
11.4.
ARTICLE XII
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DEFAULT, REMEDIES
12.1 Events of Default. The occurrence of any of the following events by or
with respect to a Partner (the "Defaulting Partner"; and the other Partner
shall be referred to herein as a "Non-Defaulting Partner") shall be defaults
hereunder and if not cured within the applicable notice and cure period
provided below, if any, with respect to such default shall constitute an "Event
of Default" hereunder: (a) The (1) failure to make an Additional Contribution
consented to by the Partners pursuant to Section 7.2(a) within the time period
set forth in such consent, or (2) failure to make any other Additional
Contribution as required by Section 7.2, or (3) failure by General Partner to
cause any Guaranteed Cost Overrun to be funded as required by Section 7.5, or
(4) occurrence of any of the events prohibited in Article X or XI; (b) Other
than as set forth in Section 12.1(a), the failure of a Partner to make any
contribution, advance or other payment as required pursuant to this Agreement,
the Purchase Agreement or any Ancillary Agreement that is not cured within five
(5) business days (or any other applicable cure period specified herein or
therein) of written notice to the Defaulting Partner; (c) The failure of a
Partner to perform any of its other obligations under this Agreement, the
Purchase Agreement or any Ancillary Agreement or the breach by a Partner of any
of the terms, conditions, representations, warranties or covenants of this
Agreement, the Purchase Agreement or any Ancillary Agreement and a continuation
of such failure or breach for more than thirty (30) days after notice by a
Non-Defaulting Partner to the Defaulting Partner that such Partner has failed
to perform any of its obligations under, or has breached, this Agreement, the
Purchase Agreement or any Ancillary Agreement; provided that if such failure or
breach is of the nature that it can be cured but cannot reasonably be cured
within such thirty (30) day period, such period shall be extended for up to an
additional thirty (30) days so long as the Defaulting Partner in good faith
commences all reasonable curative efforts within ten (10) days of its receipt
of such notice from the Non-Defaulting Partner and diligently and expeditiously
continues its curative efforts to completion; (d) As to the General Partner: a
case or proceeding shall be commenced by the General Partner seeking relief
under the federal Bankruptcy Code or any other federal or state law relating to
insolvency, bankruptcy or reorganization; an adjudication that the General
Partner is insolvent or bankrupt; the entry of an order for relief under the
federal Bankruptcy Code with respect to the General Partner; the filing of any
such petition or the commencement of any such case or proceeding against the
General Partner, unless such petition and the case or proceeding initiated
thereby are dismissed within ninety (90) days from the date of such filing; the
filing of an answer by the General Partner admitting the allegations of any
such petition; the appointment of a trustee, receiver or custodian for all or
substantially all of the assets of the General Partner unless such appointment
is vacated or dismissed within ninety (90) days from the date of such
appointment but not less than five (5) days before the proposed sale of any
assets of the General Partner; the insolvency of the General Partner or the
execution by the General Partner of a general assignment for the benefit of
creditors; the convening by the General Partner of a meeting of its creditors,
or any class thereof, for purposes of effecting a moratorium upon or extension
or composition of its debts; the failure of the General Partner to pay its
debts as they mature, or the failure generally of the General Partner to pay
its debts as they become due; the General Partner's failure to prevent the
levy, attachment or execution or other seizure of the Property or any portion
thereof where the same is not discharged within thirty (30) days thereafter;
the levy, attachment, execution or other seizure of all or substantially all of
the assets or the Partnership Interest of the General Partner where such
seizure is not discharged within thirty (30) days thereafter; the admission by
the General Partner in writing of its inability to pay its debts as they mature
or that it is generally not paying its debts as they become due; or the
occurrence of any of the events described in this Section 12.1(d) with respect
to a direct or indirect parent or general partner of the General Partner; and
(e) As to the General Partner: if any default occurs under any acquisition and
development loan with respect to the Project, which default is not cured within
any applicable period provided in the pertinent loan documents.
12.2 Remedies. Upon the occurrence of any Event of Default, the
Non-Defaulting Partner(s) may elect to do one or more of the following: (a)
exercise its rights and remedies under Section 12.3; (b) contribute or advance
money to the Partnership as provided in Section 12.4 hereof; (c) sell the
Property and terminate and dissolve the Partnership as provided in Article XIII
hereof; (d) purchase the Defaulting Partner's Partnership Interest as provided
in Section 12.6; (e) enforce any covenant by the Defaulting Partner to advance
money or to take or forbear from any other action hereunder; (f) subject to the
provisions of Section 17.21 hereof, pursue any other remedy permitted by this
Agreement or at law or in equity.
12.3 Change of Management Control. (a) In addition to any other rights or
remedies which Limited Partner may have under this Agreement or under
applicable Laws, including without limitation, Limited Partner's rights under
Section 4.5 of this Agreement, the Limited Partner shall have the option to
exercise the rights set forth below in this Section 12.3 in the event of
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(1) any Event of Default, or (2) after the occurrence of three or more defaults
hereunder (whether or not such defaults are cured or ripen into Events of
Default) by or with respect to General Partner of which General Partner has
received written notice hereunder within the then most recent twelve (12) month
period, or (3) General Partner's failure, for any reason whatsoever, to
significantly complete the construction and development of the Project for sale
to Approved Buyers in accordance with the Current Budget and Plan on or before
June 30, 1996. For purposes of this Section 12.3(a) only, the construction and
development of the Project shall be considered "significantly complete" at such
time as at least seventy percent (70%) of the site work to be constructed on
the Project in accordance with the Current Budget and Plan has been completed,
as determined by Limited Partner in its sole, but good faith, discretion. (b)
Upon the happening of any of the events set forth in Section 12.3(a), the
Limited Partner may elect, by giving written notice to the General Partner, (1)
to become a general partner in the Partnership and assume the role of Managing
Partner of the Partnership, or (2) to designate any entity or individual (which
may be an Affiliate of the Limited Partner) to become a general partner in the
Partnership and assume the role of Managing Partner of the Partnership. The
Limited Partner or any entity or individual which assumes the role of Managing
Partner pursuant to this Section 12.3(b) shall be referred herein to as the
"Replacement Managing Partner". The Replacement Managing Partner shall have
the authority to take exclusive charge and control of the Partnership free and
clear of any and all restrictions (including any and all restrictions set forth
in Article II and any and all consent, voting or approval rights granted
General Partner) imposed by this Agreement. The Limited Partner shall have the
right to amend this Agreement and/or the Partnership's Certificate of Limited
Partnership (the "Certificate") to reflect such election and to record any such
amended certificate, and each Partner hereby grants to the Limited Partner its
irrevocable power of attorney to do the same, which power of attorney shall be
deemed to be a power coupled with an interest which may not be revoked until
the termination and winding up of the Partnership. Each Partner hereby
consents to the admission of the Replacement Managing Partner as a general
partner of the Partnership and, in accordance with Section 17-401(b) of the
Act, no further consent of any Partner to such admission shall be required. In
addition, the Limited Partner may transfer all or any part of its Partnership
Interest to any entity or individual designated by the Limited Partner to
become Replacement Managing Partner, and no approval or consent of any Partner
shall be required to effect such transfer. The provisions of this Section
12.3(b) shall take precedence over any provision to the contrary set forth in
this Agreement. (c) The Replacement Managing Partner shall have the right to
contribute or lend funds to the Partnership if the Replacement Managing Partner
determines in its sole discretion that additional capital is required in excess
of the Additional Contributions set forth in Section 7.2. The Replacement
Managing Partner shall have the right in its sole discretion to designate any
funds so advanced as either a loan to the Partnership or as capital contributed
to the Partnership. If such funds are designated as a capital contribution,
the same shall be deemed to be a Default Contribution and shall be treated as
such pursuant to Sections 12.4 and 12.5. If such funds are designated as a
loan to the Partnership, such loan shall bear interest at the Base Rate plus
5%, or the maximum interest then permitted by applicable Laws (whichever is
lesser), shall be repaid before any distributions of cash pursuant to Sections
9.1, 12.5 or 13.2(d) and shall be due in full on the first anniversary of its
making. (d) If the Limited Partner becomes the Replacement Managing Partner
pursuant to this Section 12.3, the Limited Partner shall continue to retain the
Origination Fee and in addition will be paid the Management Fee from the date
that the Limited Partner becomes the Replacement Managing Partner. (e) If the
Limited Partner exercises its right to take over management of the Partnership
pursuant to this Section 12.3, (1) the General Partner shall nonetheless
remain fully liable pursuant to the terms of any acquisition and development or
other loan documents executed by General Partner as General Partner of the
Partnership and on any payment, completion or other guaranties executed in
connection therewith in favor of the lender or lenders under such loans, (2)
the Limited Partner shall hold General Partner harmless from any loss, claim or
damage, including reasonable attorneys fees, to the extent the same arises out
of the gross negligence or willful misconduct of the Replacement Managing
Partner, (3) effective upon the Limited Partner's exercise of its right to take
over management of the Partnership pursuant to this Section 12.3, at the
written request of General Partner, (i) the Partnership Interest of General
Partner shall be automatically converted into an interest as a limited partner
in the Partnership having the same interest in "Net Income", "Net Losses" (as
such terms are defined in the Tax Supplement attached hereto), and
distributions as it had held as the General Partner and only those voting
rights which limited partners are required to have under the Act, and (ii) an
appropriate amendment to the Certificate and the Partnership's LP-5 filing in
California shall be promptly executed and filed with the appropriate state
authorities, and (4) all bank accounts, contracts, deposits, accounts or other
evidences of any rights of the Partnership shall be transferred to the name or
control of the Replacement Managing Partner as the Replacement Managing Partner
shall direct and General Partner shall promptly execute such instruments and
take such actions as the Replacement Managing Partner may request to effect
such transfer.
12.4 Default Contributions, Overrun Contributions and Default Loans. (a) If a
Partner fails to make any Additional Contribution within the applicable time
period specified in the consent of the Partners entered into pursuant to
Section 7.2(a), or if any Partner fails to make any other Additional
Contribution as required by Section 7.2 or 7.6(a), or if General Partner fails
to cause any Guaranteed Costs Overrun to be funded when due as required by
Section 7.5, the same shall constitute a default hereunder and
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the other Partner may, in its sole discretion, without limitation on its other
rights and remedies under this Agreement, elect to exercise any of the options
set forth in Sections 12.4(b) or 12.4(c) below. (b) The options available to
the Non-Defaulting Partner shall include the ability to elect to either (1)
withdraw its capital contributions made pursuant to any such consent of the
Partners pursuant to Section 7.2(a), (2) in addition to its share of
contributions made as required in such consent pursuant to Section 7.2(a), if
any, make a contribution ("Default Contribution") to the Partnership in an
amount equal to the Defaulting Partner's share of any required Additional
Contribution, or (3) as to the Limited Partner, make a contribution ("Overrun
Contribution") to the Partnership to enable the Partnership to pay a Guaranteed
Cost Overrun which General Partner failed to cause to be funded as required by
Section 7.5. The making of any such contribution shall not be deemed to cure
the default of the Partner failing to make such Additional Contribution or to
cause the payment of any Guaranteed Cost Overrun. Each Default Contribution
and/or Overrun Contribution shall be considered to be an Additional
Contribution. (c) In addition to the options set forth in Section 12.4(b), the
Non-Defaulting Partner may elect to advance as a loan to the Partnership an
amount equal to but in lieu of what would have been the amount of any
applicable potential Default Contribution or Overrun Contribution (such loan
being referred to herein as a "Default Loan"). A Default Loan shall be the
obligation of the Partnership, shall bear interest at the Base Rate plus 5% per
annum payable monthly or the maximum interest then permitted by applicable Laws
(whichever is lesser), shall be repaid before any distributions of cash to the
Partners pursuant to Sections 9.1, 12.5 or 13.2(d) and shall be due in full on
the first anniversary of its making.
12.5 Distributions Upon General Partner Default. Subsequent to the making by
the Limited Partner of a Default Contribution, an Overrun Contribution or a
Default Loan, any other monetary Event of Default committed by the General
Partner, any failure of General Partner to acquire all or any portion of the
Project in accordance with the Takedown Agreement, or if any acquisition and
development lender or other lender to the Project exercises or purports to
exercise its right to accelerate its loan by reason of the Limited Partner's
exercise of any of its rights under Section 12.3 (any of the foregoing events
being and referred to herein as a "Section 12.5 Event"), the order of
distributions and Partner loan payments out of Available Cash set forth in
Section 9.1 shall thereafter be automatically adjusted as follows: (a) First
Level. To the Limited Partner to repay interest and then principal on any and
all Default Loans and any other loans (other than any ORAAD Loan) made to the
Partnership by Limited Partner until all such loans have been repaid in full;
(b) Second Level. To the Limited Partner until such time as its Preferred
Return Account balance has been reduced to zero; (c) Third Level. To the
Limited Partner until such time as the Contribution Account balance of the
Limited Partner has been reduced to zero; (d) Fourth Level. To the Limited
Partner until such time as the Limited Partner has received the Default Return;
(e) Fifth Level. To General Partner to repay interest and then principal on
any General Partner Gap Loans and any other loans made by General Partner to
the Partnership permitted by this Agreement until all such loans are repaid in
full; (f) Sixth Level. To General Partner until the balance of its Preferred
Return Account has been reduced to zero; (g) Seventh Level. To General Partner
until its Contribution Account balance has been reduced to zero; (h) Eighth
Level. Thereafter, to the Partners prorata in accordance with their
Partnership Percentages.
If a Section 12.5 Event has occurred at any time during the life of the
Partnership, then, notwithstanding any provision hereof to the contrary, any
liquidating distributions hereunder will also be made in accordance with the
provisions of this Section 12.5. Furthermore, if a Section 12.5 Event has
occurred at any time during the life of the Partnership, then, notwithstanding
Section 2.1 of the Tax Supplement but subject to the other provisions of such
Tax Supplement, Net Income and Net Losses will thereafter be allocated so that
the Capital Accounts of the Partners equal as nearly as possible the amount of
cash each Partner would receive under Sections 12.5(b), (c), (d), (f), (g), and
(h) if the aggregate amount of all Capital Account balances were cash available
to be distributed pursuant to Section 12.5. The foregoing allocation provision
is intended to comply with Code Section 704 and the Treasury Regulations
promulgated thereunder and shall be interpreted and applied in a manner
consistent therewith.
12.6 Purchase Of Defaulting Partner's Partnership Interest. (a) Right To
Purchase. At any time during the pendency of an Event of Default, or at any
time after the delivery of three (3) or more notices of default (whether or
not such defaults are cured or ripen into Events of Defaults) to a Partner in
the then most recent twelve (12) month period, the Non-Defaulting Partner shall
have the right but not the duty to acquire the Defaulting Partner's Partnership
Interest (including its rights as a creditor of the Partnership, except for the
Limited Partner's rights as a creditor under any ORAAD Loan, which shall not be
included) for an amount (the "Partnership Price") determined as hereinafter
provided. The Partnership Price shall be the amount the Defaulting Partner
would be entitled to receive or required to pay hereunder if the Partnership
sold the Property to a third party at ninety percent (90%) of its Net Asset
Value and liquidated the Partnership in accordance with Section 13.2 (taking
into account the operation of Section 4.1 of the Tax Supplement). (b)
Calculations. "Net Asset Value" shall mean the Fair Market Value of the
Property minus all Partnership liabilities (other than those liabilities which
are owed to the Partners, except for any ORAAD Loan). The "Fair Market Value"
of the Property shall mean (1) the agreed or appraised value of the real
estate assets of the
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Partnership as if sold for all cash, plus (2) the book value of the other
assets of the Partnership as such value is determined by the CPA, which
determination of book value (the "Book Value") shall be final and binding on
the Partners. The Fair Market Value shall be determined as of the date (the
"Default Date of Value") that the Non-Defaulting Partner gives the notice to
the Defaulting Partner under Section 12.6(c). (c) Initiation of Purchase Right.
The Non-Defaulting Partner may initiate the right to purchase granted by this
Section 12.6 by giving a notice to such effect to the Defaulting Partner. Upon
notice of such election to the Defaulting Partner by the Non-Defaulting Partner
of an election to initiate the right to purchase granted by this Section 12.6,
the Partners shall attempt to agree on the then fair market value of the real
estate assets of the Partnership, and the Non-Defaulting Partner shall request
CPA to compute the book value of the other assets of the Partnership.
Following the determination of the Net Asset Value, the Partners shall attempt
to agree upon the proper application of Section 13.2 (including, without
limitation, the application of Section 4.1 of the Tax Supplement) to arrive at
the Partnership Price. (d) Appraisal and Arbitration. (i) Appointment of
Appraisers. (a)If the Partners have not agreed upon the fair market value of
the Partnership's real estate assets within twenty (20) days following a notice
of an election to purchase hereunder, the General Partner and the Limited
Partner shall each, within ten (10) days after such twenty (20) day period,
appoint in writing an appraiser, which appraiser shall be a member of the
American Institute of Real Estate Appraisers, with at least five (5) years of
residential subdivision appraisal experience in the market and sub-market in
which the Property and Project are located. The Partners may not appoint an
appraiser who has previously acted in any capacity for the General Partner or
the Limited Partner. If one party has appointed an appraiser hereunder, and
the other party fails to appoint an appraiser hereunder within ten (10) days of
the first party's written request to do so, the fair market value of the
Partnership's real estate assets will be established by the determination
acting alone of the appraiser appointed by such first party, and such other
party hereby consents to the same. The appraiser or appraisers appointed under
this Section 12.6(d)(i) shall be instructed to complete their appraisals within
thirty (30) days of their appointments, and to appraise only the fair market
value of the real estate assets determined as of the date of the Non-
Defaulting Partner's notice of its exercise to purchase. (b) If two appraisers
are appointed pursuant to Section 12.6(d)(i), the two appraisers so appointed
shall conduct independent appraisals and meet within thirty (30) days after
their appointment to attempt to set the fair market value of the Partnership's
real estate assets. If they are unable to agree upon such fair market value
within said thirty (30) day period, they shall appoint a third appraiser who
meets the qualifications set forth above. If they fail to appoint a third
appraiser within seven (7) days after such thirty (30) day period, either the
General Partner or the Limited Partner, on behalf of both the General Partner
and the Limited Partner, may request such appointment by the president or
executive secretary of the chapter of the American Institute of Real Estate
Appraisers located nearest to the Property. The third appraiser shall be
instructed to complete an appraisal within twenty (20) days from his
appointment. Within five (5) days after completion of the third appraiser's
appraisal, all three appraisers shall meet and a majority of the appraisers
shall attempt to determine the fair market value of the real estate assets for
purposes of this Section 12.6. If a majority are unable to determine the fair
market value at such meeting, the three appraisals shall be added together and
their total divided by three. The resulting quotient shall be the fair market
value of the real estate assets of the Partnership. If, however, either or
both of the low appraisal or the high appraisal are more than ten percent (10%)
lower or higher than the middle appraisal, any such lower or higher appraisal
shall be disregarded. If only one appraisal is disregarded, the remaining two
appraisals shall be added together and their total divided by two, and the
resulting quotient shall be such fair market value. If both the lower
appraisal and higher appraisal are
disregarded as provided herein, the middle appraisal shall be such fair market
value. The Defaulting Partner shall pay all of the fees and costs of the
appraisers and CPA or, at the election of the Non-Defaulting Partner, the same
may be subtracted from the amount payable to the Defaulting Partner for its
Partnership Interest. (c) All appraisals conducted pursuant to this Section
12.6(d)(i) shall take into account a discounting to present value of the net
income stream represented by the estimated holding costs of completing and
selling out the Project, as well as the estimated sales proceeds to be received
over the projected sell-out period. (ii) Determination of Purchase Price. If
the Partners have not agreed upon the proper application of Section 13.2 (or
the application of Section 4.1 of the Tax Supplement) to arrive at the
Partnership Price within ten (10) days following the date on which the Net
Asset Value is determined, the Limited Partner shall provide to General Partner
in writing the names of three certified public accounting firms. General
Partner shall choose one of such firms within three (3) business days of its
receipt of such list, and failing General Partner's timely selection the
Limited Partner shall choose one of such firms. Such firm so chosen (the
"Selected CPA") shall then proceed to determine the proper application of
Section 13.2 and/or the proper application of Section 4.1 of the Tax
Supplement, whichever is applicable, to arrive at the Partnership Price. Each
of the Partners shall have five (5) days from the date the Selected CPA is
chosen to submit written arguments in support of its position to the Selected
CPA. Each of the Partners shall also cooperate fully with the Selected CPA to
assist in such determination, including, without limitation, providing copies
of all books and records of the Partnership and such other information
requested by the Selected CPA. The Selected CPA shall make its determination
of the proper application of Section 13.2 (or the proper application of Section
4.1 of the Tax Supplement) to arrive at the Partnership Price within thirty
(30) days following the date on which the Net Asset Value is determined, and
the results thereof shall be final and binding on the Partners for the sole
purpose of determining
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the Partnership Price. The Defaulting Partner shall pay all of the fees and
costs related to the making of such determination or, at the election of the
Non-Defaulting Partner, the same may be subtracted from the amount payable to
the Defaulting Partner for its Partnership Interest. Each of the Partners
hereby agree that the Selected CPA shall have no liability to either of the
Partners for its determination of the Partnership Price, unless in making such
determination, the Selected CPA has committed gross negligence or willful
misconduct. In connection therewith, each Partner hereby indemnifies and holds
harmless the Selected CPA from any liabilities, damages, costs or expenses
(including, without limitation, actual attorneys fees) arising from any claim
asserted by such Partner against the Selected CPA in connection with making the
determination required by this Section 12.6(d)(ii), provided that the Selected
CPA has not committed gross negligence or willful misconduct. (e)
Non-Defaulting Partner's Election. The Non-Defaulting Partner shall have
thirty (30) days after the determination of the Purchase Price to elect whether
or not to purchase the Defaulting Partner's Partnership Interest at the
Partnership Price. If the Non- Defaulting Partner elects not to purchase or
makes no election, the Non-Defaulting Partner shall have no purchase
obligations pursuant to this Section 12.6 and shall reimburse the Defaulting
Partner for any amounts paid by such Defaulting Partner pursuant to Sections
12.6(d)(i)b) and 12.6(d)(ii) (except those paid under the last sentence of
Section 12.6(d)(ii)). If the Non-Defaulting Partner desires to purchase, the
Non- Defaulting Partner shall give a notice to the Defaulting Partner of its
election to purchase. Such notice shall set forth the total Partnership Price
and the amount of the components of the Partnership Price, subject to any
adjustments as provided above, and shall specify a time and place of the
closing, which shall be not more than thirty (30) days thereafter. The closing
shall take place in accordance with and subject to Section 14.4 hereof. The
amount due to be paid to or received from a Defaulting Partner, as the case may
be, for its Partnership Interest in connection with a purchase pursuant to this
Section 12.6 shall be paid in full at the time of closing. (f) Designee;
Financing. Notwithstanding anything in this Agreement to the contrary, the
Non-Defaulting Partner shall be entitled to designate any third party to be the
transferee of the Defaulting Partner's Partnership Interest or obtain financing
from any third party with respect to such purchase, provided that the foregoing
shall not delay any transaction described in this Section 12.6. (g) Adjustment
By CPA. CPA shall update the Partnership Price three (3) days prior to the
transfer date to reflect sales of real estate assets and changes in the
liabilities and the other assets of the Partnership subsequent to the Default
Date of Value. CPA shall further so recalculate the Partnership Price sixty
(60) days following the transfer date. If such recalculation reflects a change
in the other assets or the liabilities of the Partnership as of the transfer
date, CPA shall determine the adjusted Partnership Price, and each Partner
agrees promptly to make a cash payment to the other Partner as shall be
necessary as a result of any difference between the Partnership Price at the
transfer date and the Partnership Price as so adjusted. To the extent that a
Selected CPA determined the Partnership Price, then CPA shall make its
adjustments using the same methodology used by the Selected CPA in arriving at
the Partnership Price.
12.7 Cumulative Remedies. No remedy conferred upon the Partnership or any
Partner in this Agreement is intended to be exclusive of any other remedy
herein or by law provided or permitted, but rather each shall be cumulative and
shall be in addition to every other remedy given hereunder or now or hereafter
existing at law, in equity or by statute.
12.8 Litigation Without Termination. Subject to the alternative dispute
resolution mechanisms, if any, set forth in this Agreement, any Partner shall
be entitled to maintain, on its own behalf or on behalf of the Partnership, any
action or proceeding against any other Partner or the Partnership (including,
without limitation, any action for damages, specific performance or declaratory
relief) for or by reason of breach of such party of this Agreement, the
Purchase Agreement or any Ancillary Agreement, notwithstanding the fact that
any or all of the parties to such proceeding may then be partners in the
Partnership, and without dissolving the Partnership as a partnership.
12.9 No Waiver. No waiver by a Partner or the Partnership of any breach of or
default under this Agreement shall be deemed to be a waiver of any other breach
or default of any kind or nature, and no acceptance of payment or performance
by a Partner or the Partnership after any such breach or default shall be
deemed to be a waiver of any breach or default of this Agreement, whether or
not such Partner or the Partnership knows of such breach or default at the time
it accepts such payment or performance. No failure or delay on the part of a
Partner or the Partnership to exercise any right it may have shall prevent the
exercise thereof by such Partner or the Partnership at any time such other
Partner may continue to be so in default, and no such failure or delay shall
operate as a waiver of any default.
ARTICLE XIII
DISSOLUTION
13.1 Events Giving Rise to Dissolution. No act, thing, occurrence, event or
circumstance shall cause or result in the dissolution of the Partnership,
except that the happening of any one of the following events shall work an
immediate dissolution of the
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Partnership: (a) The sale of all of the real estate assets of the Partnership
and the completion of all warranty obligations of the Partnership to buyers of
all or any portion of the Project (provided, however, that if a portion of the
purchase price of such sale is evidenced by a promissory note, the Partnership
shall not be dissolved by reason of such sale so long as the Partnership is the
holder of such promissory note); (b) The election of the Non-Defaulting Partner
as provided in Section 12.2 hereof; (c) The unanimous agreement in writing by
the Partners to dissolve the Partnership; (d) The expiration of the Term
pursuant to Section 1.3 of this Agreement; (e) The failure of the Close of
Escrow to occur by the date set forth in Section 13.3; or (f) The occurrence of
any event of withdrawal with respect to the General Partner as set forth in
Section 17-402 of the Delaware Revised Uniform Limited Partnership Act, unless
within ninety (90) days after the withdrawal not less than a majority in
interest of the remaining partners agree in writing to continue the business of
the Partnership and to the appointment, effective as of the date of withdrawal,
of one or more additional general partners.
Except as otherwise provided in this Agreement, each Partner agrees that a
Partner shall not have the right to withdraw from the Partnership.
13.2 Winding Up. Upon the dissolution of the Partnership as herein provided,
the Partnership shall engage in no further business thereafter other than that
necessary to wind up the business and distribute the assets. In the event of a
dissolution of the Partnership, the Limited Partner and the Managing Partner
shall jointly be the "Liquidating Partner" hereunder and shall wind up the
affairs of the Partnership and liquidate its assets; provided, however, if the
dissolution is pursuant to Section 12.2(c) by reason of the default of General
Partner, then the Limited Partner shall be the sole Liquidating Partner. To
the extent that the Limited Partner and the Managing Partner are jointly the
Liquidating Partner, all decisions shall be approved by both such Partners.
Available Cash shall continue to be applied and distributed during the
winding-up period in the same manner as provided for in Article IX (subject,
however, to the provisions of Sections 12.4 and 12.5). The Liquidating
Partner shall have the right and unlimited discretion to determine, in good
faith, the time, manner and terms of any sale or sales of Property pursuant to
such liquidation. Subject to Section 13.3, the proceeds from the liquidation
of the Property shall be applied as follows: (a) First, to the payment of
third party debts, liabilities and loans of the Partnership, including, without
limitation any ORAAD Loan; (b) Second, to the setting up of any reserves which
the Liquidating Partner may deem necessary for the warranty obligations of the
Partnership and any contingent or unforeseen liabilities or obligations of the
Partnership; (c) Third, to pay interest and then principal on any Default
Loans; (d) Fourth, to pay interest and then principal on any other loans and
advances made to the Partnership in accordance with this Agreement by Partners;
and (e) Fifth, to the Limited Partner and to General Partner prorata in an
amount equal to their positive Capital Account balances, after such balances
have been adjusted pursuant to Sections 2.1 and 2.2 of the Tax Supplement to
reflect the allocation of income or loss arising from all periods and
transactions prior to or incident to liquidation (including any adjustment
under Section 1.1(a)(ii) of the Tax Supplement with respect to any liquidating
distribution of assets in-kind). (f) Notwithstanding the above, if upon the
dissolution, liquidation or winding up of the Partnership, there exists a
Section 12.5 Event, liquidating distributions shall be as set forth in Section
12.5.
13.3 Failure to Close Escrow. If the Close of Escrow fails to occur on or
before January 16, 1995, upon the written demand therefor by any Partner, such
event shall work an immediate dissolution of the Partnership. If any Partner
delivers such written demand (A) the General Partner shall immediately execute
and file with the Delaware Secretary of State such forms as are necessary to
effect the dissolution of the Partnership, (B) notwithstanding Section 13.2,
all funds deposited with "Escrow Agent" (as such term is defined in the
Purchase Agreement) by the Partners pursuant to the Purchase Agreement shall be
immediately returned to the Partners, (C) the Purchase Agreement shall be
terminated, and (D) the Partners shall execute and deliver to the Escrow Agent
instructions sufficient for the foregoing purposes. Nothing in this Section
13.3 shall require or permit the return to General Partner of funds which
General Partner is not otherwise entitled to receive pursuant to the Purchase
Agreement.
ARTICLE XIV
BUY/SELL
14.1 Buy/Sell Offering Notice. (a) Subject to Section 14.9 below, either the
General Partner or the Limited Partner (the "Initiating Partner") may give
written notice (the "Offering Notice") to the other (the "Responding Partner")
of its intent to rely on this Section 14.1 and to purchase all, but not less
than all, of the Responding Partner's Partnership Interest. In such event, the
provisions set forth in this Article XIV shall apply. The Initiating Partner
shall specify in its Offering Notice the all cash purchase price ("Purchase
Price") at which the Initiating Partner would be willing to purchase all of the
assets of the Partnership as of the date the Offering Notice is given ("Date of
Value") and the amount ("Liquidating Distribution Amount") that each Partner
would have been entitled to receive or required to pay hereunder (taking into
account the operation of Section 4.1 of the Tax Supplement) if the Partnership
had sold the Partnership assets to a third party for the Purchase Price on the
Date of Value
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and liquidated the Partnership. (b) The Purchase Price set forth in any
Offering Notice shall represent the Initiating Partner's good faith valuation
of the fair market value of the assets of the Partnership as of the Date of
Value. If such valuation is less than the balance as of the Date of Value of
all loans properly owed by the Partnership to third parties and to Partners,
then the Responding Partner shall have the right to challenge such valuation by
delivering a written notice to the Initiating Partner within ten (10) days of
the Date of Value. Failure to give such notice of challenge within such period
shall be deemed approval of such valuation by the Responding Partner. If the
Responding Partner timely delivers such notice of challenge, and if within ten
(10) days of the Initiating Partner's receipt of such notice the Partners have
not agreed in writing on a valuation to determine the Purchase Price, then in
order to determine the Purchase Price, the fair market value of the real estate
assets of the Partnership shall be determined by the appraisal process set
forth in Section 12.6(d)(i) above and the fair market value of the other assets
of the Partnership shall be deemed equal to their Book Value determined by CPA
in accordance with Section 12.6(b) above. If such appraisal process is to be
employed, the appraisers shall be appointed pursuant to the first sentence of
Section 12.6(d)(i)a) on or before a date which is twenty (20) days after the
Initiating Partner's receipt of the notice of challenge hereunder. Further, in
the event such appraisal process is employed, for the purposes of Sections
14.1(c), 14.2 and 14.4 below, the Date of Value shall be deemed to be the date
on which the Purchase Price is determined by such appraisal process. The
Partners shall bear equally the costs and fees of the appraisers in connection
with the above appraisal process. (c) If the Responding Partner disagrees with
any Liquidating Distribution Amount set forth in an Offering Notice, then the
Responding Partner shall have the right to challenge the determination thereof
by delivering a written notice to the Initiating Partner within ten (10) days
of the Date of Value. Failure to give such notice of challenge within such
period shall be deemed approval of such determination by the Responding
Partner. If the Responding Partner timely delivers such notice of challenge,
and if within ten (10) days of the Initiating Partner's receipt of such notice
the Partners have not agreed in writing on the determination of the Liquidating
Distribution Amount in dispute, then the Limited Partner shall provide the list
of certified public accounting firms to General Partner in the manner provided
in Section 12.6(d)(ii) on or before a date which is twenty (20) days after the
Initiating Partner's receipt of the notice of challenge hereunder. General
Partner shall choose one of such firms within three business days of its
receipt of such list, and failing General Partner's timely selection the
Limited Partner shall choose one of such firms. Such firm so chosen (also
referred to herein as the "Selected CPA") shall proceed to determine the proper
application of Section 13.2 and/or the application of Section 4.1 of the Tax
Supplement, whichever is applicable, to arrive at the Liquidating Distribution
Amount in dispute. Each of the Partners shall have five (5) days from the date
the Selected CPA is chosen to submit written arguments in support of its
position to the Selected CPA. Each of the Partners shall cooperate fully with
the Selected CPA to assist in such determination, including, without
limitation, providing copies of all books and records of the Partnership and
such other information requested by the Selected CPA. The Selected CPA shall
make its determination of the Liquidating Distribution Amount in dispute within
sixty (60) days from the Date of Value and the results thereof shall be binding
on the Partners for the sole purpose of determining the Liquidating
Distribution Amount in dispute. Each of the Partners shall bear equally the
costs and fees of the Selected CPA in making its determinations. Each of the
Partners hereby agree that the Selected CPA shall have no liability to either
of the Partners for its determination of the Liquidating Distribution Amount in
dispute, unless in making such determination the Selected CPA has committed
gross negligence or willful misconduct. In connection therewith, each Partner
hereby indemnifies and holds harmless the Selected CPA from any liabilities,
damages, costs or expenses (including, without limitation, actual attorneys
fees) arising from any claim asserted by such Partner against the Selected CPA
in connection with making the determination required by this Section 14.1(c),
provided that the Selected CPA has not committed gross negligence or willful
misconduct.
14.2 Exercise of Buy/Seller. Upon receipt of the Offering Notice, the
Responding Partner shall then be obligated either: (a) To sell to the
Initiating Partner its Partnership Interest at a price equal to the amount the
Responding Partner would have been entitled to receive or required to pay
hereunder (taking into account the operation of Section 4.1 of the Tax
Supplement) if the Partnership had sold the Partnership assets to a third party
for the Purchase Price on the Date of Value and liquidated the Partnership; or
(b) To purchase the Partnership Interest of the Initiating Partner at a price
equal to the amount the Initiating Partner would have been entitled to receive
hereunder if the Partnership had sold the Partnership assets for the Purchase
Price to a third party on the Date of Value and liquidated the Partnership.
The Responding Partner shall notify the Initiating Partner of its election
within thirty (30) days after the date on which the Liquidating Distribution
Amounts for each Partner are determined in accordance with this Article XIV.
Failure to give notice within the required time period shall be deemed an
election to sell. For purposes of this Article XIV the term "Purchasing
Partner" shall mean the Partner who is obligated to purchase the other
Partner's Partnership Interest pursuant to either Section 14.2(a) or 14.2(b).
(whether such Partner is the Initiating Partner or the Responding Partner) and
the term "Selling Partner" shall mean the Partner who is obligated to sell its
Partnership Interest to the Purchasing Partner.
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14.3 Designee; Financing. Notwithstanding anything in this Agreement to the
contrary, in the event that any Partner purchases the other Partner's
Partnership Interest pursuant to this Article XIV, such Purchasing Partner
shall be entitled to designate any third party to be the transferee of such
interest or obtain financing from any third party with respect to such
purchase, provided that the foregoing shall not delay any transaction described
in this Article XIV.
14.4 Closing. (a) The Partners shall meet and exchange documents and pay any
amounts due, and otherwise do all things necessary to conclude the transaction
set forth herein at the closing of such purchase (the "Closing"). The Closing
shall occur at the office of Limited Partner's legal counsel at 1:00 p.m., on
the first Wednesday after the ninetieth (90th) day after the Date of Value
unless that day is a national or state holiday and, in that event, on the next
business day. At the Closing, the Selling Partner shall deliver to the
Purchasing Partner a duly executed assignment of its Partnership Interest, cash
for the full amount, if any, which the Selling Partner is required to pay
hereunder, and shall also, upon the request of the Purchasing Partner,
concurrently therewith (or at any time and from time to time thereafter)
execute and deliver such other documents and partnership records as the
Purchasing Partner determines are necessary or desirable to conclude the
Closing and to transfer ownership, title and control of the Partnership assets
(including but not limited to execution, in recordable form, of an amended
certificate of partnership and/or cancellation of certificate of partnership),
and to otherwise allow the Purchasing Partner to complete the Project or
otherwise develop, use, sell, rent or dispose of the Property. The Purchasing
Partner shall deliver to the Selling Partner cash for the full amount of the
consideration, if any, for such Partnership Interest, and shall deliver any
other documents necessary from the Purchasing Partner to conclude the Closing.
The Selling Partner shall transfer its Partnership Interest free of all liens
or encumbrances. Further, on the Closing, the Selling Partner and/or its
Affiliates shall be released from its liability under any third party loans to
the Partnership and any guarantees made in connection therewith. If a
Partnership creditor refuses to so release the Selling Partner and/or its
Affiliates, the Purchasing Partner shall indemnify the Selling Partner and/or
its Affiliates from liability under such loans and guarantees. (b) If the
Purchasing Partner fails to close as aforesaid, the same shall be deemed an
Event of Default hereunder by the Purchasing Partner within the meaning of
Section 12.1(b). In addition to any other remedies available under this
Agreement by reason thereof, the Selling Partner shall have the right,
exercisable by written notice to the Purchasing Partner given within thirty
(30) days of the date set for the Closing, to purchase under this Article XIV
the Partnership Interest of the Purchasing Partner. If the Selling Partner
exercises such option, the Purchase Price used for the purposes of Section 14.2
shall be ninety percent (90%) of the Purchase Price then established by the
Offering Notice previously given or pursuant to Section 14.1(b), whichever is
applicable.
14.5 Audit After Closing; Final Settlement. The CPA shall, within one hundred
and five (105) days after the Closing, complete an audit of the books of
account as of the Date of Value and prepare and deliver to the Partners an
audited financial statement as of such date. The CPA shall also examine the
books of account for the period of time after the Date of Value to and
including the date of the Closing. In that regard the Partners agree that the
amount due the Selling Partner by the Purchasing Partner shall be adjusted to
reflect all relevant activities from the Date of Value through the date of the
Closing. The adjustment shall include any capital contribution or paybacks of
capital, and each Partner's share of any tax benefits or detriments earned or
incurred by the Partnership during such period, and the expenses of the CPA's
services to the Partnership in making the settlement. The CPA shall deliver to
the Partners a detailed statement and explanation ("Final Settlement
Statement") of any adjustments to the consideration paid for the Selling
Partner's Partnership Interest as a result of any transaction occurring after
the Date of Value but prior to the date of Closing. The net amount of such
adjustments due to one Partner or the other shall be due on demand in cash and
shall bear interest from the Date of Value until paid at the highest rate then
permitted by law to be charged by a lender and, at the option of the Partner to
whom such amount is due, may be offset against any debt due to the owing
Partner. To the extent that a Selected CPA determined a Liquidating
Distribution Amount, then the CPA shall make its adjustments using the same
methodology used by the Selected CPA in arriving at the Liquidating
Distribution Amount.
14.6 Tax Returns. The CPA shall also deliver to the Partners (concurrently
with the Final Settlement Statement), prepared as of the date of Closing, all
necessary state and federal tax returns. The Purchasing Partner shall execute
(on behalf of the Partnership) and file all such state and federal tax returns.
14.7 Undisclosed Liabilities. The Selling Partner shall be solely responsible
for, and shall hold the Purchasing Partner and the Partnership harmless from,
all liabilities of which the Purchasing Partner had no knowledge.
14.8 Timing of Buy/Seller and Default Buy-Out. If either Partner shall have
given the other Partner notice of the first Partner's exercise of its rights
under Section 12.6 or under Section 14.1, then neither Partner shall have the
right to give a subsequent
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notice under either Section 12.6 or under Section 14.1, unless a Partner is
then in default under Section 12.6 or Section 14.1, in which event only the
non-defaulting Partner shall have the right to give any such notice.
14.9 Timing of Exercise of Buy/Sell. Either Partner shall be entitled to
exercise the rights set forth in this Article XIV at any time, with or without
cause and for any reason, any time after the end of the sixth (6th) month of
the Term. In addition, either Partner shall be entitled to exercise the rights
under this Article XIV at any time during the Term in the case of a bona fide
impasse between the Partners in reaching any decision required to be made by
both Partners under this Agreement. Furthermore, the a Partner shall be
entitled to exercise the rights under this Article XIV at any time during the
Term where there has been an Event of Default by the other Partner.
ARTICLE XV
INDEMNIFICATION
15.1 Breach. Each Partner hereby agrees to indemnify, defend and hold harmless
the other Partners and the Partnership (and their respective direct and
indirect agents, employees, representatives, officers, directors, shareholders
or partners) from and against all claims, losses, damages, cost, expense,
demands, liabilities, obligations, liens, encumbrances, rights of action or
attorneys' fees ("Claims") which may arise as a result of any of the following
on the part of such indemnifying Partner, its agents, employees, or other
representatives: a default under or breach of this Agreement or any act or
omission that is outside the scope of this Agreement (except as provided in
Section 15.2) or that constitutes gross negligence or willful misconduct on the
part of the indemnifying Partner. Such indemnity shall survive the termination
or expiration of the Term, the sale of all of the Property and the transfer or
sale of the Partnership Interest of the indemnifying Partner.
15.2 Conduct of Partnership. No Partner or its direct or indirect agents,
employees, representatives, officers, directors, shareholders or partners shall
be liable to the Partnership or to any other Partner for any act performed, or
omitted to be performed, by it in the conduct of its duties as a Partner, if
such act or omission is reasonably believed by such Partner to be within the
scope of the authority of such Partner under this Agreement and is performed or
omitted in good faith and without gross negligence or willful misconduct on the
part of such Partner. The Partnership shall defend, indemnify and save
harmless each Partner and its direct or indirect agents, employees,
representatives, officers, directors, shareholders or partners from any Claim
sustained by such Partner by reason of any act performed, or omitted to be
performed, in good faith and without gross negligence or willful misconduct in
the conduct of its duties within the scope of its authority expressly conferred
by this Agreement. Such indemnity shall not be construed to limit or diminish
the coverage of any Partner under any insurance obtained by the Partnership.
Payment shall not be a condition precedent to any indemnification provided in
this Agreement.
15.3 General Indemnity Provisions. Each indemnity provided for under this
Agreement shall be subject to the following provisions: (a) The indemnity shall
cover the costs and expenses of the indemnitee, including reasonable attorneys'
fees and court costs, related to any actions, suits or judgments incident to
any of the matters covered by such indemnity. (b) The indemnitee shall notify
the indemnitor of any Claim against the indemnitee covered by the indemnity
within forty-five (45) days after the indemnitee has notice of such Claim, but
failure to notify the indemnitor shall in no case prejudice the rights of the
indemnitee under this Agreement unless the indemnitor shall be prejudiced by
such failure and then only to the extent the indemnitor shall be prejudiced by
such failure. Should the indemnitor fail to discharge or undertake to defend
the indemnitee against such liability upon learning of the same, then the
indemnitee may settle such liability, and the liability of the indemnitor
hereunder shall be conclusively established by such settlement, which amount of
such liability shall include both the settlement consideration and the
reasonable costs and expenses, including attorneys' fees, incurred by the
indemnitee in effecting such settlement.
ARTICLE XVI
CERTAIN DEFINITIONS
As used herein, the following terms have the following meanings: (a)"Affiliate"
means: (1) Any other person or entity directly or indirectly controlling,
controlled by, or under common control with the person or entity to which such
term applies; (2) As to any natural person, such person's spouse, child,
grandchild, sibling, aunt, uncle or cousin, as well as the spouse of any of the
foregoing, shall be Affiliates of such person. In addition, as to any
corporation, limited liability company or partnership, any person with any of
the foregoing relationships to any person in control of such partnership as
general partner or otherwise or in control of such corporation or limited
liability company shall be deemed to be an Affiliate of such corporation,
limited liability company or partnership; (3) An Affiliate of a Partner shall
include any partnership in which such Partner or any Affiliate of such
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Partner is a general partner or otherwise has control, as well as any
corporation, limited liability company or other entity in which such Partner or
any Affiliate of such Partner has control; (4) For purposes of this Agreement,
"control" as applied to any person or entity means the possession, directly or
indirectly, of the power to direct or cause the direction of the management,
policies and decision-making of such person or entity, whether through the
ownership of voting interests or by contract or otherwise. "Control" shall
also include, without limitation, the possession of direct or indirect equity
or beneficial interests in at least 50% of the profits or voting control of any
entity. (b) "Ancillary Agreement" means any agreement, instrument, guaranty,
document or covenant made or entered into under, pursuant to, or in connection
or concurrently with the Purchase Agreement or this Agreement, including
without limitation, the Construction Contract, the Takedown Agreement, Security
Agreement, the Model Complex Deed of Trust, the Easement Agreement, that
certain Assignment of Declarant's Rights, dated of even date herewith, from
General Partner in favor of the Partnership, that certain Pledge Agreement,
dated of even date herewith, between General Partner and Orange Coast Title
Company, a California corporation, and any amendment or amendments made at any
time or times heretofore or hereafter to any of the same, but shall not, in any
event include any ORAAD Loan Document. (c) "Available Cash" shall mean the
gross receipts of the Partnership over and above such reserves as are
reasonably calculated by the Managing Partner and approved by the Limited
Partner to enable the Partnership to meet its financial obligations including
any ORAAD Loan in a timely manner and after payment of all costs and expenses
of the Partnership and the Project as the same come due. Reserves shall
include an amount for warranty expenses reasonably expected to be incurred by
the Partnership in connection with the Project, including without limitation, a
reserve from applicable cash distributions for the period ending one (1) year
from the sale of the Project, or, if sold in phases, the sale of the final
phase of the Project. Until approved otherwise by the Partners, the
Partnership shall maintain a cash reserve of $50,000. (d) "Base Rate" means the
commercial loan rate of interest announced publicly from time to time by Bank
of America in San Francisco, California as such bank's "reference rate" or
"prime rate" as from time to time in effect. (e) "Code" shall mean the Internal
Revenue Code of 1986, as amended. (f) "CPA" means the designated accountants
for the Partnership. The Limited Partner shall have the right from time to
time and in its sole discretion to designate by written notice to General
Partner that the Partnership cease to retain the services of the then existing
CPA. Upon General Partner's receipt of any such notice, General Partner shall
promptly terminate such then existing CPA and the Partners shall endeavor to
agree upon a mutually acceptable certified public accountant or accounting firm
to be the CPA. If the Partners are unable to agree upon a mutually acceptable
replacement CPA within ten (10) days of General Partner's receipt of such
notice, Limited Partner shall have the right to designate the replacement CPA
by written notice given to General Partner at any time thereafter, and General
Partner shall promptly retain such designated CPA on behalf of the Partnership.
The initial CPA shall be E&Y Kenneth Leventhal Real Estate Group. (g) "Current
Budget and Plan" means the overall budget and plan for the development,
completion, financing, operation and sale of the Project. As of the date
hereof, the Current Budget and Plan consists of the Initial Budget and Plan.
Subsequent to the date hereof, the Current Budget and Plan may be amended and
updated by the Partners as provided in this Agreement. However, no amendment
or update of the Current Budget and Plan will alter or amend the Initial Budget
and Plan. (h) "Default Return" means an amount applicable only in the event of
a Section 12.5 Event equal to $300,000. (i) "Easement Agreement" means that
certain Easement Agreement, dated of even date herewith, from General Partner
in favor of the Partnership granting the Partnership an easement and certain
other rights with respect to the model complex for the Property (the "Model
Complex"), which shall be recorded against the Model Complex in accordance with
the terms of the Takedown Agreement. (j) "Guaranteed Cost Contingency" means
the line item designated for the Project as "Guaranteed Cost Contingency" on
the Initial Budget and Plan. The Guaranteed Cost Contingency equals One
Thousand and 00/100 Dollars ($1,000) times the number of "Lots" (as defined
below) in the Project. (k) "Guaranteed Costs" means any and all costs incurred
by or on behalf of the Partnership in connection with the development,
completion and sale of the Project for grading, site preparation (including,
without limitation, any entry monumentation and perimeter walls), landscaping
or the construction of any and all on-site and off-site infrastructure
improvements, all to the extent such costs are in respect of labor, materials
or field supervision, and for the marketing and sale of the Project (including,
without limitation, advertisement, marketing material, sales offices and
commissions). Guaranteed Costs shall also include all engineering fees and
expenses, governmental fees or utility fees paid in connection with the
foregoing and shall further include all customer service costs, warranty
expenses and costs to correct defects in the on or off site improvements. In
no event, however, shall Guaranteed Costs include interest on Partnership
acquisition, development, construction or other loans obtained in accordance
with this Agreement, legal, accounting or other fees paid to consultants. (l)
"Initial Budget and Plan" means the overall budget and plan for the
development, completion, financing, operation and sale of the Project, attached
hereto as Exhibit "I" to this Agreement without any amendments, modifications
or changes thereto which may be approved by the Partners pursuant to the terms
of this Agreement. (m) "Laws" means all federal, state and local laws,
moratoria, initiatives, referenda, ordinances, rules, regulations, standards,
orders, judicial decisions, common law and other governmental,
quasi-governmental and utility company requirements (including those relating
to the environment, health and safety, or handicapped persons). (n) "ORAAD
Accountant" means E&Y Kenneth Leventhal Real Estate Group, or such other
certified public accountant or accounting firm designated by
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Limited Partner from time to time to be the ORAAD Accountant. Limited Partner
shall be entitled to designate its own in-house personnel or the personnel of
any Affiliate of Limited Partner from time to time to serve as ORAAD
Accountant. (o) "Management Rights" means all rights of a Partner with respect
to the Partnership and the Property other than the Partner Economic Interest of
such Partner, and shall include without limitation the following: (1) the
right to inspect the books and records of the Partnership, (2) the right, if
any, to participate in the business, affairs and management of the Partnership
and to vote on or grant consent or approval with respect to matters coming
before the Partnership, and (3) unless this Agreement provides to the
contrary, the right to act as an agent of the Partnership. (p) "Model Complex
Deed of Trust" means that certain Deed of Trust, Security Agreement, Assignment
of Rents, and Fixture Filing, dated of even date herewith, from General Partner
in favor of the Partnership as security for certain obligations of Seller under
the Takedown Agreement, which shall be recorded against the Model Complex in
accordance with the terms of the Takedown Agreement. (q) "Partner Economic
Interest" means all of the right, title and interest of a Partner in, to and
against the Partnership and the Property as to the profits, losses, capital and
distributions of the Partnership, but shall not include the Limited Partner's
right, title, interest or claims as lender pursuant to any ORAAD Loan. (r )
"Partnership Interest" means the Management Rights and the Partner Economic
Interest of a Partner. (s) "Partnership Percentage" means 50% with respect to
the Limited Partner and 50% with respect to General Partner; (t) "ORAAD Loan"
shall mean any acquisition and development loan made by the Limited Partner to
the Partnership pursuant to, and in accordance with, the terms and conditions
set forth in the ORAAD Loan Documents. (u) "ORAAD Loan Documents" shall mean
the "[Loan Documents]" as that term is defined in any loan agreement by and
between the Limited Partner, as lender, and the Partnership, as borrower. (v)
"Project" means the overall development, marketing, and sale of the Property as
contemplated by the Current Budget and Plan and this Agreement. (w) "Property"
means all real or personal property from time to time owned by the Partnership.
The Property consists principally of 77 residential lots (collectively, the
"Lots") of Tract Nos. 24840 and 24840-1, located in the City of Corona, County
of Riverside, State of California, and described on Exhibit "J". (x) "Purchase
Agreement" means that certain Purchase, Sale and Contribution Agreement and
Escrow Instructions, of even date herewith, between the Partnership and General
Partner, providing for, among other things, the execution of this Agreement.
(y) "Section 707(c) Payment" means a guaranteed payment as defined in Section
707(c) of the Code, or any payment deemed to be such pursuant to the provisions
of this Agreement. The fact that any payment is designated in this Agreement
as a Section 707(c) Payment does not mean that any Partner or the Partnership
has guaranteed that the person to receive such Section 707(c) Payment will in
fact receive such payment. Rather, such Section 707(c) Payment will be paid by
the Partnership as cash is available to the Partnership for such purposes, and
for federal, state and local income tax purposes the same shall be reported by
the Partnership and the Partners as a "guaranteed payment" within the meaning
of Section 707(c) of the Code and any corresponding state or local income tax
provisions. (z) "Security Agreement" means that certain Security Agreement, of
even date herewith, between the Partnership and General Partner. (aa) "Takedown
Agreement" means that certain Purchase and Sale Agreement and Escrow
Instructions, of even date herewith, between the Partnership and General
Partner, providing for, among other things, the purchase of the Project by
General Partner.
ARTICLE XVII
MISCELLANEOUS
17.1 Notices. Any notice which a party is required or may desire to give the
other party shall be in writing and may be personally delivered or given by
United States registered or certified mail, return receipt requested, addressed
as follows (subject to the right of a party to designate a different address
for itself by notice similarly given):
TO LIMITED PARTNER:
ORA A&D Associates, L.P.
c/o Olympic Realty Advisors
4444 Lakeside Drive, Second Floor
Burbank, California 91505
Attn: Melvin T. Andrews
Fax No.: (818) 558-6273
with copies to: Mathew A. Wyman, Esq.
Cox, Castle & Nicholson
2049 Century Park East, Suite 2800
Los Angeles, California 90067
Fax No.: (310) 277-7889
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TO GENERAL PARTNER:
Inco Homes Corporation
1282 West Arrow Highway
Upland, California 91786
Attn: Mr. Robert H. Daskal
Fax No.: (909) 982-9784
with copies to: Inco Homes Corporation
1282 West Arrow Highway
Upland, California 91786
Attn: Mr. Ira C. Norris
Fax No.: (909) 982-9784
Any notice so given by United States mail shall be deemed to have been given on
the third day after the same is deposited in the United States mail as a
registered or certified matter, return receipt requested, addressed as above
provided, with postage thereon fully prepaid. Any notice not given by
registered or certified mail as aforesaid shall be deemed to be given upon
actual receipt of the same by the party to whom the same is to be given,
provided that the refusal by such party to receive any such notice shall be
deemed such party's receipt of the same.
17.2 Entire Agreement. This Agreement, together with the Exhibits hereto, the
Purchase Agreement, and all Ancillary Agreements represent the entire agreement
of the parties with respect to the subject matter hereof and supersedes any and
all prior agreements, writings or understandings between the parties with
respect to the subject matter hereof. Except as otherwise expressly provided
herein, no amendment or modification to this Agreement shall be binding unless
same shall be in writing and signed by all Partners.
17.3 Governing Law; Choice of Forum; Arbitration. (a)Subject to Section 17.3(c)
below, this Agreement and the rights of the parties hereunder shall be governed
by and interpreted in accordance with the internal laws of the State of
Delaware, without reference to the rules regarding conflict or choice of laws
of such State. (b) The Partners each acknowledge and agree that, subject to
Section 17.3(c) below, the Superior Court of the State of California in and for
the County of Orange, Riverside, Los Angeles, or Sacramento, as such Court is
selected by the Limited Partner in its sole discretion, and the associated
federal and appellate courts, shall have exclusive jurisdiction to hear and
decide any dispute, controversy or litigation regarding the enforceability or
validity of this Agreement or any portion thereof. (c) Notwithstanding the
provisions of Sections 17.3(a) and (b) above, (1) if any provision of this
Agreement provides that any matter arising hereunder is to be submitted to
arbitration, then such matter shall be resolved pursuant to an arbitration
proceeding ("Arbitration Proceeding") on the terms set forth on Exhibit "K"
attached hereto, and (2) to the extent that reference need be made to the law
of any state to enforce the decision made in any such Arbitration Proceeding,
or to apply or interpret the procedural rules applicable to any such
Arbitration Proceeding, the internal laws of the State of California (without
reference to the rules regarding conflict or choice of laws of such State)
shall be utilized for such purpose.
17.4 Successors and Assigns. Except as herein otherwise specifically provided,
this Agreement shall be binding upon and inure to the benefit of the parties
and their legal representatives, successors and assigns.
17.5 Captions. Captions contained in this Agreement in no way define, limit or
extend the scope or intent of this Agreement.
17.6 Severability. If any provision of this Agreement, or the application of
such provision to any person or circumstance, shall be held invalid, the
remainder of this Agreement, or the application of such provision to the
persons or circumstances, shall not be affected thereby.
17.7 Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed an original, but all of which shall constitute
one and the same document. Any signature page of this Agreement may be
detached from any counterpart of this Agreement and re-attached to any other
counterpart of this Agreement identical in form hereto but having attached to
it one or more additional signature pages.
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17.8 Further Assurances. Each party covenants and agrees that it will at any
time and from time to time do, execute, acknowledge and deliver, or will cause
to be done, executed, acknowledged and delivered, all such further acts,
documents and instruments as may reasonably be required by the other party in
order to carry out and effectuate fully the transactions herein contemplated in
accordance with this Agreement.
17.9 Right to Specific Performance. The failure or refusal by a Partner to
comply with any or all of the provisions of this Agreement shall entitle the
other Partners to specific performance of the terms, covenants and conditions
of this Agreement or any part hereof in addition to any and all other remedies
available to such Partners at law or in equity.
17.10 Relationship of Parties. The relationships between the parties hereto
shall be that of a limited partnership, for the sole and limited purpose of
carrying on the business of the Partnership. Except insofar as otherwise
provided for in this Agreement, nothing herein shall be deemed to create a
limited partnership between the Partners for the carrying on of business
outside the scope of this Agreement, nor shall any Partner have the ability to
act as agent for any other Partner.
17.11 Approvals and Consents. Except as expressly provided herein to the
contrary, all approvals and consents to be given hereunder shall be in writing
and each Partner agrees that it will not unreasonably delay or withhold any
approval or consent requested of it pursuant to this Agreement.
17.12 Deemed Approval or Disapproval. Whenever in this Agreement it is
provided that a Partner will be deemed to have approved or disapproved a matter
or taken any other action if such Partner fails to respond as to such matter
within a specified period of time after written notice or demand from any other
Partner or Partners, the Partner receiving such notice or demand will,
notwithstanding failure to respond thereto, not be deemed to have given its
approval or disapproval or to have taken any other action unless such notice or
demand (A) advises the receiving Partner that it will be deemed to have acted
if it does not respond within the specified time period, (B) specifies the
action which will be deemed taken by virtue of the receiving Partner's lack of
response, (C) specifies the time for a response by the receiving Partner
(which time shall be ten (10) days unless otherwise specified in the applicable
Section of this Agreement) and (D) specifically refers to the applicable
Section of this Agreement pursuant to which such non-response will be deemed to
constitute an action on the part of the receiving Partner.
17.13 No Partition. No Partner shall have the right to partition any property
of the Partnership during the term of this Agreement nor shall any Partner make
application to any court or authority having jurisdiction in the matter or
commence or prosecute any action or proceeding for partition and the sale
thereof, and upon any breach of the provisions of this paragraph by any
Partner, the other Partner, in addition to all rights and remedies at law and
in equity it may have or claim, shall be entitled to a decree or other
restraining order enjoining such application, action or proceedings.
17.14 No Third Party Rights. Except as expressly provided herein or in the
Act, this Agreement is for the sole benefit of General Partner and the Limited
Partner and their respective permitted successors and assignees, and shall not
confer, nor shall be construed as conferring, directly, indirectly,
contingently, or otherwise, any rights or benefits on any person or party other
than General Partner and Limited Partner and their permitted successors, and
assignees. Without limiting the generality of the foregoing, as to any third
party, a deficit capital account of a Partner shall not be deemed to be a
liability of such Partner nor an asset or property of the Partnership.
17.15 Survival. The indemnifications provided herein and any other provisions
hereof which state that they expressly survive the termination hereof shall
survive the termination or expiration of this Agreement.
17.16 Usury. If any rate of interest or other charge payable under this
Agreement shall at any time exceed the maximum amount chargeable by applicable
Law, then the applicable rate of interest shall be the maximum rate permitted
by applicable Law.
17.17 Attorneys' Fees; Waiver of Jury Trial. (a) In the event of any litigation
between the Partners to enforce or interpret any provision or right hereunder,
the unsuccessful party to such litigation covenants and agrees to pay the
successful party all costs and expenses reasonably incurred, including without
limitation reasonable attorneys' fees. For the purpose of this Agreement, the
term "attorneys' fees" shall mean the fees and expenses of counsel to the
parties hereto, which may include printing, photostating, duplicating and other
expenses, air freight charges and fees billed for law clerks, paralegals,
librarians and others not admitted to the bar but performing services under the
supervision of an attorney. Such term shall also include all such fees and
expenses incurred with respect to appeals, arbitrations, reference out and
bankruptcy proceedings, and whether or not any
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action or proceeding is brought with respect to the matter for which said fees
and expenses were incurred. (b) General Partner and Limited Partner hereby
waive trial by jury in any action, proceeding or counterclaim brought by either
of the parties against the other in connection with any matter whatsoever
arising out of or in any way connected with this Agreement, the relationship of
General Partner and Limited Partner or any claim of injury or damage relating
to any of the foregoing, or the enforcement of any remedy under any statute
with respect thereto.
17.18 Time of the Essence. Time is of the essence of this Agreement.
17.19 Incorporation of Exhibits. All exhibits schedules and appendices
attached and referred to in this Agreement are hereby incorporated herein as if
fully set forth in this Agreement.
17.20 Certain Terminology. (a) Whenever the words "including", "include" or
"includes" are used in this Agreement, they should be interpreted in a
non-exclusive manner as though the words "but [is] not limited to" immediately
followed the same. (b) Except as otherwise indicated herein, all references in
this Agreement shall be deemed to refer to the Sections of this Agreement.
17.21 Exculpation. (a) Notwithstanding anything to the contrary contained
herein, neither the Limited Partner, nor any direct or indirect partner,
shareholder, officer, director, trustee or employee in or of the Limited
Partner (collectively, the "Nonrecourse Parties") shall be personally liable in
any manner or to any extent under or in connection with this Agreement, and
neither any Partner nor the Partnership shall have any recourse to any assets
of a Nonrecourse Party other than such party's Partnership Interest to satisfy
any liability, judgment or claim that may be obtained or made against any such
Nonrecourse Party under this Agreement or the Project. The limitation of
liability provided in this Section 17.21 is in addition to, and not in
limitation of, any limitation on liability applicable to a Nonrecourse Party
provided by law or by this Agreement or any other contract, agreement or
instrument. (b) Without limiting the generality of Section 17.21(a), General
Partner acknowledges that the State of California Public Employees Retirement
System ("System") is a limited partner in the Limited Partner, a limited
partnership which is the limited partner of the Partnership. Notwithstanding
any other term or provision of this Agreement, System's liability hereunder is
solely that of a limited partner in the Limited Partner and no personal or
direct liability shall at any time be asserted or enforceable against System,
its Board, any member thereof, or any employee or agent of System on account of
or arising out of any obligations arising out of or related to this Agreement.
General Partner agrees that it shall look solely to the assets of the Limited
Partner and its general partner for the enforcement of any claims against the
Limited Partner arising hereunder or related hereto, and waives any claim
against System, irrespective of the compliance or noncompliance now or in the
future with any requirements relating to the limitation of liability of limited
partners. General Partner acknowledges that the Limited Partner and its
general partner are obligated to obtain this waiver from each party with whom
Limited Partner does business when the contract price exceeds $5,000, and that
this and each such contractual relationship would not be created except with
the inclusion of this provision.
17.22 Partner Estoppel Certificates. Upon the written request of a Partner,
the other Partner shall, within fifteen (15) days of its receipt of such
request, execute and deliver a written statement certifying: (A) that this
Agreement is unmodified and in full force and effect (or, if modified, that
this Agreement is in full force and effect as modified and, stating any and all
modifications), (B) that such Partner is not in default hereunder and, to its
actual knowledge, the requesting Partner is not in default hereunder, in each
case except as specified in such statement, (C) that to its actual knowledge,
no event has occurred which with the passage of time or the giving of notice,
or both, would ripen into a default hereunder, except as specified in such
statement, and (D) as to the then current balances of its accounts provided for
under Article VII. Such written statement may be relied upon by a Partner's
prospective purchasers, investors or lenders.
17.23 Construction. The Partners have each been represented by counsel of
their respective choice in connection with this Agreement, the terms of which
have been fully and fairly negotiated. The language in all parts of this
Agreement shall in all cases be construed simply according to the fair meaning
thereof and not strictly against the party which drafted such language.
17.24 Business Days. Any reference in this Agreement to "business days" shall
mean all calendar days except Saturdays, Sundays and California and federal
legal holidays. Any other reference to "days" shall mean calendar days.
17.25 Nondiscrimination Language. During the term of this Agreement, neither
General Partner nor any of its Affiliates, employees or agents shall unlawfully
discriminate against any employee or applicant for employment because of race,
religion, color, national origin, ancestry, physical handicap, medical
condition, marital status, age (over 40) or sex. The General Partner
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and its Affiliates, employees and agents shall assure that the evaluation and
treatment of their employees and applicants for employment are free of such
discrimination. General Partner and its Affiliates, employees and agents shall
comply with the provisions of the California Fair Employment and Housing Act
Section 12900 et seq. of the California Government Code) and the applicable
regulations promulgated thereunder (California Administrative Code, Title 2,
Section 7285.0 et seq.). The applicable regulations of the Fair Employment and
Housing Commission implementing Government Code Section 12990, set forth in
Chapter 5 of the Division 4 of Title 2 of the California Administrative Code
are incorporated herein by this reference and are made a part as if set forth
herein in full. General partner and its Affiliates, employees and agents shall
give written notice of their obligations under this clause to labor
organizations with which they have a collective bargaining or other agreement.
General Partner shall include the foregoing nondiscrimination compliance
provisions in all contracts to perform work or provide service under this
Agreement. During the term of this Agreement, General partner, its Affiliates,
employees and agents shall conduct their respective activities in accordance
with Title VI of the Civil Rights Act of 1964 and the rules and regulations
promulgated therein.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date
first above written.
GENERAL PARTNER:
Inco Homes Corporation, a Delaware corporation
By: Robert H. Daskal
Its: Executive Vice President
LIMITED PARTNER:
ORA A&D Associates, L.P. a California limited partnership
By: ORA California I, LLC, a Delaware limited liability company, its general
partner
By: Olympic Realty Advisors, LLC, a Delaware limited liability company
By: Melvin T. Andrews
Its: Executive Vice President
Ira C. Norris agrees to be bound by the provisions of Sections 11.2 hereof.
By: Ira C. Norris
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EXHIBIT 10.2
FREEDOM - EAGLE RANCH HOUSING PARTNERS
A CALIFORNIA LIMITED PARTNERSHIP
LIMITED PARTNERSHIP AGREEMENT
THIS LIMITED PARTNERSHIP AGREEMENT is made and entered into as of this 1st day
of May, 1996, by and between INCO HOMES CORPORATION, a Delaware corporation
("Inco Homes" or the "General Partner" herein)and JULIA CONSTRUCTION INC., a
California corporation ("Julia" herein), FRED E. LIAO ("Mr. Liao" herein), and
BOB C. CHANG ("Mr. Chang" herein) (collectively the "Limited Partners" herein)
with reference to the following facts:
A. Inco Homes, a publically owned corporation whose stock is traded on the
NASDAQ, is in the business of developing and selling single-family houses
principally in the entry-level/affordable market. Ira C. Norris ("Mr. Norris"
herein) is the President of Inco Homes and is its largest stockholder.
B. Inco Homes currently owns that certain parcel of undeveloped real property
located in the master planned development known as "Eagle Ranch" (the "Real
Property" herein). The legal description of the Real Property is attached
hereto as Exhibit A-1 and a Site Plan is attached hereto as Exhibit A-2. Inco
Homes has subdivided the Real Property into One Hundred and Sixty-Six (166)
lots for development with single family detached houses (the "Development"
herein).
C. The General Partner has determined that (in addition to debt financing from
third party institutions in amounts typically obtained for the construction of
similar projects) it will need equity capital in the amount of Nine Hundred
Thousand Dollars ($900,000) to refund Inco Homes for costs to acquire the Real
Property, to obtain all of the entitlements necessary to be authorized to
construct the Development on the Real Property, to construct all on-site and
off-site improvements required to complete the Development in a first-class,
highly professional manner, and to market the completed homes in the
Development.
D. The General Partner desires to form a limited partnership which will own the
Real Property and construct and market the Development. The General Partner is
seeking limited partners who will contribute to such Partnership the
above-described equity required to construct and market the Development.
E. The General Partner has represented to the Limited Partners that it has all
the personnel, knowledge, expertise, financing, and resources, and reasonably
believes it can obtain all required entitlements to construct the Development
in a first-class, highly professional manner, and market the completed houses
to buyers in the first-time/affordable price market in the Victorville area.
The General Partner reasonably believes that it can profitably construct and
market the Development for its partners.
F. The General Partner and the Limited Partners hereby desire to form a
California limited partnership (the "Partnership" herein) to own the Real
Property and to construct and market the Development. Upon the execution of
this Agreement, the General Partner will promptly deed title to the Real
Property to the Partnership which will concurrently assume the obligations of
Inco Homes in connection therewith, the Limited Partners will contribute Nine
Hundred Thousand Dollars ($900,000) of cash as equity capital to the
Partnership. The Partnership will then own the Real Property, and design,
construct, and market the Development. The General Partner and Limited
Partners will, as a result of such services and capital contribution, share in
the income, losses, and cash earned by the Partnership.
G. The name, address, capital contribution and interest in income/losses of
each Partner of the Partnership is set forth on Exhibit B hereto.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the parties hereto agree as follows:
<PAGE> 2
ARTICLE I
DEFINITIONS
Unless otherwise expressly provided herein or unless the context otherwise
requires, the following terms are hereby defined as follows:
1.01 "Adjusted Invested Capital" of a Partner shall mean the "Invested
Capital" of a Partner which is the total amount of Capital contributed to the
Partnership as set forth in Sections 4.01 and 4.02 hereof, increased by the
value of all additional contributions to Partnership Capital thereafter made by
the Partner and reduced by the value of all Distributions thereafter made to
the Partner pursuant to either Section 5.03(b)(iii) or Section 5.03(b)(iv)
hereof; provided, however, that a Partner's Adjusted Invested Capital shall not
be reduced below Zero Dollars ($0).
1.02 "Affiliate" shall mean: (i) Any Person directly or indirectly
controlling, controlled by or under common control with another Person; (ii)
Any Person owning or controlling Ten Percent (10%) or more of the outstanding
voting securities of such other Person; and (iii) Any Person who is an officer,
director or partner of a company, corporation, association and/or partnership.
1.03 "Assignee" shall mean a Person who has acquired a beneficial interest of
any type in the Partnership from a third party, including a Partner or his
Assignee, but who has not yet become a Substitute Limited Partner as provided
in Section 8.03 hereof.
1.04 "Bankruptcy" shall mean the institution of any proceedings on behalf of
a Person under federal or state law for the relief of debtors, including the
filing of a voluntary or involuntary petition in bankruptcy, or the
adjudication as insolvent or bankrupt, or the assignment of the Person's
property for the benefit of creditors, or the appointment of a receiver,
trustee or a conservator of any substantial portion of the Person's assets, or
the seizure by a sheriff, receiver, trustee or conservator of any substantial
portion of the Person's assets, and the failure in the case of any of the
foregoing events to obtain the dismissal of the proceedings or removal of the
receiver, trustee or conservator or the recovery of the seized assets within
ninety (90) days from the occurrence of any of the above-listed events.
1.05 "Capital" shall mean the money and/or property contributed to the
Partnership by a Partner in exchange for his Percentage Interest in the
Partnership.
1.06 "Capital Account" shall mean the account maintained by the Partnership
for each Partner as part of the Partnership's internal records. Each Partner's
Capital Account shall be credited with the amount of that Partner's Original
Invested Capital, with the amount of each subsequent contribution of Capital
and with the amount of that Partner's share of Net Income allocated to that
Partner. Each Partner's Capital Account shall likewise be debited in the
amount of each Distribution made to a Partner (provided, however, that any
Distribution of an asset (other than cash) to a Partner shall result in a
reduction in such Partner's Capital Account in an amount equal to the Gross
Asset Value of the distributed asset net of liabilities secured by such asset
that the Partner is considered to assume or take subject to under Section 752
of the Code) and with the amount of that Partner's share of Net Loss allocated
to that Partner. It is the intent of the Partnership to maintain Capital
Accounts in accordance with Regulations Section 1.704-1(b)(2)(iv) and,
accordingly, all Capital Accounts shall be adjusted in any manner necessary to
conform to Regulations Section 1.704-1(b)(2)(iv).
1.07 "Cash Available For Distribution" shall mean the excess of Partnership
cash, including but not limited to, cash realized from Partnership operations,
from the sale or refinancing of Partnership assets, and/or from any and all
loans made to the Partnership, over: (i) cash required to satisfy incurred
Operating Expenses and (ii) the Working Capital Reserve.
1.08 "Code" shall mean the Internal Revenue Code of 1986, as amended, or
corresponding provisions of subsequent, superseding revenue laws.
<PAGE> 3
1.09 "Development" shall mean the One Hundred and Sixty-six (166)
single-family, detached homes to be constructed by the Partnership on the Real
Property and all other on-site and off-site improvements related thereto.
1.10 "Distribution" shall mean the cash or other property distributed to a
Partner from or on behalf of the Partnership as a result of his interest in the
Partnership. "Cash Distribution" shall mean a Distribution consisting only of
the lawful money of the United States.
1.11 "General Partner" shall mean Inco Homes Corporation, a Delaware
corporation or any other Person who shares with, or succeeds to, its capacity
as the general partner of the Partnership.
1.12 "Gross Asset Value" means, with respect to any asset, the asset's
adjusted basis for federal income tax purposes, except as follows: (a) The
initial Gross Asset Value of any asset contributed by a Partner to the
Partnership shall be the gross fair market value of such asset, as determined
by the contributing Partner and the Partnership; (b) The Gross Asset Value of
all Partnership assets shall be adjusted to equal their respective gross fair
market values, as determined by the General Partner, as of the following times:
(i) the acquisition of an additional interest in the Partnership by any new or
existing Partner after the formation of the Partnership in exchange for more
than a de minimis Capital contribution; (ii) the distribution by the
Partnership to a Partner of more than a de minimis amount of Partnership assets
as consideration for an interest in the Partnership; and (iii) the liquidation
of the Partnership within the meaning of Regulations Section 1.704-
1(b)(2)(ii)(g); provided, however, that adjustments pursuant to clauses (i) and
(ii) above shall be made only if the General Partner reasonably determines that
such adjustments are necessary or appropriate to reflect the relative economic
interests of the Partners in the Partnership; (c) The Gross Asset Value
of any Partnership asset distributed to any Partner shall be the gross fair
market value of such asset on the date of distribution; and (d) The Gross Asset
Value of the Partnership assets shall be increased (or decreased) to reflect
any adjustments to the adjusted basis of such assets pursuant to Section 734(b)
and 743(b) of the Code, but only to the extent that such adjustments are taken
into account in determining Capital Accounts pursuant to Regulations Section
1.704-1(b)(2)(iv)(m); provided, however, that Gross Asset Values shall not be
adjusted pursuant to this paragraph (d) to the extent that the General Partner
determines that an adjustment pursuant to paragraph (b) of this definition is
necessary or appropriate in connection with a transaction that would otherwise
result in an adjustment pursuant to this paragraph (d).
If the Gross Asset Value of any asset has been determined or adjusted pursuant
to paragraphs (a), (b) or (d) hereof, such Gross Asset Value shall thereafter
be adjusted by the Depreciation (defined in Section 1.14(d) hereof) taken into
account with respect to such asset for purposes of computing Net Income and Net
Loss under Section 1.14 hereof.
1.13 The "Limited Partner" or "Limited Partners" shall mean either
individually or collectively Julia Construction, Inc., a California
corporation, Mr. Fred E. Liao, and Mr. Bob C. Chang.
1.14 "Net Income" and "Net Loss" shall mean, for each fiscal year or other
period, an amount equal to the Partnership's taxable income or loss for such
year or period, determined in accordance with Section 703(a) of the Code (for
this purpose, all items of income, gain, loss, or deduction required to be
stated separately pursuant to Section 703(a)(1) of the Code shall be included
in taxable income or loss), with the following adjustments: (a) Any income of
the Partnership that is exempt from federal income tax and not otherwise taken
into account in computing Net Income or Net Loss pursuant to this Section 1.14
shall be included in computing such Net Income or Net Loss; (b) Any
expenditures of the Partnership described in Section 705(a)(2)(B) of the Code
or treated as Section 705(a)(2)(B) expenditures pursuant to Regulations Section
1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Net
Income or Net Loss pursuant to this Section 1.14, shall be subtracted in
computing such Net Income or Net Loss; (c) Gain or loss resulting from any
disposition of an asset of the Partnership shall be computed by reference to
the Gross Asset Value of the asset disposed of notwithstanding that the
adjusted tax basis of such asset differs from its Gross Asset Value; (d) In
lieu of the depreciation, amortization, and other cost recovery deductions
taken into account in computing such taxable income or loss, there shall be
taken into account Depreciation (as defined in the following sentence) for such
fiscal year or other period, computed in the following manner. "Depreciation"
for each fiscal year or other period, shall be an amount equal to the
depreciation, amortization, or other cost recovery deduction allowable for
federal income tax purposes with respect to an asset for
<PAGE> 4
such year or other period, except that, if the Gross Asset Value of an asset
differs from its adjusted tax basis for federal income tax purposes at the
beginning of such year or other period, Depreciation shall be an amount that
bears the same ratio to such beginning book value as the federal income tax
depreciation, amortization, or other cost recovery deduction for such year or
other period bears to such beginning adjusted tax basis and if such adjusted
tax basis is zero, the Depreciation shall be based on the method of
depreciation utilized in preparing the financial statements of the Partnership;
and (e) In the event the Gross Asset Value of any Partnership asset is adjusted
pursuant to Section 1.14(b) or (c) above, the amount of such adjustment shall
be taken into account as gain or loss from the disposition of such asset for
purposes of computing Net Income or Net Loss.
1.15 "Net Sales Price of Homes" shall mean the gross sales price of a home or
homes in the Development less all discounts and allowances.
1.16 "Operating Expenses" shall mean all direct and indirect costs and fees to
construct and market the Development and all other costs, expenses, trade
payables, fees, including management and other fees, paid to all Persons for
the day-to-day operation, management and administration of the Partnership.
Operating Expenses shall, to the greatest extent allowable, be expensed in the
year incurred on the Partnership's income tax returns.
1.17 "Original Invested Capital" and "Invested Capital" shall mean the amount
of Capital originally contributed to the Partnership by the Partners as set
forth in Sections 4.01 and 4.02 hereof.
1.18 "Partners" shall collectively refer to both the General Partner and the
Limited Partners, and reference to a "Partner" shall be to any one of the
Partners.
1.19 "Partnership", shall mean the California limited partnership created
pursuant to this Agreement.
1.20 "Percentage Interest" shall mean the interest of a Partner in the
Capital, Net Income, Net Losses and Distributions of the Partnership as set
forth herein.
1.21 "Person" shall mean an individual or a legal entity, including, but not
limited to, a partnership, corporation, trust or association.
1.22 "Real Property" shall mean that certain real property described in
Recital B hereof on which the Partnership intends to construct the Development.
1.23 "Revised Act" shall mean California Corporations Code Sections
15611-15723, inclusive, more generally known as the California Revised Limited
Partnership Act.
1.24 "Regulation" shall mean Treasury Regulations.
1.25 "Working Capital Reserve" shall mean Partnership cash from all sources in
an amount as determined by the General Partner that is reasonably necessary to
fund the current Operating Expenses plus an amount reasonably estimated by the
General Partner as necessary to satisfy the obligations and contingencies
expected to mature or accrue in the immediate future based upon the operations
of the Partnership conducted in the ordinary course of business.
ARTICLE II
FORMATION OF THE PARTNERSHIP
2.01 Formation of the Partnership. (a) The Partners hereby form the
Partnership pursuant to the Revised Act. Unless otherwise specifically
provided herein, the terms and provisions of the Revised Act shall control the
formation, operation and administration of the Partnership. (b) Following the
execution hereof, the General Partner shall take all action required under the
Revised Act to properly form the Partnership as a limited partnership under the
laws of California, including particularly, but not limited to, the completion,
execution and filing of a Certificate
<PAGE> 5
of Limited Partnership, Form LP-1, with the California Secretary of State. (c)
Upon the formation of the Partnership, each Partner shall have all of the
rights, liabilities, obligations and responsibilities of either a general
partner or a limited partner, as the case may be, as provided under the Revised
Act and other pertinent laws of California.
2.02 Name of the Partnership. The name of the Partnership shall be
"FREEDOM-EAGLE RANCH HOUSING PARTNERS, A CALIFORNIA LIMITED PARTNERSHIP," or
such other name as allowed under California law as may be selected by the
General Partner from time to time.
2.03 Principal Office and Place of Business. The principal office and place of
business of the Partnership shall be 1282 West Arrow Highway, Suite 200,
Upland, California 91786, or such other place as may be selected by the General
Partner from time to time. The General Partner shall immediately notify the
Limited Partners of any change in the location of the principal office or place
of business of the Partnership.
2.04 Term of the Partnership. (a) The term of the Partnership shall commence
on the date hereof and shall continue until the dissolution of the Partnership
which shall occur upon the earliest of the following events: (i) The election
to dissolve by both the General Partner and the Limited Partners; (ii) The sale
of all or substantially all of the assets of the Partnership and the
distribution of the net proceeds therefrom to the Partners; (iii) The removal,
bankruptcy, incompetency or dissolution of the then last remaining general
partner of the Partnership; or (iv) December 31, 2016. (b) The occurrence of
any of the events set forth in Section 2.04(a) above shall automatically cause
a dissolution of the Partnership and of the relationship between the Partners
created hereunder pursuant to the Revised Act. The Limited Partners
nevertheless may, upon the occurrence of any of these events, reconstitute the
business of the Partnership in a new limited partnership on the same terms as
this Agreement and with a new general partner selected by the affirmative vote
of the Limited Partners who then own a majority Percentage Interest of all
Limited Partners in the Partnership. Expenses incurred in the reformation, or
attempted reformation, of the Partnership shall be deemed Operating Expenses of
the Partnership.
2.05 Relationship of the Partners. The relationship between the parties
hereto is solely as partners in the Partnership which is being formed pursuant
hereto only for the purpose described in Section 3.01 hereof. The parties
hereto do not intend to be, nor shall they be construed to be, by estoppel or
any other fact or legal doctrine, a legal entity of any other kind or formed
for any purpose other than as a partnership formed for the purpose set forth in
the preceding sentence, nor shall any Partner have any right or power to commit
or bind or make liable any other Partner for any other purpose or to any
greater extent than as set forth herein. Accordingly, the Partners may engage
in or possess interests in other businesses of every kind and description,
including real estate developments which may or may not compete with the
Partnership and/or any other Partner, and no Partner shall have any rights
based on this Agreement to participate in or in any way limit, restrict or
control or share in any such other business of any other Partner.
2.06 Title to Assets. Title to all assets of the Partnership shall be held in
the Partnership's name.
ARTICLE III
PURPOSE OF THE PARTNERSHIP
3.01 Purpose of the Partnership. The sole purpose of the Partnership is to
acquire title to the Real Property from Inco Homes, to obtain all of the
necessary entitlements to the Real Property required to be allowed under
appropriate law to construct the Development thereon, and then for the
Partnership to plan, finance, design, and construct the Development and sell
the completed houses for such prices and on such terms and conditions as the
General Partner reasonably believes will earn the maximum profit reasonably
obtainable for the Partners.
ARTICLE IV
CAPITAL CONTRIBUTIONS
4.01 Capital Contribution of the General Partner. The General Partner shall
contribute to the Partnership all of its rights to the Real Property and shall,
to the extent that it is legally able or practical to do so, shall also
contribute to
<PAGE> 6
the Partnership (by assignment or other appropriate form of conveyance) all of
its respective right, title and interest in all of the maps, drawings, plans,
rights, approvals, entitlements, fees, documents and all other tangible and
intangible property and rights pertaining to the Real Property and its
improvement as the Development. As a result of such contributions, the General
Partner shall be given a credit to its Capital Account equal to the sum of the
following (which sum shall be deemed to be Inco Homes Invested Capital): (a) In
consideration for contributing the Real Property to the Partnership, the sum of
Seven Hundred Twenty-Two Thousand Eight Hundred and Seventy-Three Dollars
($722,873.00) less the amount of any outstanding loans secured by the Real
Property on the date the Real Property is deeded by the General Partner to the
Partnership; plus (b) The costs of the improvements made by the General Partner
to the Real Property up to the date the Real Property is deeded by the General
Partner to the Partnership.
4.02 Capital Contribution of the Limited Partners. The Limited Partners shall
as a group contribute to the Partnership on the date of this Agreement but in
no event later than May 10, 1996, the sum of Nine Hundred Thousand Dollars
($900,000) in the lawful money of the United States (which amount is deemed to
be their Invested Capital). Each of the Limited Partners agrees to
respectively contribute the following amount of Capital to the Partnership:
<TABLE>
<CAPTION>
Partner Amount
<S> <C>
Julia $700,000
Mr. Liao $100,000
Mr. Chang $100,000
Total $900,000
</TABLE>
4.03 Interest on Capital Contributions. Other than the preferred return set
forth in Section 5.03(b)(ii) hereof, no Partner shall receive any interest on
his Capital contributions to the Partnership.
4.04 Loans From Partners. Any Partner may, with the approval of the General
Partner, lend any funds to the Partnership necessary for its operation, which
loans shall be on such terms and conditions as are typical for the loan
provided, but such loan shall not bear interest that exceeds the highest legal
rate; provided, however, except as provided below, no Partner has any
obligation to make any such loan. In the event that the Partnership needs
additional funds in excess of the Capital Contributions from the Partners and
the available debt financing from third party institutions, Inco Homes agrees
to loan such funds to the Partnership on such terms and conditions and for such
rate of interest as are typical for such loans.
4.05 Return of Capital Contributions. No Partner may withdraw any Capital
from the Partnership and no Partner shall be entitled to the return of his
contributions to Capital to the Partnership except as provided in Section 5.03
during the term of the Partnership or in Section 9.03 upon the dissolution of
the Partnership. Furthermore, the General Partner shall not be liable for the
return of the Capital of any Limited Partner. Any return of Capital to any
Partner shall be made solely from Partnership assets and once such Capital is
returned to a Partner, such Partner shall have no further obligation to again
contribute same to the Partnership.
<PAGE> 7
ARTICLE V
INCOME/LOSSES AND CASH DISTRIBUTIONS
5.01 Accountings. As soon after the close of each fiscal year as is
reasonably practical (not to exceed 90 days), an annual accounting shall be
made with respect to the affairs of the Partnership for, and as of, the end of
such fiscal year. Upon such accounting being made, the Net Income earned or
Net Loss incurred by the Partnership during such fiscal year shall be
ascertained and shall then be credited or debited, as the case may be, on the
books of the Partnership to each Partner's respective Capital Account in the
proportion that each Partner shares in Partnership Net Income and Net Losses.
5.02 Allocation of Income and Losses. Net Income, Net Losses, tax credits and
other items shall be allocated among the Partners as follows: (a) Net Losses of
the Partnership shall initially be allocated as follows:
<TABLE>
<CAPTION>
Partner Interest in Net Losses
<S> <C>
Inco Homes 1.0%
Limited Partners (as a group) 99.0%
Total 100.0%
</TABLE>
Net Losses shall be allocated to each Limited Partner in the ratio that their
respective Capital bears to the total Capital of all Limited Partners (see
Exhibit B hereto). The Net Losses allocated pursuant to this Section 5.02(a)
shall not exceed the maximum amount of Net Losses that can be so allocated
without causing any Limited Partner who is not a General Partner to have a
Capital Account deficit at the end of any fiscal year after giving affect to
the following adjustments: (i) credit to such Capital Account the amount which
such Limited Partner is obligated to restore (pursuant to the terms of this
Agreement or under applicable law) or deemed obligated to restore under the
Regulations published under Section 704(b) of the Code and (ii) debit to such
Capital Account the items described in Regulations Section 1.704-
1(b)(2)(ii)(4), (5) and (6). All Net Losses in excess of such limitation shall
be allocated to the General Partner. To the extent that Net Losses are
incurred after an allocation of Net Income has been made pursuant to Section
5.02(c) hereof, such Net Loss shall first be allocated so as to reverse the
effect of the allocation of Net Income on the Capital Accounts of the Partners
who have received such allocations on a "last in, first out" basis, and
thereafter such additional Net Losses shall be allocated pursuant to this
Section 5.02(a). (b) Net Income of the Partnership shall initially be
allocated in the same percentages as set forth in Section 5.02(a) until such
time as, the prior Net Losses of the Partnership, if any, shall be restored
pursuant to this Section 5.02(b) (see Exhibit B hereto). (c) After the
allocations provided in Section 5.02(b) hereof have been made, Net Income shall
thereafter be allocated among the Partners as follows: (i) First, 100% to the
Partners, until each Partner has been allocated pursuant to this Section
5.02(c)(i) an amount equal to such Partner's current and accrued Distributions
pursuant to Section 5.03(b)(ii) through and including the date of
determination; and (ii) Thereafter,
<TABLE>
<CAPTION>
Partner Interest in Net Income
<S> <C>
Inco Homes 50.0%
Limited Partners (as a group) 50.0%
Total 100.0%
</TABLE>
Net Income shall be allocated to each Limited Partner in the ratio that their
respective Capital bears to the total Capital of all Limited Partners (see
Exhibit B hereto). (d) All payments made pursuant to Section 6.07(a) and
Section 6.07(b) hereof shall be treated as guaranteed payments described in
Section 707(c) of the Code.
5.03 Cash Distributions. (a) Not less often than within fifteen (15) days
after the end of each calendar quarter, the General Partner shall distribute to
the Partners in the amounts and proportions as hereinafter provided (and as
appropriate debit such Distributions from their respective Capital Accounts)
all Cash Available For Distribution. Once distributed, such cash shall be the
property of the Partners and need not be returned, loaned or recontributed to
the Partnership. (b) Cash Available For Distribution shall be distributed to
the Partners in the following amounts and order: (i) First, to repay in full
any and all loans made to the Partnership by a Partner; (ii) Next, One Hundred
Percent (100%) to the Partners as preferred return until each Partner has
received Cash Distributions pursuant to this Section 5.03(b)(ii) in an amount
equal to Ten Percent (10%) per annum of their Invested Capital (as set forth in
<PAGE> 8
Sections 4.01 and 4.02 hereof); (iii) Next, One Hundred Percent (100%) to
Inco Homes in the amount equal to its respective Invested Capital, (as set
forth in Section 4.01 hereof) until all of said Capital has been returned in
full; (iv) Next, One Hundred Percent (100%) to the Limited Partners pro-rata
until each Limited Partner has received an amount equal to all of its
respective Invested Capital (as set forth in Section 4.02 hereof); and (v)
Then, with respect to all future Cash Available For Distribution, the balance
of said cash shall be distributed pro-rata to each Partner as follows:
<TABLE>
<CAPTION>
Inco Homes 50.000%*
<S> <C>
Julia 38.900%
Mr. Liao 5.550%
Mr. Chang 5.550%
Total 100.000%
</TABLE>
* This profit distribution to Inco Homes is subject to the guarantee set forth
in Section 6.04(g)(2).
(c) The Partnership is authorized to withhold from Distributions (including
Distributions pursuant to Section 9.03 hereof) any amount required to be
withheld under applicable federal and state statutes, rules and regulations.
Any amounts withheld from Distributions shall be treated as distributed to the
Partner on whose behalf the withholding was made.
ARTICLE VI
GENERAL PARTNER
6.01 General Partner. The Partnership shall initially have only one (1)
general partner, Inco Homes Corporation, a Delaware corporation. The
Percentage Interest owned by the General Partner is set forth on Exhibit B
hereto.
6.02 Management of the Partnership. The General Partner shall, subject to the
limitations hereinafter set forth, have full, complete and exclusive discretion
and authority to manage and control the business and affairs of the Partnership
for the purpose herein stated. In so doing the General Partner shall take all
actions reasonably necessary and appropriate to conduct the business and
affairs of the Partnership as a reasonable, prudent businessman would conduct
his own affairs. The General Partner shall devote as much of its time and the
time of its personnel as is necessary to manage the business and affairs of the
Partnership on a first-class basis and shall take all actions reasonably
necessary and appropriate to foster, protect and promote the interest of the
Limited Partners as a group.
6.03 Authority of the General Partner. (a) The General Partner shall have the
authority to take and perform any and all acts that the Partnership and the
general partner of a California limited partnership, formed and operated under
the Revised Act, are authorized to take and perform, including, but not limited
to: (i) Borrow money and issue evidences of indebtedness for the purpose of
obtaining such funds as may be required to permit the Partnership to achieve
the purpose of the Partnership as set forth in Section 3.01 hereof and to
timely to meet its obligations as may arise from time to time; (ii) Acquire,
hold, own, maintain, sell, transfer, convey, encumber, assign, exchange or
otherwise dispose of the Partnership assets, including the Real Property and
all interests therein; (iii) Enter into, execute and carry out Partnership
contracts and agreements and any and all other documents and instruments; (iv)
Operate, manage and protect all Partnership property and assets, and hire or
retain qualified personnel or professionals as are necessary in connection
therewith; (v) Institute and/or defend any actions at law or equity; and (vi)
Do any and all other acts and things necessary or proper in furtherance of the
Partnership business, including but not limited to achieving the Partnership
purpose as set forth in Section 3.01 hereof, which are allowed hereunder or by
law. (b) Notwithstanding anything herein to the contrary, the General Partner
shall have no authority to do any of the following without the prior written
consent of the Limited Partners who own a majority of the Percentage Interest
owned by all Limited Partners: (i) Take any action that is in contravention
of the specific terms, provisions and authorities provided and granted
hereunder or by law; (ii) Take any action or fail to take any action, as and
when required, the effect of which would materially adversely affect or make it
impossible to carry on the business of the Partnership; (iii) Admit a Person
as a general partner of the Partnership; or (iv) Amend this Agreement in any
respect.
<PAGE> 9
6.04 Representations and Warranties and Affirmative Covenants of the General
Partner. As a material condition for the Limited Partners to enter into this
Agreement, the General Partner hereby represents and warrants to, and agrees
with, the Limited Partners as follows: (a) Promptly following the execution
hereof the General Partner shall deed the Real Property to the Partnership and
shall assign to the Partnership all other ancillary rights with respect
thereto. (b) Title to the Real Property shall be subject only to such liens,
encumbrances and exceptions which have been reviewed and approved by the
Limited Partners and which the General Partner represents and warrants will not
have any materially adverse affect on the Partnership constructing and selling
the Development in the time and manner projected by the General Partner. (c)The
General Partner has, to the extent that it is legally able to, or it is
practical to do so, concurrently herewith assigned to the Partnership, and by
this Section 6.04(c) hereby assigns to the Partnership, all of its right, title
and interest in and to all maps, drawings, plans, rights, fees, documents and
any and all other tangible and intangible property pertaining to the Real
Property and the right to construct and market the Development. (d) The General
Partner reasonably believes that it has all of the personnel, knowledge,
expertise, financing and resources necessary to construct and market the
Development on a first-class, highly professional basis. The General Partner
shall contribute to the Partnership on a non-exclusive basis the time,
personnel (including, as necessary, the services of Mr. Norris) and resources
necessary to construct the Development in a diligent, efficient, cost
effective, and highly professional basis and to finance and market same in a
manner that the General Partner believes will earn the maximum profit
reasonably obtainable for the Partners. (e) The General Partner shall use its
reasonable best efforts to timely construct, or cause to be constructed, the
Development and all on-site and off-site improvements related thereto: (i) In
a reasonably commercial workmanlike manner using subcontractors who have the
reputation of constructing a high quality work product consistent with both the
General Partner's standards for quality and workmanship; and (ii) By using
such materials that in all ways substantially comply with plans and
specifications and that equal or, if necessary, exceed code requirements, and
using its reasonable commercial efforts to cause the improvements constituting
the Development to not have any material defects as a result of the materials
used to construct same. (f) The General Partner shall obtain all acquisition,
development, construction and other financing necessary to construct and sell
the Development. To the extent such financing is not available from third
party financial institutions on terms and conditions reasonably acceptable to
the General Partner, the General Partner agrees to provide such financing to
the Partnership on the terms and conditions that are typical at the time for
the financing provided. (g) Attached hereto as Exhibit C is a copy of the
Budget Report for Freedom-Eagle Ranch prepared by Inco Homes dated March 25,
1996 (the "Proforma" herein). The Proforma is only a reasonable projection of
what the General Partner expects based on current economic conditions.
However, the General Partner hereby agrees to provide the following guarantees
to the Limited Partners: (1) The projected sales prices of the three models
planned for the Development are $106,990, $113,990, and $124,990 for homes that
are 1,515 sq. ft., 1,666 sq. ft., and 1,895 sq. ft., respectively. The General
Partner agrees not to lower the projected base sales prices for these
respective homes by more than Five Percent (5%) without the approval of the
Limited Partners who own a majority Percentage Interest of all Limited
Partners. Also, the General Partner agrees that as long as it sells houses in
the Development for no more than the above-projected sales prices, the average
base sales prices of all other houses being sold by the General Partner in its
Eagle Ranch master planned community shall be greater than One Hundred and Ten
Percent (110%) of the average base sales prices of houses in the Development.
Notwithstanding the foregoing, in the event the General Partner, based on sales
and other valid business factors, reasonably believes that it is in the best
interest of the Limited Partners to raise the sales prices of the houses in the
Development, it may do so in which event the above-described One Hundred and
Ten Percent (110%) average price differential guarantee shall terminate and be
of no further force or effect. Also, this guarantee shall automatically
terminate upon the sale of the One Hundred and Twenty-Fifth (125th) home in the
Development. (2) The direct construction cost projected for the houses in the
Development is set forth on the attached Proforma under Costs-Direct
Construction. The General Partner guarantees to the Limited Partners that the
Direct Construction Costs for the houses shall not, without the consent of the
Limited Partners who own a majority Percentage Interest of all Limited
Partners, exceed One Hundred and Ten Percent (110%) of the projected
construction costs set forth on the Proforma, except for increases in the cost
of lumber, concrete, drywall, copper and oil-based products, strikes or other
labor shortages and acts of God, all of which are specifically excluded from
this guarantee and any Direct Construction Cost increases caused by any of
these factors shall not be the responsibility of the General Partner. However,
in the event the Direct Construction Costs exceed the projected costs for any
reason except for the excluded reasons noted above, the General Partner shall
distribute pro-rata to the Limited Partners Fifty Percent (50%) of such excess
Direct Construction Costs in cash from the profit distribution it would have
received from the Partnership under Section 5.03(c)(v).
<PAGE> 10
6.05 Delegation of Authority. The General Partner may delegate any or all of
its powers, rights and obligations hereunder but not its responsibilities. The
General Partner, therefore, may appoint, employ, contract or otherwise deal
with any Person for the transaction of the Partnership business and said Person
may perform any acts or services for the Partnership.
6.06 Compensation of General Partner and Reimbursement of Certain Costs of the
General Partner. (a) The General Partner shall be paid no fee or compensation
as a result of the formation of the Partnership. After the payment of all
costs and expenses of the Partnership (including the costs and expenses set
forth in Section 6.07(a) and 6.07(b) hereof) as total compensation for its
services as the General Partner of the Partnership, the General Partner shall
receive the interest in Net Income and Net Losses as set forth in Section 5.02
hereof and the interest in Distributions, particularly Cash Distributions, as
set forth in Section 5.03(b) hereof. (b) To reimburse the General Partner for
the overhead and administrative costs and expenses it will incur to construct
and sell the Development, irrespective of the actual costs and expenses
incurred, the General Partner shall be entitled to receive an Overhead
Reimbursement Draw from the Partnership in the amount of Four Percent (4%) of
the actual Net Sales Price of the Homes in the Development. Said Overhead
Reimbursement Draw may be payable in advance of such sales from cash available
from the construction loan or other Partnership cash or financing, with the
amount of such Draw payable in monthly installments from such sources pro-rated
on the basis of time over the projected life of the Development (30 months) and
computed on the basis of the total projected total Net Sales Price of all of
the homes in the Development and with the balance of such Draw payable from
cash realized by the Partnership from the actual closing of the sale of the
homes in the Development.
6.07 Partnership Expenses. The Partnership shall pay all direct costs and
expenses which it reasonably incurs to third parties in furtherance of the
business and affairs of the Partnership and to those persons and entities who
are employed by and/or affiliated with the General Partner or any Limited
Partner who perform their services exclusively on the Real Property and
exclusively for the benefit of the Partnership to construct and/or market the
Development, including, but not limited to the following which shall be deemed
to be for income tax purposes "guaranteed payment expenses" of the Partnership:
(a) An amount equal to Thirty-Six Thousand Dollars ($36,000). This amount
shall be paid at such time as the Partnership receives all of the Capital
Contribution of the Limited Partners pursuant to Section 4.02 hereof and said
amount shall be split equally (50% - 50%) between Fred E. Liao and Bob C. Chang
for services rendered to the Partnership; and (b) An amount equal to One
Percent (1.0%) of the Net Sales Price of the Homes. This amount shall be paid
at the close of the sale escrow of each house in the Development based on the
actual Net Sale Price of said House and said amount shall be split equally (50%
- - 50%) between Fred E. Liao and Bob C. Chang for services rendered to the
Partnership.
6.08 Resignation, Bankruptcy, Dissolution, or Removal of the General Partner.
(a) The General Partner may not resign such position without the prior written
approval of the Limited Partners which approval may be withheld in the sole
discretion of the Limited Partners. (b) Upon the bankruptcy, dissolution or
removal of the General Partner, the Partnership shall nevertheless continue in
full force and effect provided that either (i) the Partnership still has at
least one (1) general partner or (ii) the Limited Partners who own a majority
Percentage Interest of all Limited Partners consent to the continuation of the
Partnership and elect a new general partner so that the Partnership has at
least one (1) general partner. (c) The General Partner may be removed by the
affirmative vote of the Limited Partners who own a majority Percentage Interest
of all Limited Partners only for "cause" (fraud, mismanagement, breach of
fiduciary duty and any other matter which materially adversely affects the
ability of the General Partner to perform its duties hereunder but "cause"
shall not include any action or decision which the General Partner does or
makes in good faith as part of the day-to-day operations of the Partnership).
Notice of such removal shall be served on the General Partner either by
certified or by registered mail, return receipt requested, or by personal
service. The notice shall, among other things, set forth the specific reasons
or causes for such removal and the effective date of the removal.
Notwithstanding the foregoing, the General Partner shall, after receipt of the
notice, be given a reasonable period of time to correct any and all such
deficiencies which caused the vote for its removal and to thereby return to
compliance hereunder. (d) If the General Partner is allowed to resign or
becomes bankrupt, is dissolved, or is removed, it shall automatically have its
Percentage Interest in the Partnership converted to that of a Limited Partner;
provided, however, said Percentage Interest shall be reduced in the amount and
to the extent the Partnership must pay or expend funds to compensate the new
general partner to perform the services of the General
<PAGE> 11
Partner who has resigned, become bankrupt, dissolved or removed, and, if the
General Partner is in default hereunder, its Percentage Interest shall be
further reduced to compensate and reimburse the Partnership and/or the Limited
Partners for all reasonable loss, costs and damages caused thereby.
6.09 Other Investment Opportunities. Except as otherwise expressly set forth
herein, provided that the General Partner at all times exercises its fiduciary
duties to the Limited Partners to reasonably maximize their profits earned from
the construction and sale of the Development, the General Partner shall be free
to engage in other businesses of any type, including real estate, and may
engage in other enterprises and businesses, including those in competition with
the Partnership, and need not offer such business opportunities to the
Partnership or to the Limited Partners and may take advantage of those
opportunities for its own account or for the account of other partnerships or
enterprises with which it is associated. Accordingly, neither the Partnership
nor any other Partner shall have the right to any income or profit earned by
the General Partner from any such other enterprise or opportunity in which it
participates.
6.10 Release of the General Partner. THE PARTNERSHIP AND THE LIMITED PARTNERS
EACH HEREBY RELEASE AND FORGIVE THE GENERAL PARTNER FOR ANY LOSS, DAMAGE, OR
LIABILITY INCURRED OR SUFFERED BY THE PARTNERSHIP OR BY THE LIMITED PARTNERS
CAUSED OR DUE TO THE GENERAL PARTNER ACTING IN SUCH CAPACITY FOR THE
PARTNERSHIP, OR IN ANY WAY CONNECTED WITH THIS AGREEMENT, THE FORMATION OF THE
PARTNERSHIP (INCLUDING ANY ALLEGED VIOLATION OF FEDERAL OR STATE SECURITIES
LAWS) OR THE LIKE.
6.11 Indemnification of the General Partner. THE GENERAL PARTNER SHALL BE HELD
HARMLESS AND INDEMNIFIED BY THE PARTNERSHIP FOR ANY LIABILITY OR LOSS TO THIRD
PARTIES SUFFERED BY THE PARTNERSHIP, OR BY THE GENERAL PARTNER INDIVIDUALLY,
INCURRED BY VIRTUE OF IT ACTING AS THE GENERAL PARTNER FOR THE PARTNERSHIP;
PROVIDED, HOWEVER, SUCH INDEMNIFICATION SHALL NOT APPLY WITH RESPECT TO ANY
ACTION OR INACTION OF THE GENERAL PARTNER WHERE THE COURT DETERMINES THAT THE
GENERAL PARTNER WAS ACTING FRAUDULENTLY, IN BAD FAITH, OR WAS GROSSLY
NEGLIGENT.
ARTICLE VII
LIMITED PARTNERS
7.01 The Limited Partners. (a) The Partnership shall initially have the
Limited Partners whose names are subscribed on the signature page hereof and
who have agreed to contribute the Invested Capital to the Partnership as set
forth in Section 4.02 hereof and who own the Percentage Interest set forth next
to their name on Exhibit B hereto.
7.02 Management and Control. The Limited Partners shall, except as allowed
under the Revised Act or as provided hereunder, specifically in Sections
6.03(b) and 7.03 hereof, take no part in or interfere in any manner with the
management, conduct or control of the Partnership business and shall have no
right, power or authority to act for or bind or obligate the Partnership in any
manner whatsoever. Notwithstanding the foregoing, if the General Partner has
been removed and the Partnership has been dissolved, the Limited Partners may,
as allowed under the Revised Act, act for and bind the Partnership during the
winding up period.
7.03 Voting Rights. The Limited Partners who own a majority Percentage
Interest of all Limited Partners (unless the Revised Act requires approval of a
larger percentage of Limited Partners in which event the vote required under
the Revised Act shall control) shall, as allowed by the Revised Act, have the
right to approve (or disapprove) all matters allowed to be approved (or
disapproved) by limited partners under the Revised Act including, but not
limited to, the following Partnership matters before the General Partner
initiates such specified act (unless a different approval and/or authorization
is specifically provided hereunder in which event the terms of this Agreement
shall control): (a) The dissolution and winding up of the Partnership; (b) The
sale, exchange, lease, or other transfer of all or substantially all of the
assets of the Partnership, other than the sale of single family houses in the
Development in the ordinary course of Partnership business which action is
within the sole discretion and control of the General Partner; (c) A change in
the nature and/or purpose of the Partnership's business, including the purchase
by the Partnership of any additional real property; (d) Transactions in which
the General Partner has an
<PAGE> 12
actual or potential conflict of interest with either the Limited Partners or
the Partnership; (e) The removal of the General Partner which the Limited
Partners may do but only if they do so in compliance with Section 6.08(c)
hereof; and (f) The election of a successor general partner if the General
Partner is removed by the Limited Partners pursuant to Section 6.08(c) hereof,
or the election of an additional general partner.
7.04 Partnership Meetings. Unless otherwise provided herein, Partnership
meetings shall be called and held in accordance with the procedures set forth
in Section 15637 of the Revised Act. Partnership meetings may only be called
by either the General Partner or by the Limited Partners who collectively own
more than Ten Percent (10%) of the Percentage Interest of the Partnership.
Partnership meetings shall be held at least quarterly at the principal office
of the Partnership or any other place within Los Angeles or San Bernardino
County, California as set forth in the notice of meeting.
7.05 Limitations on Rights of the Limited Partners. (a) The Limited Partners
shall have no right or power to: (i) Withdraw or reduce any portion of their
Adjusted Invested Capital except as a result of the dissolution of the
Partnership or as otherwise provided herein or by law; (ii) Bring an action for
any partition of the Real Property or any other real property owned by the
Partnership; (iii) Cause the termination and dissolution of the Partnership,
except as set forth in this Agreement; or (iv) Demand to receive property other
than cash in return for their Adjusted Invested Capital. (b) No Limited Partner
shall have priority over any other Limited Partner either as to the return of
his respective Adjusted Invested Capital or as to allocations of Net Income,
and Net Loss or Distributions.
7.06 Additional Limited Partners. The General Partner may, only with the prior
written consent of the Limited Partners who own a majority of the Percentage
Interest of all Limited Partners, admit additional limited partners to the
Partnership.
7.07 Death, Incompetency, Dissolution or Bankruptcy of a Limited Partner. The
death, legal incompetency, dissolution or bankruptcy of a Limited Partner shall
not terminate or in any way affect the Partnership in any manner whatsoever.
Upon the death, legal incompetency, dissolution or bankruptcy of a Limited
Partner, the personal representative, guardian, trustee or other successor in
interest of said Limited Partner shall have all of the rights of the Limited
Partner for the sole purpose of settling the estate or affairs of the Limited
Partner; provided however, that with the written consent of the General
Partner, such personal representative, guardian, trustee or other successor in
interest, or the estate of the Limited Partner, or the distributee of such
estate, may be designated as a Substitute Limited Partner in the Partnership in
the place of said Limited Partner.
7.08 Representations of the Limited Partners. Each Limited Partner, by
executing and delivering this Agreement, represents, warrants, and covenants
with the Partnership, and to and with the General Partner, that: (a) The
Limited Partner is sophisticated and experienced in business affairs and with
respect to real estate investments, understands the profit, loss and risk
potential of real estate investments, in general, and investments in the
development and sale of detached, single-family homes, in particular. (b) The
Limited Partner is acquiring its Percentage Interest for purpose of long-term
investment for its own account and for the account of its respective limited
partners. The Limited Partner recognizes and understands that the Percentage
Interest being purchased and sold hereunder has not been registered under the
Securities Act of 1933, as amended, by reason of the fact that the contemplated
transaction is exempt from registration pursuant to Regulation "D" of the
Securities Act of 1933, as amended, nor has the Percentage Interest been
qualified under the California Securities Law of 1968 pursuant to the exemption
therefrom provided under Section 25102(f) of the California Corporations Code.
To qualify for such exemptions, the Limited Partner hereby represents and
warrants that it is purchasing the Percentage Interest for its own account and
not for the purpose of distribution; that no Person other than the Limited
Partner (and its respective limited partners) owns any beneficial interest in
the Limited Partner's Percentage Interest; and that there are no contracts,
undertakings or arrangements with any Person to sell or transfer to any Person
or to have any Person sell for it all or any portion of its Percentage Interest
or to afford or allow any participation therein by any other Person. The
foregoing representations, warranties and covenants do not preclude the
existence of such rights, if any, as a Partner's spouse may have as to his
Percentage Interest under community property laws.
7.09 Power of Attorney. (a) Each Limited Partner hereby makes, constitutes and
appoints Inco Homes Corporation, a Delaware corporation as his true and lawful
attorney-in-fact, with full power and authority to act in his name and
<PAGE> 13
on his behalf with respect to the execution, acknowledgment, delivery, filing
and recording of documents pertaining to the Partnership as follows: (i) Any
documents or instruments required to receive an interest in the Partnership,
including any assignment and substitution agreement, this Limited Partnership
Agreement and any amendments to this Limited Partnership Agreement, required or
allowed under the laws of the State of California or any other state, provided
that such agreements are expressly allowed hereunder or otherwise do not
materially adversely change the rights, preferences, and privileges of the
Limited Partners hereunder. (ii) Any documents which may be required to
establish the Partnership or amend this Limited Partnership Agreement or to
effect the continuation of the partnership, the admission of an additional or
substituted limited partner or general partner or the dissolution and
termination of the Partnership, provided that such establishment, continuation,
admission, transfer or dissolution and termination is materially in accordance
with the terms of this Limited Partnership Agreement; and (iii) Any other
instrument, document, deed or lien of any type or form whatsoever that may be
required to be signed by the Partnership to further the business of the
Partnership which said attorney-in-fact deems advisable to sign, provided that
such instruments are not inconsistent with this Limited Partnership Agreement.
(b) The Power of Attorney is a special power of attorney, coupled with an
interest and is irrevocable and shall survive the death, bankruptcy,
disability, incapacity and cessation of the existence of the Limited Partner as
a legal entity. The Limited Partner hereby gives and grants to said attorney
full power and authority to do and perform all and every act and thing
whatsoever requisite, necessary or appropriate to be done in or in connection
with this power of attorney as fully to all intents and purposes as the Limited
Partner might or could do if personally present, hereby ratifying all that said
attorney shall lawfully do or cause to be done by virtue of this power of
attorney.
ARTICLE VIII
TRANSFER OF PARTNERSHIP INTERESTS
8.01 Permitted Transfer of Partnership Interests. A Partner shall have the
right without restriction to sell, assign, or transfer his Percentage Interest
or any portion thereof to any of the following: (a) To another Partner; (b) To
any immediate relative of the Transferring Partner; (c) To an inter vivos trust
primarily for the benefit of the Transferring Partner and/or any immediate
relative of the Transferring Partner; (d) By will or by testamentary trust to
any Person whatsoever.
Notwithstanding the foregoing, any Person who acquires a Percentage Interest in
the Partnership in the manner set forth in subparagraphs (a) through (d) above
shall nevertheless acquire and hold such Percentage Interest subject to the
terms of Section 8.02 hereof.
8.02 Right of First Refusal. (a) Before there can be a valid sale, assignment
or transfer ("Transfer" herein) of any or all of a Partner's Percentage
Interest in the Partnership to any Person not set forth in Section 8.01 hereof,
the Partner who desires to Transfer his Percentage Interest in the Partnership
(the "Transferring Partner" herein) shall first give written notice to the
General Partner of his intention to Transfer such Percentage Interest (the
"Notice" herein). The Notice shall specify the Percentage Interest to be
Transferred, the price, the terms on which such Transferring Partner intends to
make such Transfer, and the name and address of each Person who is to acquire
such Percentage Interest. (b) The General Partner shall, within Ten (10) days
after the receipt of the Notice, send a copy of same to all of the other
Partners. (c) Such other Partners, including the General Partner, shall have
Thirty (30) days from the date they receive the Notice within which to offer to
acquire all or part of the Percentage Interest the Transferring Partner desires
to Transfer for the same price and upon the same terms and conditions as set
forth in the Notice. Such offer must be in writing and must be received by the
General Partner before the end of said Thirty (30) day period. (d) If the other
Partners offer to purchase a Percentage Interest which exceeds the Percentage
Interest the Transferring Partner desires to Transfer, each Partner who desires
to purchase such Percentage Interest (the "Offering Partner" herein) shall be
entitled to purchase such proportion of the Percentage Interest referred to in
the Notice as his respective Percentage Interest in the Partnership bears to
the total Percentage Interest in the Partnership owned by all of the Offering
Partners. (e) Provided that the Offering Partners collectively offer to
purchase all, but not less than all, of the Percentage Interest the
Transferring Partner desires to Transfer, the General Partner shall give the
Transferring Partner written notice thereof within Ten (10) days after the end
of the Thirty (30) day period referred to in Section 8.02(c) above and the
Transferring Partner shall, within Ten (10) days after the receipt of said
notice from the General Partner either (i) sell his Percentage Interest to the
Offering Partners for the same price and upon the identical terms and
conditions as set forth in the Notice, or (ii) withdraw his offer to Transfer
any portion
<PAGE> 14
of his Percentage Interest altogether by giving written notice of same to the
General Partner. (f) If the Offering Partners collectively do not within the
Thirty (30) day period referred to in Section 8.02(c) above so offer to
purchase all, and not less than all, of such Percentage Interest which the
Transferring Partner desires to Transfer, the General Partner shall promptly
notify the Transferring Partner thereof and the Transferring Partner shall have
no obligation to sell any of his Percentage Interest to the other Partners as
hereinabove provided and may, within the next Sixty (60) days after the receipt
of such notice from the General Partner, Transfer all of the Percentage
Interest referred to in the Notice but only to the Person or Persons set forth
in the Notice and only for the same price and upon the identical terms and
conditions as set forth therein. Any such transferee shall nevertheless take
such Percentage Interest subject to each and all of the terms of this Agreement
including, particularly, the provisions of this Article VIII. If such Transfer
is not made by the Transferring Partner within said Sixty (60) day period
exactly as set forth in Article VIII hereof, the Transferring Partner shall
again have to fully comply with all of the terms and conditions of this Article
VIII before Transferring, or attempting to Transfer, his Percentage Interest in
the Partnership referred to in the notice. (g) Any Transfer, or attempted
Transfer, by a Partner of any portion of his Percentage Interest shall be null
and void unless the terms, conditions and provisions of this Section 8.02 are
strictly observed and followed.
8.03 Admission of a Substitute Partner. (a) Subject to the other provisions of
this Article VIII, an Assignee of any portion of a Percentage Interest of a
Partner shall be admitted as a Substitute Partner of the Partnership only upon
the completion of the following: (i) With respect to the admission of a
Substitute Limited Partner, consent of the General Partner which consent the
General Partner may unreasonably withhold; (ii) The Transferring Partner, at
his expense, shall provide the General Partner with an opinion of counsel
acceptable to counsel for the Partnership that such a substitution will not
cause the Partnership to be deemed to be dissolved and will not cause the
Partnership to be taxed other than as a partnership for federal income tax
purposes; (iii) The Assignee shall have accepted and agreed to be bound by all
of the terms and provisions of this Agreement by executing a counterpart
hereof, and such other documents or instruments as the General Partner and
Partnership counsel may require in order to effect the admission of such Person
as a Substitute Partner hereof; and, (iv) The Transferring Partner or his
Assignee shall reimburse the Partnership for all costs, fees and expenses
incurred by it in connection with such Transfer. (b) For the purpose of
allocating Partnership Income and Losses and making Partnership Distributions,
a Substitute Partner shall be treated as having become a Partner on the date he
signs and delivers a copy of this Agreement to the General Partner.
8.04 Tax Elections - Transfer of Partnership Interests. In the event of a
Transfer of all or any part of the Percentage Interest of a Partner, the
Partnership hereby elects, pursuant to Code Sections 743 and 754 (or any
corresponding provisions of succeeding law), to adjust the basis of the
Partnership property with respect to the Percentage Interest of such
Transferring Partner. With respect to any Partner whose Percentage Interest
has been affected by an election pursuant to Code Section 754, appropriate
adjustments shall be made to the determination of Partnership Income, Losses
and Distributions. Each Partner agrees to furnish the Partnership with all
information necessary to give effect to such election. The Partnership may
elect to make any other election permitted under any provision of the Code if,
in the opinion of the General Partner based upon the advice of tax counsel
and/or the accountants for the Partnership, such election would be advantageous
to the Partners as a group, or to any Partner, without being disadvantageous to
any other Partner.
ARTICLE IX
DISSOLUTION AND LIQUIDATION
9.01 Dissolution of the Partnership. The Partnership shall be dissolved and
its assets liquidated and distributed at the time provided in Section 2.04(a)
hereof.
9.02 Winding Up and Distribution. (a) Upon the dissolution of the
Partnership, the Partnership business shall be wound up and its assets
liquidated as provided in this Section 9.02 and the net proceeds of such
liquidation shall be distributed in accordance with Section 9.03 hereof. (b)
The General Partner shall act as liquidator and shall file all certificates and
notices of the dissolution of the Partnership required by law. The General
Partner shall proceed without any unnecessary delay to sell and otherwise
liquidate the Partnership's property and assets; provided, however, that if it
determines that an immediate sale of part or all of the Partnership's property
would cause undue
<PAGE> 15
loss to the Partners, in order to avoid such loss, except to the extent
prohibited by the Revised Act, it may defer the liquidation of the
Partnership's property for a reasonable time. Upon the complete liquidation
and distribution of the Partnership's assets, the Partners shall cease to be
Partners of the Partnership and the General Partner shall execute, acknowledge
and cause to be filed all certificates and notices required by law to terminate
the Partnership. (c) Upon the dissolution of the Partnership, the accountants
for the Partnership shall promptly prepare, and the General Partner shall
furnish to each Partner, a statement setting forth the assets and liabilities
of the Partnership upon its dissolution. Promptly following the complete
liquidation and distribution of the Partnership's property and assets, the
Partnership's accountants shall prepare, and the General Partner shall furnish
to each Partner, a statement showing the manner in which the Partnership's
assets were liquidated and distributed and the receipts and disbursements
therefor, including an accounting of all of the Distributions made pursuant to
Section 9.03 hereof. (d) In addition to all of the other terms and provisions
of this Article IX, the General Partner is entitled in its discretion to retain
a cash warranty reserve of up to a maximum of One Thousand Five Hundred Dollars
($1,500) for each house sold in the Development. The General Partner shall
maintain that warranty reserve for a maximum of one (1) year and during that
period shall use said reserve to fund all warranty repairs only for the house
for which such reserve was created. At the end of said one (1) year, the
remaining warranty reserve for each house, if any, shall be either returned to
the Partnership general fund and shall be used to fund on-going Partnership
operations and expenses, if any, or distributed to the Partners pursuant to
Section 5.02(b) or distributed to the Partners or others pursuant to Section
9.03 hereof, as appropriate. Notwithstanding the foregoing, if the cost of the
warranty repairs to any house in the Development exceeds the warranty reserve
for such house and the Partnership has not distributed all of its cash or
assets, the Partnership is authorized to use other available Partnership cash
or assets to fund such additional required warranty repairs. However, if the
Partnership does not, for any reason including liquidation of the Partnership
assets, have any available cash or assets to fund such additional required
warranty repairs, no Partner has any obligation or liability whatsoever to
contribute any money or assets to the Partnership whatsoever to fund such
repairs. (e) Subject to the foregoing, the business and affairs of the
Partnership shall be wound up and its assets distributed in the manner provided
by the laws of the State of California. (f) After all of the debts of the
Partnership have been paid, the Partners may elect by mutual agreement to
distribute the assets of the Partnership in kind. In such event, the Partners
shall evaluate such assets on a mutually acceptable basis and only if such a
basis is agreed to and the evaluation made, the assets shall be distributed to
the Partners in the same proportion as if said Distributions were in cash as
set forth in Section 9.03 hereof.
9.03 Distribution of Proceeds. The proceeds from the liquidation of the
assets of the Partnership shall be distributed in the following amounts and
order: (a) First, payment of the expenses of liquidation; (b) Next, payment of
the debts of the Partnership, both secured and unsecured, other than debts
owing to Partners; (c) Next, payment of debts owing to Partners; (d) Next, to
the Partners in accordance with the positive balances in their Capital
Accounts, as determined after taking into account all capital account
adjustments for the fiscal year during which the liquidation occurs (or, if
later, within 90 days after the date of such liquidation), other than any
capital account adjustments which are made pursuant to this Section 9.03. No
Partner shall be required to contribute to the Partnership any negative balance
in such Partner's Capital Account; and (e) Last, to the Partners in the
percentage they share in the Cash Distributions of the Partnership as set forth
in Section 5.03(b)(v).
ARTICLE X
BOOKS AND RECORDS
10.01 Partnership Records. The General Partner shall keep and maintain at the
Partnership's office such Partnership books, records and documents as required
under the Revised Act including, but not limited to, the following: (a) A
current list of the full name and last known business or residence address of
each Partner set forth in alphabetical order together with the contribution and
the Percentage Interest owned by each Partner; (b) A copy of the Certificate of
Limited Partnership and all Certificates of Amendment, and executed copies of
any powers of attorney pursuant to which any Certificate has been executed; (c)
Copies of the Partnership's federal, state and local income tax or information
returns and reports for the six (6) most recent taxable years; (d) An executed
copy of the Limited Partnership Agreement and all amendments thereto; (e)
Copies of financial statements of the Partnership, if prepared, for the six (6)
most recent fiscal years; and (f) The Partnership's books and records for the
current and past three (3) fiscal years.
<PAGE> 16
10.02 Delivery and Inspection of Partnership Records. (a) Upon the request of
any Limited Partner, the General Partner shall promptly deliver to all Limited
Partners, at the expense of the Partnership, a copy of any or all of the
information required to be maintained pursuant to Section 10.01 hereof and any
such other data or information about the operations of the Partnership or any
financial information about the Partnership requested by said Limited Partner
provided that such requested data and or information is reasonable in amount
and scope and can be compiled by the General Partner with a reasonable effort.
(b) Each Limited Partner has the right, upon reasonable prior notice, to
inspect and copy during normal business hours any and all of the Partnership
records required to be maintained pursuant to Section 10.01 hereof.
10.03 Reports. Upon the written request of any Limited Partner, the General
Partner shall cause to be prepared and delivered to each Limited Partner the
following reports of Partnership operations: (a) An income statement of the
Partnership for the initial three-month, six-month and nine-month period of each
fiscal year of the Partnership and a balance sheet of the Partnership as of the
end of each period. (b) An income statement for each fiscal year of the
Partnership, a balance sheet of the Partnership as of the end of each such year
and a statement of cash flows of the Partnership for such year. (c) A weekly
sales report showing the number of houses in the Development that were placed
under contract for sale during said week and the sales price of each. (d) A
monthly construction schedule report showing the actual progress/status of the
construction of the Development during said calendar month. (e) A monthly
construction budget report showing Inco's estimate of the Direct Construction
Costs incurred during said calendar month and Inco's estimate of the Direct
Construction Costs of the Development incurred to date. (Inco cannot produce
actual costs to compare against the Proforma until the completion of the
Development.) (f) Such other reports as may from time to time be reasonably
requested by a Limited Partner pertaining to the construction or marketing of
the Development or the operation of the Partnership or the financial status of
the Partnership.
10.04 Tax Returns. (a) Certified public accountants for the Partnership shall
be retained and instructed by the General Partner to timely prepare and file
all required income tax returns for the Partnership. (b) The General Partner
shall send, or cause to be sent, to each Partner within ninety (90) days after
the end of each taxable year the information necessary for the Partner to
complete his federal and state income tax or information returns, and, if
requested by a Limited Partner, the General Partner shall also send such
Partner a copy of the Partnership's complete federal, state and local income
tax or information returns for the year. (c) The General Partner shall be the
"Tax Matters Partner" for the purposes of Section 6231(a)(7) of the Code.
10.05 Bank Accounts. All funds of the Partnership not otherwise invested shall
be deposited in one or more accounts maintained in the name of the Partnership
in such banking institutions as the General Partner shall determine, and
withdrawals shall be made only in the regular course of Partnership business on
such signature or signatures as the General Partner may from time to time
determine.
10.06 Accountants. The certified public accountants for the Partnership shall
be selected by the General Partner.
10.07 Fiscal Year. The fiscal year of the Partnership shall be the calendar
year.
ARTICLE XI
GENERAL PROVISIONS
11.01 Notices. Any and all notices, demands or other communications required
or desired to be given hereunder by any party shall be in writing and shall be
validly given or made to another party if served either personally, by an
overnight delivery service or by the United States mail, certified or
registered, postage prepaid, return receipt requested. If such notice, demand
or communication is served personally, service shall be conclusively deemed
made at the time of such personal service. If such notice, demand or
communication is served by overnight delivery service, service shall be
conclusively deemed made within twenty-four (24) hours after it was delivered
to said overnight delivery service. If such notice, demand or communication is
given by mail, service shall be conclusively deemed made forty-eight (48) hours
after the deposit thereof in the United States mail addressed to the party to
whom such notice, demand or other communication is to be given as set forth on
Exhibit B hereto. Any party hereto may change his address for the purpose of
receiving notices, demands and other communications as herein provided by a
written notice given in the manner aforesaid to the other parties hereto.
<PAGE> 17
11.02 Applicable Law and Severability. This Agreement shall, in all respects,
be governed by the laws of the State of California applicable to agreements
executed and to be wholly performed therein. Nothing contained herein shall be
construed so as to require the commission of any act contrary to law, and
wherever there is any conflict between any provision contained herein and any
present or future statute, law, ordinance or regulation contrary to which the
parties have no legal right to contract, the latter shall prevail but the
provision of this Agreement which is affected shall be curtailed and limited
only to the extent necessary to bring it within the requirements of the law.
11.03 Further Assurances. Each of the parties hereto shall execute and deliver
any and all additional papers, documents, and other assurances, and shall do
any and all acts and things reasonably necessary in connection with the
performance of their respective obligations hereunder and to carry out the
intent of the parties hereto.
11.04 Successors and Assigns. All of the terms and provisions contained herein
shall inure to the benefit of and shall be binding upon the parties hereto and
their respective heirs, personal representatives, successors and assigns.
11.05 Attorney's Fees. In the event any action be instituted by a party to
enforce any of the terms and provisions contained herein, the prevailing party
in such action shall be entitled to be awarded from the losing party such
reasonable attorney's fees, costs and expenses (including all court costs) as
the Court may award.
11.06 Entire Agreement. This Agreement constitutes the entire understanding
and agreement of the parties and any and all prior agreements, understandings,
or representations of any kind are hereby terminated and canceled in their
entirety and are of no further force or effect. No amendment, change or
modification of this Agreement shall be valid unless in writing and signed by
all of the parties hereto.
11.07 Captions. The captions appearing at the commencement of the paragraphs
hereof are descriptive only and for convenience in reference. Should there be
any conflict between any such caption and the paragraph at the head of which it
appears, the paragraph and not such caption shall control and govern in the
construction of this Agreement.
11.08 No Partition. No Partner, without the prior written consent of the
General Partner, shall have any right, power or authority to make application
to any court or commence or prosecute any action or to in any way force the
partition or involuntary sale of any Partnership property, including
particularly the Real Property, and, in the event any such application is made
or any such action is commenced, the General Partner or any other Partner, in
their own name or in the name of the Partnership, in addition to all other
rights and remedies provided hereunder, at law and in equity, shall have the
right to obtain an injunction, decree and/or restraining order to enjoin or
stop such application, action or proceeding.
11.09 Counsel For the Partnership. The Partnership shall retain the services
of Thomas E. Gibbs, Jr. who shall provide certain of the legal services
pertaining to the formation, administration and operation of the Partnership,
including drafting this Limited Partnership Agreement. The Partnership shall
pay Mr. Gibbs the fees for his professional services and shall reimburse him
for all of his direct costs incurred on behalf of the Partnership. The
Partners acknowledge that Mr. Gibbs represents the Partnership and not any of
the respective Partners; provided, however, the Limited Partners are further
advised and hereby acknowledge that Mr. Gibbs also represents Inco Homes with
respect to other matters. Accordingly, there may be a potential conflict
between Mr. Gibbs legal representation of Inco Homes and the legal position of
one or all of the Limited Partners. By executing this Agreement, the Limited
Partners each hereby waive any such potential conflict in interest and agree to
obtain separate legal counsel to represent their respective legal interest with
respect to entering into this Agreement.
11.10 Arbitration. The parties shall submit any dispute concerning the
interpretation of or the enforcement of rights and duties under this Agreement
to final and binding arbitration pursuant to the rules of the American
Arbitration Association. At the request of any party, the arbitrators,
attorneys, parties to the arbitration, witnesses, experts, court reporters, or
other persons present at the arbitration shall agree in writing to maintain the
strict confidentiality of the arbitration proceedings. Arbitration shall be
conducted by a single, neutral arbitrator, or, at the election of any party,
three neutral arbitrators, appointed in accordance with the rules of the
American Arbitration
<PAGE> 18
Association. The award of the arbitrator(s) shall be enforceable according to
the applicable provisions of the California Code of Civil Procedure. The
arbitrator(s) may award damages and/or permanent injunctive relief, but in no
event shall the arbitrator(s) have the authority to award punitive or exemplary
damages. If proper notice of any hearing has been given, the arbitrator(s)
will have full power to proceed to take evidence or to perform any other acts
necessary to arbitrate the matter in the absence of any party who fails to
appear.
IN WITNESS WHEREOF, the parties have executed and delivered this Limited
Partnership Agreement as of the date first set forth above.
GENERAL PARTNER:
Inco Homes Corporation,
a Delaware corporation
By ___________________________
Ira C. Norris,
Chairman and CEO
LIMITED PARTNERS:
Julia Construction, Inc., a California Corporation
By __________________________
Li-Ping Cheng, President
_____________________________
Fred E. Liao
_____________________________
Bob C. Chang
<PAGE> 1
SECURED PARTICIPATION NOTE
--------------------------
$600,000 Gardena, California June 26, 1996
FOR VALUE RECEIVED, INCO HOMES CORPORATION, a Delaware corporation
("Maker" herein) promises to pay to ALG 1996-1, a California Limited
Partnership ("Holder" herein), or order, the principal sum of SIX HUNDRED
THOUSAND DOLLARS ($600,000) together with accrued interest from the date hereof
computed and paid to Holder as hereinafter set forth.
1. Definitions. Unless otherwise expressly provided herein or unless the
context otherwise requires, the terms set forth below are hereby defined as
follows:
"Available Cash" shall mean all of the cash derived from the Development from
whatever source, including, but not limited to, that which Maker has generated
from the sale of Homes, and related assets and services, in the Development and
all net proceeds or land draws received by Maker from any A&D loans or other
financing services, less funds reimbursed to Maker for amounts previously
advanced by Maker to the Development prior to the date hereof (except for the
purchase of the Real Property), and less, subject to Holder's written approval
not to be unreasonably withheld, Maker's reasonable estimate of the amount of
cash that will be required by Maker to construct and sell the next phase or
phases of the Development after taking into account the additional cash Maker
expects to receive from conventional financing sources, such as A&D loans and
construction loans.
"Base Interest" shall mean the amount of interest earned by Holder computed by
multiplying the outstanding principal balance hereunder times an interest rate,
based on the actual number of days elapsed during the period, which rate shall
be the Prime Rate (as the same may change from time to time) plus Three Percent
(3%).
"Contingent Interest" shall mean Forty-Five Percent (45%) of the Net Income
earned by Maker from the construction and sale of the Homes, and related assets
and services, in the Development.
"Deed of Trust" shall mean the deed of trust encumbering the Real Property that
is executed by Maker in favor of Holder and recorded in the Office of the
County Recorder of San Bernardino County on the date hereof to secure the
payment of the Loan.
"Development" shall mean the One Hundred and Fifty-One (151) Homes to be
constructed on the Real Property, and the related assets and services, and sold
to buyers in the "entry-level" price market in Adelanto, California.
"Event of Default" shall mean either of the following:
The failure of Maker to pay Holder in full all sums due hereunder within
Five (5) days of the date such payment is due, provided that Holder shall
give Maker written notice thereof and Maker shall have Three (3) days after
the receipt of said notice to cure by making payment in full to Holder; or
The occurrence of an Event of Default under the Deed of Trust or any other
agreement or document relating to the Loan executed now or at any time
during the term of this Note.
"Home" shall mean a single family home constructed by Maker or one of the Lots
of the Real Property.
"Inco G&A" shall mean Three Percent (3%) of the "Gross Sales Price" of all of
the Homes (total cash actually realized from the sale of a Home less discounts
and allowances). For the purpose of computing Available Cash and Net Income,
Maker may draw against the Inco G&A in equal monthly installments over the
projected term of the Development computed on the basis of the total projected
Gross Sales Price of all of the Homes in the Development. Maker shall
periodically revise the projected Gross Sales Price
<PAGE> 2
expected to be realized from the sale of all of the Homes, shall provide Holder
with a revised projection in such form as is reasonably acceptable to Holder
and shall adjust its draw accordingly.
"Loan" shall mean the Six Hundred Thousand Dollars ($600,000) advanced from
Holder to Maker on the date hereof evidenced by this Note, payment of which is
secured by the Deed of Trust.
"Lot" shall mean One (1) of the One Hundred and Fifty-One (151) mapped single
family lots which comprise the Real Property.
"Minimum Principal Payment" shall mean the following payments of principal by
Maker to Holder:
A principal payment of Four Thousand Five Hundred Dollars ($4,500) at the
close of the sale escrow for each of the first Seventy-Five (75) Homes in
the Development; plus
A principal payment of Seven Thousand Five Hundred Dollars ($7,500) at the
close of the sale escrow for each of the next Thirty-Five (35) Homes in the
Development.
"Net Income" shall mean the net income realized by Maker from the construction
and sale of the Homes and all related assets and services. The computation of
Net Income shall be made by Maker on the accrual basis of accounting and,
except as hereinafter provided, shall be consistent with the method it uses to
compute net income for its other single family housing development projects, an
example of which is the Proforma dated June 11, 1996, pertaining to the project
referred to as New VL-AD, a copy of which is attached hereto as Exhibit A. For
example, the total cost of the Real Property is $890,452 or $5,897 per Lot.
Net Income for the purposes of this Note shall mean total gross revenues
realized from the sale of the Homes, and all related assets and services, less
only those costs and expenses specifically related to the construction and sale
of the Homes (which costs and expenses are subject to the reasonable review and
approval of Holder), less the amount of Base Interest paid by Maker hereunder
and less the Inco G&A.
"Prime Rate" shall mean the "prime rate" or "preferred rate" that Bank of
America advertises that it charges its most creditworthy customers.
"Real Property" shall mean the land located in Adelanto, California which has
been subdivided by Maker into One Hundred and Fifty-One (151) Lots generally
described as follows:
Hometown at Adelanto
Recorded Tract 15377-5 (57 Lots)
Unrecorded Tract 15377-6 (50 Lots)
Unrecorded Tract 15377-7 (34 Lots)
Reunion at Adelanto
Recorded Tract 14801-2F (10 Lots)
2. Principal Payments. Not later than the Twenty-Fifth (25th) day of each
calendar month during which period principal remains outstanding hereunder,
Maker shall compute the total amount of Available Cash. After deducting the
amount of accrued Base Interest currently payable to Holder, Maker shall
deliver all of such remaining Available Cash to Holder on the Twenty-Fifth
(25th) day of such calendar month as payment of principal and such payment
shall be credited in full against the next Minimum Principal Payment due.
Notwithstanding the foregoing, Maker shall pay to Holder the Minimum Principal
Payments when due and payable.
3. Term. The entire unpaid principal balance hereunder, together with all
unpaid Base Interest accrued thereon, shall be due and payable in full on June
26, 1998. Contingent Interest shall be earned on the sale of each Home to be
payable as hereinafter set forth, until all of the Homes have been developed
and sold. Provided, however, at such time as the entire unpaid balance of
principal and accrued Base Interest have been paid in full, the Deed of Trust
shall continue to encumber the Real Property which has not been sold
<PAGE> 3
and reconveyed. The entire unpaid balance of Contingent Interest shall be due
and payable in full on May 31, 2001 (the "Outside Date"). If, at the Outside
Date, Lots are not improved with Homes and have not been sold or Lots have been
improved with Homes but have not been sold and, therefore, Contingent Interest
with respect to any such unsold Lots and Homes has not been paid, Net Income
and Contingent Interest for each such unsold Lot and Home shall be calculated
based on the average Net Income for all Homes previously sold and the
calculated amount of Contingent Interest shall be paid on the Outside Date.
Furthermore, after Maker has sold and closed all of the One Hundred and
Forty-One (141) Homes to be constructed on the Real Property described as
Hometown at Adelanto, Holder agrees to allow Maker, at the option of Maker, to
pay Holder Contingent Interest for all of the Ten (10) Lots of the Real
Property described as Reunion at Adelanto based on the average Net Income and
average Contingent Interest paid to Holder for the first One Hundred and
Forty-One (141) Homes. In the event Maker elects to so pay Holder the average
Contingent Interest for the Ten (10) Lots described as Reunion at Adelanto,
upon receipt of such payment Holder shall be paid in full hereunder and shall
then release its lien on said Ten (10) Lots imposed by the Deed of Trust.
4. Payment of Base Interest. Base Interest shall be computed for each
calendar month during which there is an outstanding principal balance hereunder
and shall be due and payable by Maker to Holder, in arrears, on the Fifth (5th)
day of each calendar month following the calendar month for which such Base
Interest was earned.
5. Contingent Interest. Contingent Interest payable to Holder shall be
Forty-Five Percent (45%) of the Net Income earned by Maker from the
construction and sale of the Homes. Contingent Interest which is earned with
respect to Homes that are sold shall be estimated by Maker on a month-by-moth
basis and the estimate thereof shall be paid by Maker to Holder from Available
Cash not later than the Twenty-Fifth (25th) of the following month. Maker
shall make a precise computation of Net Income and shall make any additional
payment of Contingent Interest to Holder from Available Cash not later than on
the Fiftieth (50th) day after the end of each calendar quarter for the first
three (3) calendar quarters of each calendar year and not later than the One
Hundred and Fifth (105th) day after the end of the last calendar quarter of
each calendar year.
6. Payments to Holder. All payments of principal, Base Interest, Contingent
Interest and all other payments due Holder from Maker hereunder shall be
payable only in the lawful money of the United States and payment thereof shall
be made to Holder without deduction or offset. All payments due and payable
under this Note shall be paid to Holder in immediately available funds
delivered to Holder as follows:
ALG 1996-1
% Thomas E. Gibbs, Jr.
Suite 400
879 West 190th Street
Gardena, CA 90248
7. Deed of Trust. (a) Payment of this Note is secured by the Deed of Trust of
even date which Deed of Trust creates a first lien on the Real Property on
which the Development is to be constructed. This Note is subject to the terms
and conditions of the Deed of Trust, all of which are incorporated herein by
reference. (b) Holder agrees from time to time as necessary to subordinate its
lien, imposed by the Deed of Trust on only that portion of the Real Property on
which Maker intends to immediately commence construction of a portion of the
Development and on which the construction lender, who has agreed to provide
construction financing therefor, requires a first lien to secure its
construction loan. Maker agrees that Holder shall retain a first lien under
the Deed of Trust on all of the Real Property which is not subject to a
construction loan deed of trust and Holder shall retain a second lien (superior
to any rights of mechanics' or materialmen) under the Deed of Trust on that
portion of the Real Property that is subject to a construction loan deed of
trust. Provided that Maker is not in default hereunder, subject to the payment
of the Minimum Principal Payment required with respect to the sale of each
Home, Holder agrees to release its lien imposed by the Deed of Trust on a Home
by Home basis at the close of the sale escrow for the sale of a Home in the
Development to a third party buyer. (c) Notwithstanding anything herein to the
contrary, Holder agrees as
<PAGE> 4
necessary to subordinate (but not release) its lien, imposed by the Deed of
Trust on the Lots which comprise that portion of the Real Property described as
Reunion at Adelanto on which Lots Maker intends to construct its Three (3)
Model Homes, to the lien of the construction lender who has agreed to provide
the construction financing therefor. Holder has the right to review and
approve, which approval shall not be unreasonably withheld, the terms and
conditions of said construction loan. Furthermore, Maker agrees that the funds
generated from said construction loan shall only be used to construct the
on-site and off-site improvements (excluding the cost of the furniture and the
landscaping that is over and above the landscaping included in the production
Homes) of said model Homes or used to repay to Holder the outstanding principal
due hereunder.
8. Title Insurance. At the funding of the Loan and the recording of the Deed
of Trust, Maker shall provide Holder with a CLTA lender's policy of title
insurance in the amount of the Loan which shows that Holder has a first deed of
trust lien (prior to all mechanic's liens, if any) and subject to only such
exceptions and exclusions as approved in writing by Holder. Maker shall also
provide Holder with such endorsements and updated policies of title insurance
as reasonably requested by Holder when it subordinates its lien under the Deed
of Trust to a first deed of trust lien in favor of a construction lender, or
re-records following the recordation of a construction loan. Such title
policy, in connection with a subordination or re-recording shall contain
mechanics lien endorsements insuring priority of the Deed of Trust,
subordinated or re- recorded over all mechanics liens.
9. Escrow and Costs. The funding of the Loan shall be consummated through an
escrow at a title company selected by Maker and approved by Holder. Maker
shall pay, or reimburse Holder as necessary, for all escrow fees, recording
costs, title insurance premiums (both at closing and if title insurance is
updated hereunder) and for the legal fees incurred by Holder to its legal
counsel in connection with this Loan in the amount of Seven Thousand Five
Hundred Dollars ($7,500).
10. Reports. Maker shall provide Holder periodic reports in the form and in
the manner reasonably requested by Holder about the construction and sale of
the Development and the amount of Net Income earned therefrom for each calendar
month in which any amounts are due and owing to Holder hereunder. Such reports
shall include, but not be limited to, a monthly report due not later than the
Fifteenth (15th) day of the following calendar month on status of construction,
sales, and closings, and by not later than the Twenty-Fifth (25th) day of the
following calendar month on the amount of Available Cash, and the computation
of Net Income. A final report on all such items shall be due not later than
the Fiftieth (50th) day after the end of each calendar quarter for the first
three (3) calendar quarters of the calendar year and not later than One Hundred
and Fifth (105th) day after the end of the last calendar quarter of the
calendar year.
11. Late Payment Charge. In the event Maker fails to make any payment due to
Holder hereunder, in addition to all other rights and remedies of Holder, to
reasonably compensate Holder for the costs and expenses it will incur due to
such delayed payment, Maker shall pay to Holder a Late Payment Charge equal to
Ten Percent (10%) of the total amount of such delayed payment.
12. Remedies Upon Default. Upon the occurrence of an Event of Default, at the
option of the Holder, without demand or notice to Maker, the entire outstanding
balance of principal together with all accrued Base Interest and Contingent
Interest shall immediately become due and payable. Furthermore, so long as such
Event of Default shall continue, all amounts due and payable to Holder hereof
shall bear interest at the Prime Rate plus Five Percent (5%) (the "Default
Interest Rate" herein). All interest accrued at the Default Interest Rate
shall not be deducted from the Net Income of the Development to determine the
Contingent Interest payable to Holder hereunder.
13. Arbitration. The parties shall submit any dispute concerning the
interpretation of this Note and the calculation of Available Cash, Net Income
and Contingent Interest to final and binding arbitration pursuant to the rules
of the American Arbitration Association. At the request of any party, the
arbitrators, attorneys, parties to the arbitration, witnesses, experts, court
reporters, or other persons present at the arbitration shall
<PAGE> 5
agree in writing to maintain the strict confidentiality of the arbitration
proceedings. Arbitration shall be conducted by a single, neutral arbitrator,
or, at the election of either party, three neutral arbitrators, appointed in
accordance with the rules of the American Arbitration Association. The award
of the arbitrator(s) shall be enforceable according to the applicable
provisions of the California Code of Civil Procedure. The arbitrator(s) may
determine and award amounts owing and payable to Holder, including, but not
limited to, principal, Base Interest and Contingent Interest, based upon their
calculation of Available Cash and Net Income. If proper notice of any hearing
has been given, the arbitrator(s) will have full power to proceed to take
evidence or to perform any other acts necessary to arbitrate the matter in the
absence of any party who fails to appear.
14. Attorneys Fees. If any and all amounts due and payable under this Note
are not paid when due or if any Event of Default occurs, Maker promises to pay
all costs of enforcement and collection, including, but not limited to,
reasonable attorneys' fees and court costs, whether or not any action or
proceeding is brought to enforce the provisions hereof.
15. Waiver by Holder. No consent to any action, waiver of any provision, or
waiver of any breach of any duty or obligation of Maker hereunder, by Holder
shall constitute a waiver of any other provision or consent to any other action
or subsequent breach, whether or not similar. No waiver or consent by Holder
shall constitute a continuing waiver or consent or commit Holder to provide a
waiver in the future except to the extent specifically set forth in writing.
16. Waivers by Maker. Maker hereby waives diligence, presentment, protest and
demand, notice of protest, dishonor and nonpayment of this Note, and expressly
agrees that, without in any way affecting the liability of Maker hereunder,
Holder may extend any maturity date or the time for payment of any installment
due hereunder, accept additional security, release any party liable hereunder
and release any security now or hereafter securing this Note. Maker further
waives, to the full extent permitted by law, the right to plead any and all
statutes of limitations as a defense to any demand on this Note, or on any deed
of trust, security agreement, guaranty or other agreement now or hereafter
securing this Note.
17. Right to Inspect Books and Records/Audit. Maker shall keep and maintain a
separate set of books and financial records devoted solely to construction and
sale of the Development. Each monthly, quarterly, and annual computation of
Net Income shall be computed by maker and certified by the Chief Financial
Officer for Maker. Holder may, at any time during business hours, following
reasonable prior notice, inspect the books and financial records of Maker
relating to the Development and make copies thereof and any other documents,
papers and materials related thereto. Furthermore, Holder may, at its sole
cost and expense, retain its own certified public accountant to audit the books
and financial records of Maker relating to the Development. Maker shall,
however, pay Holder for the full cost of such audit if such audit concludes
that the Net Income of the Development had previously been under reported to
Holder for the period of the audit by at least Five Percent (5%).
18. Use of Funds. Maker hereby covenants and agrees with Holder that all
Available Cash shall exclusively be used to either (i) fund the cost to
construct and sell the Homes (excluding the cost of the furniture in the model
Homes and the landscaping of the model Homes that is over and above the
landscaping of the production Homes), (ii) pay Holder the Base Interest due
hereunder or (iii) pay Holder the Contingent Interest and concurrently
therewith pay Maker its proportionate share of Net Income. Maker shall pay,
only from Maker's separate funds, all other costs, fees, and expenses of Maker,
including all interest and principal, if any, payable to Albert and Margaret
Meer and/or Riverside National Bank, with respect to the loans due from Maker
to them.
19. Status of Title. Holder has received a Preliminary Title Report from
Orange Coast Title Company dated June 6, 1996, Order No. S-109737-9 (the
"PTR"), which relates to the Real Property. Maker hereby represents, warrants,
and covenants to Holder that on the date hereof and during the term of this
Note that: (i) All taxes and assessments which are assessed against the Real
Property and which are due and payable are currently paid in full and will
continue to be paid in full when due; (ii) None of the exclusions and
<PAGE> 6
exceptions to title to the Real Property as set forth in the PTR will have any
material adverse affect on the construction and sale of the Homes or in any
material way increase any of the costs and expenses relating thereto or reduce
the Contingent Interest projected to be earned by Holder as set forth on
Exhibit A; (iii) Maker shall not further encumber the Real Property except as
required to construct and market the Development; and (iv) Maker shall not
create any exceptions to title or clouds on title which would materially reduce
the Contingent Interest to be earned by Holder as set forth on Exhibit A.
20. Subordination. A portion of the Real Property is currently encumbered by
a deed of trust in favor of Albert and Margaret Meer. Maker has represented to
Holder that the current outstanding balance is approximately Eighty Thousand
Dollars ($80,000). At the funding of this loan, Orange Coast Title Company
will hold in escrow sufficient funds (from the proceeds of the Loan) to pay
said loan in full and will, accordingly, insure that Holder's lien imposed by
the Deed of Trust is a first lien on the Real Property. Maker has advised
Holder that Mr. and Mrs. Meer are willing to subordinate their lien to the lien
imposed by the Deed of Trust and are also further willing to subordinate their
lien to the lien of a construction lender. Holder is willing to allow Mr. and
Mrs. Meer to subordinate their lien provided that Maker delivers to Holder the
proposed form of Subordination Agreement to be executed by Mr. and Mrs. Meer
together with the revised promissory note which evidences said loan, including
particularly the release provisions, for Holder's review and approval which
approval shall be subject to Holder's reasonable determination that the terms
and conditions do not in any way impair Holder's security interest in the Real
Property and Maker's ability to effectively construct and market the Department
in the best interest of Holder to reasonably earn the maximum amount of
Contingent Interest under the circumstances. Upon approval by Holder of the
form of Subordination Agreement, Holder shall authorize Orange Coast Title to
record the Subordination Agreement and release to Maker all Loan funds it is
holding with respect to such obligation.
IN WITNESS WHEREOF, Maker has executed and delivered this Note at Gardena,
California on June ___, 1996.
INCO HOMES CORPORATION,
a Delaware Corporation
By: ______________________________
Ira C. Norris
Chairman and CEO
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000897432
<NAME> INCO HOMES CORP.
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<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 702
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<RECEIVABLES> 20
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0
0
<COMMON> 86
<OTHER-SE> 14,171
<TOTAL-LIABILITY-AND-EQUITY> 42,676
<SALES> 2,972
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<CGS> 2,827
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<OTHER-EXPENSES> 0
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<INCOME-PRETAX> (857)
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<NET-INCOME> (857)
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