SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transaction period from __________ to __________
Commission file number 33-58934
LUNDGREN BROS. CONSTRUCTION, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0970679
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
935 EAST WAYZATA BLVD., WAYZATA, MINNESOTA 55391
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (612) 473-1231
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by
non-affiliates of the registrant. The aggregate market value shall be computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of a specified date within 60 days prior to the
date of filing.
The voting stock is privately held. None of the voting stock is held by
non-affiliates of the registrant.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the last practicable date.
On March 27, 1998, there were 594 voting and 10,031 non-voting shares
of the registrant's no par value common stock outstanding.
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FORM 10-K INDEX
PART I
Item 1. BUSINESS.....................................................1
Item 2. PROPERTIES..................................................16
Item 3. LEGAL PROCEEDINGS...........................................16
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS DURING FOURTH QUARTER OF FISCAL YEAR................16
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS.................................16
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA........................16
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS..................................................18
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................24
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.........................24
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF
THE REGISTRANT..............................................25
Item 11. EXECUTIVE COMPENSATION......................................28
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.......................................29
Item 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS................................................31
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K.....................................33
SIGNATURES....................................................................40
EXHIBIT INDEX.................................................................42
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PART I
ITEM 1. BUSINESS
GENERAL
Lundgren Bros. Construction, Inc. ("Lundgren" or the "Company") is engaged
in the interrelated activities of land development and the design, construction
and sale of detached single family homes in the Minneapolis and St. Paul,
Minnesota ("Twin Cities") metropolitan area. The Company maintains an inventory
of potential home lots by controlling undeveloped land through options,
contingent purchase agreements, joint ventures, partnerships and other contract
relationships with landowners (referred to herein collectively as "Land
Acquisition Agreements"). Upon obtaining the appropriate regulatory approvals
and zoning changes, and dependent on market conditions, the Company develops the
undeveloped land into finished lots for residential subdivisions, primarily for
its own use. The Company also periodically options or purchases finished lots
from other developers.
Since its incorporation in 1970, the Company and its affiliates have
developed 2,717 lots. On December 31, 1997, the Company controlled 17 parcels of
land under Land Acquisition Agreements for future development of an estimated
1,392 lots. An important part of the Company's land development strategy is to
control prime property for residential development two to five years in advance
of actual development, using Land Acquisition Agreements structured to require
limited initial investment by the Company. Management believes that this
strategy minimizes the risk of the Company owning too much land at any one time
but allows the Company to control key sites for future development. See
"Business--Land Acquisition."
The Company builds custom homes and homes from standard plans at prices
typically ranging from $130,000 to $800,000 for both the home and lot, with an
average selling price of approximately $321,000 in 1997. Lundgren's wholly-owned
subsidiary, Brush Masters, Inc. ("Brush Masters"), provides painting, staining
and drywall services to the Company, as well as to other residential building
contractors in the Twin Cities metropolitan area.
Since inception, the Company has built and sold over 2,652 single family
homes. The Company sells its homes primarily through its own staff of sales
personnel, although it also utilizes local realtors. The Company closed the
sales of 204 homes in 1997, and as of December 31, 1997, had purchase agreements
for the sale of 70 homes, representing approximately $21.5 million in sales. In
1996, the Company closed the sales of 198 homes, and as of December 31, 1996,
had contracts for the sale of 41 homes, representing approximately $13.9 million
in sales. The Company markets its homes to middle and upper income professionals
and executives. The Company's marketing efforts emphasize the community
atmosphere of its residential subdivisions and those characteristics it believes
are distinctive to the Lundgren-built homes: desirable designs, quality
construction, competitive prices and customer service, before, during and after
the sale of a home.
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The Company was incorporated as a Minnesota corporation on October 29,
1970. The Company's offices are located in Wayzata, Minnesota.
OPERATING STRATEGY
The Company's operating strategy is to attempt to achieve the following
inter-related goals:
* Land Acquisition - locate and control the best residential property in a
specific geographic area in its price range of homes, with minimum up-front
expenditure and financial exposure.
* Land Development - enhance the existing features of the acquired land that
make it unique, as well as develop subdivisions in a manner that creates a
community feeling with superior attributes to those developed by
competitors.
* Home Building and Home Sales -
(a) Product Design - design and periodically update home plans in order to
provide the best value in the Company's price range of homes.
(b) Customer Service - provide outstanding customer service.
(c) Quality and Customization - build homes of the highest possible
quality in a particular price range and offer home buyers an
opportunity to customize their homes to a degree superior to the
competition's products.
(d) Cost Control - closely monitor the design of home plans and the
construction process, from the bidding of the homes through
construction in the field, to ensure that the Company is producing its
homes in a manner that best balances cost-effectiveness and quality.
(e) Design Center - provide home buyers with ease and convenience in
making selections to personalize their homes.
* Inventory Management - monitor its finished lot inventory and the number of
unsold homes in order to react to changing market conditions.
* Painting, Staining and Drywall - provide cost-effective and superior
painting, staining and drywall services.
LAND ACQUISITION
The Company believes that its future success depends upon its continued
ability to acquire superior home sites at competitive prices. The Company has
developed procedures for, and employs management specialized in, site
acquisition and development. Before the Company enters
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into any acquisition arrangement, it generally employs an independent marketing
consultant to perform a market analysis of the geographic area to assess the
future desirability of that area for single family homes, the current and future
development competition, and the history of demand for housing in the area. The
Company's objective is to locate areas where there will be great demand for
homes in the future but with limited competition. The Company has concentrated
its efforts on the western and southwestern suburbs of Minneapolis, in the
communities of Eden Prairie, Chanhassen, Chaska, Minnetonka, Medina,
Minnetrista, Plymouth, Shorewood and Maple Grove, Eagan, Watertown and Elco. The
Company believes that these communities are and will be some of the most
desirable areas for housing in the Twin Cities metropolitan area.
Generally, land acquired by the Company for development in the next one to
three years is located within the Minneapolis-St. Paul Municipal Urban Service
Area ("MUSA"). Land located within the MUSA is permitted to be serviced with
metropolitan sewer service and municipal water. A limited portion of the
Company's resources are used to control parcels of land outside the MUSA in
municipalities which the Company believes are willing to attempt to obtain
approval for the extension of the MUSA. Although the Company has been successful
in assisting municipalities in which it controls land to obtain extensions of
the MUSA, there can be no assurance that the Company will be able to
successfully assist municipalities to further extend the MUSA in the future.
The Company attempts to control parcels of undeveloped land with minimum
capital expenditure. The Company acquires control of undeveloped land in several
ways. Generally, the Company has been able to obtain long-term options to
purchase land for future development. The Company uses the option period to
obtain necessary development approvals from government units and to evaluate the
feasibility of development, including whether the development costs are within
cost parameters per lot for a particular type of standard home plan. The Company
also purchases land through contingent purchase agreements. Under such
agreements, the Company agrees to purchase the land, contingent upon the
Company's obtaining necessary zoning and government approvals, on terms
satisfactory to the Company, within a predetermined period. These arrangements
allow the Company to reduce the risk of purchasing a site it will not be able to
develop profitably. Under these arrangements, the Company attempts to acquire
the land with minimum cash investment and maximum amount of seller financing.
The Company attempts to obtain such purchase money financing on a nonrecourse
basis, thereby limiting both its exposure to the amount invested in the property
and its predevelopment costs on such site. While this policy may somewhat raise
the cost of the land the Company acquires, it significantly reduces the
Company's financial exposure. As competition for land increases, the Company may
not be able to acquire land through such favorable arrangements in the future
and may be required to expend more cash and bear more risk in order to gain and
maintain control of undeveloped land. During the due diligence periods provided
for in the Company's Land Acquisition Agreements, the Company employs a detailed
checklist to assist in its investigation of factors affecting the feasibility of
the project, including: topography, geology, soils and grading, traffic,
transportation and access, environmental issues, archeological site status,
regulatory processing and approval schedule, financing alternatives, market
research, and economic feasibility.
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Occasionally, the Company acquires control of land through joint ventures
and other contractual relationships with third party landowners ("Joint
Ventures"). Under these Joint Ventures, the Company generally is employed as an
agent of the Joint Venture to zone and develop the property and build and sell
homes on it. The Company must meet certain criteria as to cost control and
absorption rates for the sale of the finished lots. The landowner subordinates
his or her interest in the land to a mortgage securing the development
financing. As lots are sold, the landowner shares in the profits on the finished
lots. This approach allows the landowner to maximize the profit to be made on
the sale of the land. It also enables the Company to control a site which it
might not have been able to purchase through an option or contingent purchase
agreement. The Joint Venture also enables the Company to participate in the lot
profit, while retaining the profit from the construction of the homes on the
site.
Periodically, the Company acquires lots through optioning and/or purchasing
finished lots from unaffiliated developers. This approach allows the Company to
control a large number of finished lots, including an entire subdivision, while
also enabling the Company to market a new subdivision with minimal capital
expenditure and limited development risk. Generally, under these agreements, the
Company can continue to control these finished lots as long as the Company
purchases a specified number of such lots within a predetermined time period.
This arrangement, however, provides the Company less profit on the sale of the
lot.
Occasionally, the Company may sell a site to another entity and have it
develop the site for the Company. The Company will enter into an option
agreement with this entity to purchase the developed lots back. This approach
allows the Company to limit the amount of debt associated with developing the
site but provides the Company with less profit on the sale of the lot.
The Company continuously searches for new sites to control which meet its
development criteria. The Company also attempts, whenever possible, to upgrade
the property it controls. If a better site becomes available, the Company will
try to acquire control of the new site and to determine whether it should hold,
sell or terminate its agreement for the less desirable parcel. The Company will
also abandon attempts to zone and develop a parcel if significant development
problems arise. Accordingly, the land controlled by the Company for future lot
inventory is constantly changing. The Company has Land Acquisition Agreements
and finished lot inventory sufficient to satisfy its land requirements for the
next two to three years, and attempts to control land sufficient for its needs
approximately two to five years in advance.
LAND DEVELOPMENT
The Company's operations differ from the majority of home builders in the
U.S. Census Bureau Twin Cities Metropolitan Statistical Area (The "Twin Cities
MSA"), which area includes 11 Minnesota counties and two counties in Wisconsin,
in that it is involved in both land development and home building. Land
development is historically the most profitable portion of the Company's
business and an essential element to the success of the Company's home building
business.
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During 1997, 79.9% of the homes delivered by Lundgren were built on lots
developed by Lundgren, compared to 84.8% in 1996 and 77.2% in 1995. In the
future, the Company's goal is to maintain this percentage in the range of 50% to
70%. Since inception, the Company has developed 113 residential subdivisions,
ranging in size from 3 to 94 lots, in the Twin Cities MSA. In 1996, the Company
commenced the development of 11 new residential subdivisions and, in 1997,
commenced the development of five new subdivisions.
Once the Company acquires control of undeveloped land, it commences the
process of obtaining zoning and other government approvals necessary for the
proposed development. This process is generally completed in one to three years.
The Company estimates the cost of development of the entire parcel to determine
whether finished lots can be brought to market at a competitive, yet profitable,
price. Periodically during the approval process, the Company normally updates
its market studies to determine both the level of competition by other land
developers and builders which are, or will be, developing subdivisions in the
area, and projected lot absorption rates for that area. If at any time during
the zoning and approval process it appears that the cost of the lots will be too
great for the market, or that the approval process is not progressing
satisfactorily, the Company will cease the zoning and approval process and sell
or abandon its interest in the land. Therefore, because the Company's land
acquisition strategy is to acquire control of the land through Land Acquisition
Agreements structured to require limited initial investment by the Company and
to obtain the necessary zoning and governmental approvals prior to purchasing
the land, the Company minimizes the risk of substantial capital expenditures on
land which it ultimately cannot successfully develop. However, the Company may
spend between approximately $50,000 to $300,000 during the approval process
prior to determining whether it can, or will, develop the land. Nonetheless, the
Company believes that the outlay and potential loss of these pre-development
costs substantially reduces the risks of greater costs and capital expenditures
associated with owning undevelopable land. The Company generally has been
successful in obtaining the necessary zoning and governmental approvals for the
development of its land.
During the zoning and approval process, the Company determines the
availability of utilities, surveys and tests soil conditions on the site, and
performs the required environmental reviews. Upon receipt of final governmental
approvals, the Company will usually complete its purchase of the land and begin
site development.
Site development is the process whereby the undeveloped land is developed
into finished lots ready for home construction. During the initial development
stage, the land is graded and sanitary sewer, watermain, stormsewer, curbs,
gutters and streets are installed. Upon completion of the initial development
stage, the Company landscapes the subdivision and constructs various amenities.
The Company believes that to create a successful subdivision distinguishable
from that of its competitors, it is important to create a neighborhood and a
sense of community. A number of factors are involved in the creation of this
sense of community: a street and lot configuration that arrives at the best
balance of installation and construction costs and the esthetics of the
subdivision; the location, design, landscaping and creation of the entrance; and
the creation of common amenities in the subdivision, such as children's play
areas, tennis courts,
<PAGE>
swimming pools, basketball courts, gazebos and community open spaces with trails
for neighbors to enjoy the natural beauty of the land.
Since inception, the Company has developed 2,717 lots, for which the sales
of 2,412, or 88.8%, had been closed as of December 31, 1997. The remaining lots
are subject to purchase agreements or are available for sale. The development of
all but approximately 154 lots is complete. The subdivisions in which such 154
lots are located require minor finishing work, such as laying the final coat of
blacktop on the subdivision streets.
The Company expects to complete such finishing work in 1998.
HOME BUILDING AND HOME SALES
The Company closed on 204 home sales in 1997. The Company's homes are sold
primarily through its own sales staff. The Company also sells its homes through
local realtors. The Company recognizes a sale for accounting purposes on the
closing date of the sale.
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HOME CLOSINGS
Below is a summary of the Company's closings for the past five years.
YEARS ENDED DECEMBER 31,
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1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Dollars in thousands, except numbers of homes closed)
Homes Closed 216 247 202 198 204
Average Selling Price $ 265 $ 297 $ 311 $ 339 $ 321
of Homes(1)
Total Volume of Closed Homes $57,136 $73,471 $62,796 $67,079 $65,549
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(1) The average selling price per home is affected by the mix of the type of
lots developed, the product line of homes sold and mortgage interest
rates. The Company estimates that the average selling price for the types
of homes that it will be selling in the year ended December 31, 1998, will
be lower compared to 1997.
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The Company markets its homes primarily to middle and upper income buyers
in the Twin Cities MSA. The Company's promotional efforts include advertisements
in newspapers and other printed media, internet, radio and television,
illustrated brochures, billboards, on-site displays, realtor programs and
furnished model homes. Based upon its experience in the home building business
and the comments it receives from its customers, the Company believes that, in
addition to the location and design of its subdivisions, it has the competitive
advantages in the areas of (a) product design; (b) customer service; (c) quality
and customization; (d) cost control; and (e) its design center.
(a) PRODUCT DESIGN.
The Company designs, and builds from, a variety of standard home plans
that can be customized to some extent by the customer. The Company also designs
and builds true custom homes. The Company employs its own in-house designers,
which it supplements from time to time with national and local architectural
firms. The Company reviews its home designs on a regular basis in order to
ensure that the homes incorporate marketable floor plans that are both desirable
and practical. The Company also monitors local competition to determine whether
its product lines and home designs continue to maintain a competitive design
advantage. Additionally, the Company gets input on new home designs it is
developing from focus groups, which consist of individuals who have purchased
homes in the last six months in approximately the same price range as that of
the Company's new home designs.
In addition to implementing its current product lines and having its new
home designs reviewed, the Company utilizes a number of marketing consultants in
cities across the United States having similar climate and housing construction
techniques. During the year, the Company periodically consults with these
marketing consultants to determine what type of houses within the price and
square footage ranges of the product lines offered by the Company are selling
well in other markets. Usually two or three times a year, the Company sends a
team of its employees to study these homes for new ideas that the Company can
use. In recent years, Company employees have traveled to Seattle, Denver,
Chicago, St. Louis, Kansas City, Indianapolis and Washington, D.C. This housing
market review allows the Company's design team to keep the Company's designs
current and to incorporate innovations from around the country.
(b) CUSTOMER SERVICE.
Providing a high level of customer service has always been a priority for
the Company and a part of its competitive strategy. The Company attempts to
maintain personal contact with its customers from their first meeting with the
Company's sales representative through the construction process and after the
closing. This relationship begins with the Company's sales representatives when
the customer first visits one of the Company's model homes and selects a home
plan and lot. The Company emphasizes customer service by making it a topic at
every weekly sales meeting with the Vice President -- Sales and Marketing, as
well as by making it an important part of the annual sales training program that
all the sales representatives are required
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to take. The Company's sales representatives service the customers' needs until
the customers' final plans have been approved for construction. Once approval
for construction has been obtained, a construction coordinator is assigned to
the customers. The construction coordinators have offices at the Company's
headquarters and report directly to the Vice President -- Construction. The
construction coordinators handle any of the customers' concerns, changes,
service and warranty work and are available to talk with customers at any time
during the Company's normal business hours. Additionally, these construction
coordinators are specially trained to understand customers' needs and the
importance of solving their problems quickly and pleasantly.
Building a home is a very complicated process and one in which customers
probably have limited or no experience. Accordingly, the Company has developed a
system to educate its customers as to the Company's procedures and schedule for
everything that will happen from the time a customer signs a purchase agreement
through the entire construction process and through any service and warranty
work. This system establishes, prior to a customer's signing a purchase
contract, the correct customer expectations and the sequences and timing of
events during the process of building and servicing their home. The system also
explains when customer input is required in order for construction to proceed as
scheduled. The system is summarized for the customer in a comprehensive book
entitled "Building a New Home with Lundgren Bros.," which is given to them after
they have executed a purchase agreement with the Company. Moreover, at strategic
points in the construction process, customers are automatically sent letters
informing them of the progress and indicating what is required of them in order
to keep on schedule.
The Company also employs a system by which to evaluate the quality of its
service and the satisfaction level of its home buyers. The Company telephones
its home buyers at four different times during the term of its relationship with
the home buyers. These telephone calls are designed to get the home buyers'
feedback on how the Company is doing and how the Company is addressing their
problems, if any. The responses the Company receives from these telephone calls,
which are delivered weekly to the President of the Company and the Company's
department heads, are used to give management a qualitative measure as to how
the Company is doing at various critical points during the home building
process. In addition, the Company employs an outside firm to survey Company
customers who have recently closed on a home to determine both how such
customers feel about the treatment that they have received from the Company at
various stages during the home building process and whether they would recommend
the Company to another home buyer.
(c) QUALITY AND CUSTOMIZATION.
Since its inception, the Company has designed and built both custom homes
and a number of standard plan homes that can be customized to a customer's
personal taste. Through a series of meetings with the Company's sales
consultants and, if necessary, its designer, a customer's home plans evolve to a
compromise that balances the customer's wish list and budget. The design process
ends in a detailed final plan review with the customer.
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In order to provide home customers the price advantage of a standardized
product line while still providing them with flexibility to customize their home
before and after the final plan review, the Company has integrated its
construction process with a schedule for the customer's required
decision-making, contained in the book "Building a New Home with Lundgren Bros."
The book coordinates the customer's required input (final plan review, change
orders and selections) with the separate stages of construction. To ensure
proper communication between the customer and the field superintendent, as well
as to provide an inspection process to assure the customer that the construction
will meet the Company's performance standards, four orientation meetings are
scheduled for the customer before the closing: an on-site preconstruction
meeting; a pre-drywall orientation; a preclosing orientation; and a new home
orientation (walk-through). The book also alerts the customer to construction
deadlines for needed customer selections. Additionally, the Company's
construction coordinator helps the customer schedule and complete all the
necessary paperwork, meetings, change orders and selections. Because the Company
believes that its home buyers will increasingly demand more customizing
opportunities, it has positioned itself to take advantage of such a trend.
The Company has four standard product lines of homes that it offers its
homebuyers, in addition to building totally customized homes. The standard
product lines are the Heritage Homes, the Heartland Homes, the Lifestyle Homes
and the Traditional Homes. The Heritage Homes range in size from approximately
1,350 to 2,400 square feet. These homes with the lot sell for approximately
$130,000 to $190,000. The Heartland Homes range from 1,800 to 3,000 square feet
and sell with the lot from approximately $220,000 to $300,000. The Lifestyle
Homes series is a maintenance free attached or detached home. It is built in a
community that has a homeowners association that controls the maintenance of the
exteriors of the buildings and the common land. The Lifestyle Homes range from
1,800 to 2,200 square feet and sell with the lot from approximately $230,000 to
$300,000. The Traditional Homes range in size from 1,800 to 4,000 square feet
and sell with the lot from approximately $250,000 to $550,000. The purchasers of
the Company's standard houses can select from various base floor plan and
elevation combinations, as well as customize their homes with a selection of
changes, features and upgrades. Some typical features of the Company's floor
plans, depending on the subdivision, are:
* vaulted or higher-than-average ceilings and large decorative windows
to admit natural light
* two story entries which offer a sight line through the house
* incorporation of columns, arches, bridges, niches and wall cutouts,
formal and informal stairways and other design features
* basements, most with windows or outside entries
* two and three car garages.
In addition, purchasers can choose, at additional cost, optional amenities such
as different front elevations for the house, bay windows, decks, cabinets,
upgraded carpets and floor coverings, fireplaces, lighting fixtures, appliances
and hardware.
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Custom homes designed and built by the Company have ranged from
approximately $250,000 to $800,000 for house and lot, and have ranged from
approximately 2,500 to 5,000 square feet.
(d) COST CONTROL.
In order for the Company to control construction costs without sacrificing
quality, it must start with the efficient design of its homes. After completion
of the schematic plan of a home from the Company's standard product line, the
construction department, purchasing department and estimating department review
the plan to ensure the home is designed to minimize the costs of labor and
materials. The sales department also reviews the plan at the same time to ensure
that amenities designed into the home will create value for the home buyer. The
plan is then sent to an outside structural engineer who reviews the structural
integrity of the plan and makes recommendations where necessary. Additionally,
the plan is sent to a truss manufacturer, electrical consultant and a cabinet
maker for additional input and recommendations. The Company then reviews these
recommendations and, if appropriate, incorporates them into the final plans.
Along with the design department, the construction and purchasing departments
also review the final plan and officially approve it for use by the Company. The
purchasing and construction department may seek the advice of suppliers and
subcontractors with respect to better or more cost efficient ways to design and
build the home so as to create more value for the home buyer. Thereafter, the
plan is revised based on all of the above reviews and input into the Company's
Auto Cad (computerized architectural design programs) system. The Auto Cad
creates very detailed drawings of the home and allows the Company to make
changes to the plan rapidly. Once the plan is completed, the purchasing and
estimating departments seek to obtain competitive pricing from local
subcontractors and suppliers. The Company has negotiated contracts with various
vendors for set pricing on certain standard product line plans. The Company
believes it is generally able to negotiate satisfactory pricing due to both the
high volume of work it offers to its unaffiliated subcontractors and its ability
to pay its bills promptly. The Company has also arranged and is continually
attempting to establish direct purchase relationships with national vendors in
order to provide certain items at a lower price. The Company believes its design
center is appealing to these national vendors because it offers them a
professional place to show their products, while also giving the Company an
opportunity to negotiate special relationships with the national vendors.
The Company utilizes its management information system to monitor all
subcontractor expenditures for each home it builds. Once the home plans are
completed, they are sent to the estimating department, which, using a
computerized estimating system, determines the exact quantities of materials
needed to build the home and the estimated cost associated with using such
materials. This estimated cost is then verified with individual cost quotes or
bids from each subcontractor or supplier. A detailed budget for the home is then
input into the computerized purchase order system which enables the Company to
monitor all of its costs and variances from the original budget for the home.
The Company has one person who is responsible for recording and inputting into
the system variances from the original budget for the home as they occur. This
allows the Company to view on a daily basis any variance on every home under
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construction. Management normally has weekly meetings to review all variances so
as to determine the cause and to establish procedures to eliminate such
variances in the future.
The Company also uses its management information system to pay its
suppliers and subcontractors for their completed work on the home. Unless there
is an approved variance purchase order or an approved change order that has been
entered into the system, the only amount paid to the suppliers and
subcontractors is the amount which was originally budgeted on the system. With
this system, the Company knows at all times the current cost of each home. If
there is a variance from the original budget, the Company can study the variance
when it occurs to determine what went wrong and how to correct its plans and
procedures so the variance will not occur in the future. By using this system
over a period of time, the Company can determine the most cost efficient way to
produce its homes. The Company also monitors its gross margin on each home at
four different points in order to make certain how the actual margin compares to
the budgeted one: when the purchase agreement is signed by the Company, after
the budget is placed in the computerized purchase order system, when the home
closes and approximately 45 days after the home closes and all outstanding
invoices have been reviewed and entered into the purchase order system.
(e) DESIGN CENTER.
All of the Company's home buyers can choose from the Company's various
base floor plans and elevation combinations or design a custom plan for
themselves. Home buyers can further customize their home by making a number of
selections and upgrades from the Company's state-of-the-art Design Center. The
Design Center is located in a separate building and allows the buyers to view a
wide selection of items. The Design Center currently has seven complete
kitchens, six bathrooms and a media center on one level. The lower level of the
Design Center displays numerous items, including selections of roofing, siding,
plumbing fixtures, cabinets, interior and exterior doors, carpeting, floor
coverings, counter tops and window treatments. The Company's home buyers can
visit this center as many times as they like. The Company employs interior
decorators who work full time for the Company and staff the Design Center to
assist customers. In addition, the Company's interior design staff will meet
with home buyers on an appointment basis when it is convenient for the home
buyer to make selections, or home buyers can visit the design center, which is
open weekdays as well as during convenient evening and weekend hours. The
Company is not aware of any other housing company in the Twin Cities that has a
comparable facility. Normally, a home buyer purchasing a home from one of the
Company's competitors will be forced to travel to many different locations
scattered around the city to make their selections from different suppliers.
This is not only time-consuming, but there is no way of controlling the quality
of service the home buyer will receive at each of these different suppliers. The
Company's home buyers will be able to make the vast majority of all their
selections at the Company's Design Center where they will be assisted by the
Company's trained staff.
<PAGE>
INVENTORY MANAGEMENT
Much of the risk in the home building industry is related to excessive
inventory, including undeveloped land, finished lots and completed homes. The
Company attempts to reduce its exposure to excess capital committed to land by
continuously monitoring its undeveloped and finished lot inventory. The Company
tries to purchase land through options and non-recourse contingent purchase
agreements, which reduce the amount of committed capital and permit the Company
to terminate or postpone the ultimate purchase of land that it does not need.
The Company controls its finished lot inventory by developing finished lots in
increments of approximately 20 to 40 lots, which it believes can be sold and
closed in a normal market within one and one-half years from the completion of
lot development. The Company reviews its lot inventory on a weekly basis.
The Company attempts to limit its exposure to an excess inventory of
completed houses by (a) generally not starting construction of a home until
execution of a purchase agreement, receipt of satisfactory earnest money,
receipt by the home buyer of a preliminary mortgage commitment and removal of
all contingencies, and (b) controlling the number of finished homes held in
inventory on a project-by-project basis and monitoring weekly the sales progress
of each subdivision.
For sales and marketing purposes, the Company generally will build one to
three model homes in each of its subdivisions. These homes are completed,
including interior furnishings and decorations, in order to market a particular
home plan to potential home buyers. These model homes are not generally marketed
for sale for at least a year or, if earlier, until the subdivision in which they
are located is nearly sold out.
As of December 31, 1997, the Company had 39 houses built or under
construction to be held as inventory which represents 35.7% of the Company's
total house inventory. Total house inventory also includes homes under purchase
agreements. A house is put in this category as soon as application is made for a
building permit. Therefore, these 39 houses could be at any stage in the
construction process. In the Company's experience, these houses often sell prior
to completion. The Company rarely holds many houses in inventory after
completion of construction.
The 39 houses in inventory as of December 31, 1997, were located in 19
different subdivisions. Houses in inventory are generally marketed to transferee
home buyers. Transferee home buyers have traditionally represented a significant
portion of the Company's sales. A transferee home buyer typically is relocating
for employment, needs a new house within 30 to 60 days, and cannot buy a new
home which is not currently under construction because it would take too long to
complete. The Company has actively marketed to this type of buyer for most of
its history. The Company believes that these home buyers are primarily concerned
about the reputation of the builder, location and quality of the subdivision,
the competitive price of the home and the resale potential of the home. The
number of homes held in inventory will vary seasonally and with changes in the
local and national economy.
<PAGE>
PAINTING , STAINING AND DRYWALL SERVICES
Brush Masters provides painting, staining and drywall services to the
Company and to unaffiliated residential building contractors. Brush Masters
offers value added services to its contractors and their customers. Such
services include blueprint estimating, advising contractors on recent
innovations in paint and stain products and their application, daily visits from
a superintendent to construction sites, and providing professional stain and
paint color selection service.
Brush Masters currently services approximately 34 residential building
contractors, including three of the largest builders in the Twin Cities MSA.
Brush Masters also provides all of the Company's painting and staining services.
The Company's transactions with Brush Masters are conducted on terms of price,
quality and service that are comparable to terms available in arm's length
transactions. The Company represented 35.8% of Brush Masters' sales in 1997.
Brush Masters competes with numerous small painting, staining and drywall
contractors, generally on the basis of quality and service.
COMPETITION
The Company faces competition in its land acquisition, land development
and home building activities. While the Company's objective is to purchase and
develop land located in areas where there will be great demand for homes in the
future with limited competition, it, nonetheless, competes with many national
builders, including the Rottlund Companies, U.S. Homes (doing business as Orrin
Thompson Homes), Pulte Homes, Centex Homes, Ryland Homes, Town & Country and
D.R. Horton (doing business as Joe Miller Homes), as well as a number of large
local builders, who also seek to acquire land in the same types of areas. In
addition, the Company faces competition in its land development activities. The
competition principally consists of the larger home builders, mentioned above,
which develop land for their own account, as well as land developers who
specialize in developing for small builders. The Company's home building
activities are also subject to competition from national builders and large and
small local builders. The building and sale of residential properties is highly
competitive and fragmented, and it involves a number of interrelated factors,
including location, product design, perceived value, price and reputation in the
marketplace. With the entrance of the above-referenced national builders into
the Twin Cities market, the home building competition in the Twin Cities has
increased. Additionally, the Company competes with a large number of relatively
small local builders who generally purchase finished lots from unaffiliated
developers, build homes on these lots and then sell them to the public. These
small builders, however, are generally restricted to making a profit only on the
actual sale of the house, while the lot develper realizes the profit on the sale
of the lot. The Company also faces competition with respect to the sale of the
houses it builds with the resale of existing houses and rental homes.
<PAGE>
EMPLOYEES
At December 31, 1997, the Company employed 205 full-time employees,
including executive and office personnel, construction superintendents, painters
and general laborers. The Company's employees are not covered by a collective
bargaining agreement and the Company believes its relations with its employees
are good.
GOVERNMENTAL REGULATION
The Company's business is subject to regulation by a variety of state and
federal laws and regulations relating to, among other things, advertising,
collection of state sales and use taxes and product safety. The Company's
development activities are also affected by local zoning ordinances, building
codes and other municipal laws as well as federal, state and municipal
environmental and conservation laws, including, for example, a Minnesota law
regulating development of wetland areas. While the Company believes it is
presently in material compliance with such regulations, in the event that it
should be determined that the Company is not in compliance with all such laws
and regulations, the Company could become subject to cease and desist orders,
injunctive proceedings, civil fines and other penalties.
The Company generally acquires undeveloped land located within the MUSA.
The location and size of the MUSA is regulated by the Metropolitan Council. The
MUSA is the area within the metropolitan area where public services, including
roads, water and sanitary service are permitted by the Metropolitan Council to
be made available. The Metropolitan Waste Control Commission, a regional agency,
regulates the extension of sewer services within the MUSA. Access to public
water and sanitary sewer is necessary to enable the Company, as well as other
developers, to develop undeveloped land economically. There is a limited amount
of land within the MUSA available for development. Accordingly, competition for
prime land within the MUSA will likely increase. The Company has attempted to
acquire what it believes are some of the best undeveloped parcels of land within
the MUSA in the western suburbs of the Twin Cities metropolitan area.
Occasionally, the Company has acquired land outside the MUSA and successfully
assisted the municipalities in which such land was located in obtaining
extension of the MUSA line to include such land. The process of seeking an
extension can be costly and time-consuming, thus adding to the cost of such
land, and there can be no assurance that the extensions sought will be granted.
<PAGE>
ENVIRONMENTAL AND LEGAL PROCEEDINGS
The Company currently is not subject to any environmental litigation or
administrative proceedings. The Company is not currently involved in any legal
proceedings other than those arising in the ordinary course of business.
The Company believes that its potential liability for environmental
concerns can arise in one of two contexts: (a) liability could arise with
respect to substances that are in, under or on land which the Company intends to
acquire; or (b) liability could arise in connection with how the Company intends
to develop the land. With respect to a substance in, under or on land for which
the Company could face environmental liability, the Company performs a Phase I
environmental audit prior to exercising an option. If the audit uncovers any
environmental hazards on the land, the Company would not exercise the option
unless the hazard could be corrected at a reasonable cost. With respect to
liabilities in connection with a planned development, the Company obtains the
federal and state permits necessary for building and development before it
exercises the options. If a planned development is not permissible under
environmental laws, the Company will not exercise the option. The Company's
operations are generally small enough (subdivisions typically are less than 100
acres in size) that no environmental impact statement is required prior to
development.
<PAGE>
ITEM 2. PROPERTIES
The Company's corporate offices are located at 935 East Wayzata Boulevard,
Wayzata, Minnesota 55391 and consist of approximately 11,000 square feet. The
Company leases these offices from a related partnership. The lease expires March
31, 2009, and calls for monthly rental and tax escrow payments of approximately
$12,700, subject to annual adjustments. See "Certain Transactions." The Company
also owns property in Wayzata, Minnesota which it utilizes as its Design Center.
In addition, the Company leases the following properties in Minnesota:
SQUARE LEASE MONTHLY EXPIRATION
TYPE FEET LOCATION PAYMENT DATE
---- ---- -------- ------- ----
Warehouse 1,120 Loretto $ 650 month to
month
Office/Warehouse 8,450 Medina $3,000(1) 4/30/98
- --------------------
1) Does not include required additional payments for operating expenses.
ITEM 3. LEGAL PROCEEDINGS
The Company is not subject to any currently pending legal proceedings other than
those arising in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
DURING FOURTH QUARTER OF FISCAL YEAR.
There were no matters submitted to a vote of the Company's shareholders during
the three-month period ended December 31, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's common stock is held of record by five persons and is not actively
traded. The Company paid no dividends on its common stock during the three-year
period ended December 31, 1997. The terms of certain of the Company's debt
agreements restrict the payment by the Company of dividends on its common stock.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company as of
and for the years ended December 31, 1993, 1994, 1995, 1996, and 1997 are
derived from consolidated financial statements of the Company. The independent
auditors' report on the consolidated financial statements as of December 31,
1996 and for the years ended December 31, 1995 and 1996 of Coopers & Lybrand
L.L.P., and independent auditors' report on the consolidated financial
statements as of December 31, 1997 and for the year ended
<PAGE>
December 31, 1997 of Deloitte & Touche L.L.P. are included elsewhere in the Form
10-K. The consolidated statement of operations data, as they relate to each of
the three years in the period ended December 31, 1997, and the selected
consolidated balance sheet data, as of December 31, 1996 and 1997, should be
read in conjunction with the Consolidated Financial Statements, including the
Notes thereto, set forth elsewhere in this Form 10-K and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," which
follows.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
SELECTED STATEMENT OF OPERATIONS DATA:
Revenues(2) ................................. $ 58,955 $ 75,814 $ 65,217 $ 69,798 $ 68,658
Cost of revenues ............................ 50,233 64,004 55,591 59,052 60,839
-------- -------- -------- -------- --------
Gross profit ................................ 8,722 11,810 9,626 10,746 7,819
Operating expenses .......................... 5,994 7,858 7,429 7,238 6,528
-------- -------- -------- -------- --------
Operating income ............................ 2,728 3,952 2,197 3,508 1,291
Other income (expense), net ................. (727) (706) (1,608) (1,643) (2,427)
-------- -------- -------- -------- --------
Income (loss) from continuing operations
before income taxes ....................... 2,001 3,246 589 1,865 (1,136)
Income tax provision (benefit) for
continuing operations ..................... 817 1,308 253 709 (489)
-------- -------- -------- -------- --------
Income (loss) from continuing operations .... 1,184 1,938 336 1,156 (647)
Cumulative effect on prior years of
change in accounting method ............... -- -- 763 -- --
Income (loss) from discontinued operations(1) 62 (740) 86 (145) --
-------- -------- -------- -------- --------
Net income (loss) ........................... $ 1,246 $ 1,198 $ 1,185 $ 1,011 $ (647)
======== ======== ======== ======== ========
Income (loss) per share (basic and diluted):
Continuing operations ..................... $ 111 $ 182 $ 32 $ 109 (61)
Cumulative effect of change in
accounting method ....................... -- -- 72 -- --
Discontinued operations ................... 6 (69) 8 (14) --
-------- -------- -------- -------- --------
Net income (loss) ....................... $ 117 $ 113 $ 112 $ 95 $ (61)
======== ======== ======== ======== ========
</TABLE>
AS OF DECEMBER 31,
------------------------------------------------
SELECTED BALANCE SHEET DATA: 1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Inventories ............. $23,903 $30,246 $34,166 $37,828 $35,614
Total assets ............ 35,825 42,619 47,763 51,695 52,784
Long-term debt .......... 7,219 10,664 10,766 15,739 16,337
Total liabilities ....... 31,823 37,419 41,378 44,299 46,035
Stockholders' equity..... 4,002 5,200 6,385 7,396 6,749
- -------------------------
(1) Discontinued operations reflect the discontinuation of the remodeling
business in November 1996.
(2) Revenues from lot and home sales are recognized on the closing date of the
property sale. See Note 1 of Notes to Consolidated Financial Statements.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following analysis of the Company's consolidated financial condition and
results of operations as of December 31, 1996 and 1997, and for the years ended
December 31, 1995, 1996, and 1997 should be read in conjunction with the
Company's Consolidated Financial Statements, related Notes thereto, and other
information presented elsewhere in this Form 10-K.
GENERAL
The Company operates in the new homes business segments which includes land
acquisition and development, home building and home sales, inventory management
and painting, staining and drywall services. In 1995 and 1996 the Company also
operated in the remodeling segment, which was discontinued in November 1996, and
which consisted of home remodeling design and construction services.
The Company's revenues are derived from its interrelated activities of land
development and home building, providing painting, staining and drywall
services. When a home sale is closed, the revenues are allocated both to the
home (home construction revenues) and to the lot on which the home is
constructed (lot revenues). In 1997, home construction and lot revenues were
$65.5 million or 95% of total revenues. Revenues from painting, staining and
drywall (excluding those to the Company's new home construction operations) were
$3.1 million or 5% of total revenues. The 1997 percentages are consistent with
the percentages for 1996. The Company sells finished lots to other builders when
the Company has excess finished lot inventory and when a subdivision is nearly
sold out. In 1997, sales of lots to other builders accounted for less than 1% of
total revenues.
The Company's gross profit on home construction revenues and lot revenues
for 1997 was $7.3 million or 93% of the total gross profit. Of the $7.3 million
gross profit, $5.3 million was derived from the sale of homes and $2.0 million
from the sale of lots on which such homes were built. The gross profit margins
experienced by the Company are historically higher on lot revenues than on home
construction revenues when the lot and house are sold together. In 1997 the
gross profit margin on home construction revenues was 10%, while the gross
profit margin on lot revenues was 14%. The gross profit margin on homes varies
significantly from development to development. The Company's painting, staining
and drywall business had gross profit margins (excluding those derived from the
Company's new home construction operations) of 17% in 1997.
The Company generally enters into a purchase agreement with a potential
home buyer prior to commencing construction of a home, except where the Company
is building a house to be held in inventory or to be used as a model home. The
Company does not recognize a sale for accounting purposes until construction is
completed and the sale is actually closed. The time period from execution of a
purchase agreement with a home buyer to the closing of the home sale generally
ranges from three to six months. This time period varies due to many factors,
including the purchaser's mortgage approval process, the status of the home's
construction when the purchase agreement is executed and the removal of the
contingencies, if any, contained in the purchase agreement. At December 31,
1997, the Company had signed purchase agreements for the sale of 70 homes,
compared to 41 homes at December 31, 1996. The
<PAGE>
Company considers these signed purchase agreements to constitute its backlog.
The Company's business is significantly affected by local and national general
economic conditions, in particular by mortgage interest rates and the
availability of mortgage financing. The Company believes that trends in general
economic conditions, mortgage interest rates and consumer confidence levels in
the Twin Cities metropolitan area are currently more favorable than at the end
of 1996. Any substantial increase in mortgage interest rates or decrease in
consumer confidence levels could cause a decrease in future home sales. Such a
decrease in sales would be offset in part by decreased development and
construction costs and overhead.
RESULTS OF OPERATIONS
1997 Compared to 1996
Revenues decreased $1.1 million or 1.6% in 1997 compared to 1996. The
Company closed on sales of 204 homes in 1997, compared to 198 closings in 1996.
The average selling price of homes closed decreased by 5.3% in 1997 from the
average selling price of homes closed in 1996. The decrease in average selling
price is due to a change in the mix of homes closed in 1997 compared to 1996,
the sale of 14 model homes at lower than their appraised value under
sale-leaseback agreements in May and December 1997 and the effect of a special
promotion on pricing offered in late 1996 through the first quarter of 1997.
Gross profit margin decreased to 11.4% in 1997, compared to 15.4% in 1996.
The Company believes that this decrease in gross profit margin is primarily due
to the sale and leaseback of 14 model homes at no profit, and to a lower average
sales price as a result of the special promotion in late 1996 through the first
quarter of 1997 on sales of the Company's completed house inventories. The
decrease in gross profit margins was also due to changes in the mix of homes
sold and increases in the cost of land developed by the Company due to
competition for, and reductions in the availability of, raw land within the Twin
Cities metropolitan area. The Company expects that the increased costs of land
could continue to negatively impact the gross margins in the future, unless such
increased costs can be passed on to homebuyers.
Operating expenses (which include selling, general and administrative
expenses) decreased by $710,000 in 1997 compared to 1996. As a percentage of
revenues, these expenses decreased to 9.5% in 1997 compared to 10.4% in 1996.
The decrease is mainly due to a $592,000 decrease in discretionary officer and
management bonuses, a decrease in land option fees and abandoned projects, and a
decrease in consulting fees in 1997. These decreases are partially offset by an
increase in personnel costs through the hiring of additional personnel during
1997.
OTHER INCOME (EXPENSE), NET
Interest expense increased by $639,000 in 1997 compared to 1996. The
increase is mainly due to higher interest rates and increased borrowings on the
Company's lines of credit to finance increased working capital needs.
Other income (expense), net decreased $145,000 in 1997 from 1996. The
decrease is mainly due to a gain in 1996 on the sale of an investment in a land
development partnership of $123,000 which is partially offset by a increase in
interest income.
<PAGE>
INCOME (LOSS) FROM CONTINUING OPERATIONS
Loss from continuing operations in 1997 was $647,000 compared to income
from continuing operations of $1.2 million in 1996. This decrease in 1997 is
primarily due to a decrease in gross profit margins and increase in interest
expense in 1997.
1996 Compared to 1995
Revenues increased $4.6 million or 7.0% in 1996 compared to 1995. The
Company closed on sales of 198 homes in 1996, compared to 202 closings in 1995.
The average selling price of homes closed increased by 9.0% in 1996 from the
average selling price of homes closed in 1995. The increase in average selling
price is due to general price increases as a result of inflation and changes in
the mix of homes closed in 1996 compared to 1995.
Gross profit margin increased to 15.4% in 1996, compared to 14.8% in 1995.
The Company believes that this increase in gross profit margin is due to changes
in the location of the home developments, improvements to the Company's cost
controls, changes in methods of construction, and an increase in the mix of
homes sold on land developed by the Company versus lots purchased from other
developers.
Operating expenses (which include selling, general and administrative
expenses) decreased by $191,000 in 1996 compared to 1995. As a percentage of
revenues, these expenses decreased to 10.4% in 1996 compared to 11.4% in 1995.
The decrease is mainly due to a $540,000 decrease in discretionary officer
bonuses and a decrease in fees paid for mortgage commitments in 1996. These
decreases are partially offset by an increase in advertising costs for special
promotions in 1996, and increases in real estate taxes as a result of increased
land and house inventories.
OTHER INCOME (EXPENSE), NET
Interest expense increased by $86,000 to $1.8 million in 1997 from $1.7
million in 1996. Other income (expense), net increased $51,000 in 1996 from
1995. The increase is mainly due to a gain on the sale of an investment in a
land development partnership of $123,000 which is partially offset by a decrease
in interest income.
INCOME FROM CONTINUING OPERATIONS
Income from continuing operations was $1.2 million, an increase of 244.0%
in 1996 from $336,000 in 1995. This increase is primarily due to improved gross
profit margins and a decrease in operating expenses in 1996.
<PAGE>
NET INCOME (LOSS)
Net income in 1996 was $1.0 million, a decrease of $174,000 from $1.2
million of net income in 1995. This decrease is mainly due to the increase in
1995 income for the 1995 change in accounting for land acquisition and
development costs of $763,000 and a loss in 1996 from the discontinued
operations of the Company's remodeling division of $145,000, which is partially
offset by an $820,000 increase in income from continuing operations.
LIQUIDITY AND CAPITAL RESOURCES
1997 Compared to 1996
Cash increased $726,000 to $2.0 million in 1997 from $1.3 million in 1996.
Cash flows provided by operating activities were $2.1 million in 1997, an
increase of approximately $3.1 million from the $1.0 million used in 1996. In
1997, cash was provided by a decrease in cash invested for land and model home
inventories of $4.2 million and a $1.4 million increase in accounts payable.
These cash provisions were partially offset by cash used for an increase in
restricted cash of $875,000; a $486,000 decrease in estimated costs to complete
sold homes; a $456,000 increase in prepaid expenses; a $647,000 loss from
continuing operations and $1.0 million related to other changes in operating
assets and liabilities.
Cash flows used in investing activities were $756,000 in 1997, an increase
of approximately $104,000 from $652,000 cash used in 1996. The increase was
primarily due to an increase in expenditures for property and equipment and to
the effect of proceeds from the sale of an investment in a land development
partnership 1996.
Cash flows used in financing activities were $594,000 in 1997, an increase
of approximately $544,000 from the $50,000 used in financing activities in 1996.
The increase was primarily due to increased net borrowings on the Company's bank
lines of credit to finance increased working capital needs.
1996 Compared to 1995
Cash decreased $1.7 million to $1.3 million in 1996 from $3.0 million in
1995.
Cash flows used in operating activities were $1.0 million in 1996, a
decrease of approximately $2.0 million from the $3.0 million used in 1995. In
1996, cash was used for a $871,000 increase in deposits and prepaid expenses,
principally for expenses incurred in research of potential land projects, a
reduction of accounts payable of $1.3 million, and $374,000 for discontinued
operations. These uses of cash were partially offset in 1996 by $1.2 million in
cash provided by income from continuing operations, an increase in accrued
expenses, principally for bonuses to employees other than stockholders, of
$431,000, and other changes in operating assets and liabilities.
<PAGE>
Cash flows used in investing activities were $652,000 in 1996, an increase
of approximately $78,000 from $574,000 cash used in 1995. The increase was
primarily due to an increase in cash surrender value of life insurance and
expenditures for property and equipment, which were partially offset by proceeds
from the sale of an investment in a land development partnership.
Cash flows used in financing activities were $50,000 in 1996, a decrease
of approximately $3.3 million from the $3.2 million provided by financing
activities in 1995. The decrease was primarily due to a reduction in net
borrowings on the Company's bank lines of credit as a result of a decrease in
cash used in operating activities and a reduction in cash and cash equivalents
in 1996 compared to 1995. These decreases were partially offset in 1996 by $3
million of additional subordinated debenture debt.
Financing
The Company believes that internally generated funds, amounts available
under its four lines of credit and borrowing arrangements, including the
Subordinated Debentures, will continue to be the primary sources of capital for
liquidity. However, the Company may seek additional long-term financing.
The Company's financing needs depend primarily upon sales volume, asset
turnover, land acquisition and inventory balances. The Company presently
finances substantially all of its land acquisition and development and home
construction activities through borrowing arrangements for individual projects
or homes under construction. The borrowing arrangements evolve with each stage
of the process from land acquisition, to development, to construction of a home,
and to the sale of the home and lot. During 1997, the Company entered into
arrangements involving the sale of raw land to other entities for which the
Company has an option to subsequently purchase back as developed lots.
The Company also utilizes secured lines of credit to finance its
operations. The Company has approved aggregate credit of $10.4 million, subject
to a borrowing base. At December 31, 1997, the aggregate maximum credit
available under the lines of credit was $9.7 million, of which $7.5 million was
utilized and $2.2 million was available.
The Company's outstanding indebtedness as of December 31, 1997, included
$19.3 million due within one year. The Company has historically operated with a
substantial amount of its outstanding indebtedness due within one year and has
historically paid such debt out of earnings or through refinancing, where
applicable. The Company believes that the amounts available under its lines of
credit, borrowing arrangements, and amounts generated from operations will be
sufficient to satisfy its debt obligations due in the next year. However, there
can be no assurance that the Company will be able to continue to obtain adequate
short-term financing, including bank financing, in the future.
INFLATION AND THE EFFECTS OF CHANGING PRICES
Real estate and residential housing prices are affected by inflation, which
can cause increases in the price of land, raw materials and subcontracted labor.
Historically, the Company has been able to pass most increased costs due to
inflation on to its customers and expects to be able to do so in the future.
Unless such costs are recovered through higher sales prices, gross profit
margins will decrease. Interest rate fluctuations also affect gross profit
margins by increasing or decreasing financing costs for land, construction and
operations. The Company believes that product demand and sales are impacted by
mortgage interest rates.
<PAGE>
The Company benefited from low mortgage interest rates from mid-year 1995
through early 1996, and then again in late 1997. As interest rates increase,
construction and financing costs, as well as the cost of borrowed funds, also
increase and can result in lower gross profits. In addition, as interest rates
continue to rise, customers may be discouraged from purchasing a home, due to
the increased cost, decrease in buying power and possible difficulty in
qualifying for a mortgage. Seasonality is generally not a significant factor in
the Company's operations, in part because homes can be constructed year-round.
The forward-looking statements contained in this annual report on Form 10-K,
including without limitation forward-looking statements contained in
Management's Discussion and Analysis, are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Certain
important factors could cause results to differ materially from those
anticipated by some statements made herein. You are cautioned that all
forward-looking statements involve risks and uncertainties. Among the factors
that could cause results to differ materially are the following: cyclical
economic conditions; fluctuations in operating results; continuing need to
acquire land for future development; substantial leverage; reliance on financing
and no assurance of availability of credit; extensive government regulation; and
environmental factors. Reference is also made to the risk factors contained in
the Company's Registration Statement on Form S-1, as filed with the Securities
and Exchange Commission on October 18, 1996.
IMPACT OF ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED IN THE FUTURE
In December 1996, the Financial Accounting Standard's Board (FASB) issued
SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of SFAS No.
125." SFAS No. 127 delayed the effective date of certain provision of SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities." The Company will adopt the deferred provisions
of SFAS No. 125 in the first quarter of 1998. The Adoption of this standard will
not have a material effect on the results of operations of the Company.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes new rules for the reporting and display of
comprehensive income and its components in a company's financial statements. The
Company will adopt SFAS No. 130 in the first quarter of 1998. The adoption of
this standard will not have an effect on the results of operations of the
Company.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
and Enterprise and Related Information." SFAS No. 131 requires a company to
utilize a "management approach" to reporting segment information. The Company
will adopt SFAS No. 131 in the first quarter of 1998. The adoptions of this
standard will not have an effect on the consolidated results of operations of
the Company.
YEAR 2000 COMPLIANCE
The Company has and will continue to make certain investments in its software
systems and applications to ensure the Company is year 2000 compliant. The
financial impact has not been and is not anticipated to be material to its
financial position or results of operations in any given year.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 and Index to Consolidated Financial Statements beginning on page 43.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Previously reported on Forms 8-K filed with the Securities and Exchange
Commission on October 15, 1997 and November 21, 1997.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The current executive officers and directors of Lundgren are as follows:
Name Age Title
- ---- --- -----
Peter Pflaum 55 President and Director, Executive Committee Member
Terrance M. Forbord 47 President - Land Development Division, Executive
Committee Member
William O. Burgess 33 Vice President - Purchasing, Executive Committee Member
James L. Weaver 44 Vice President - Construction, Executive Committee
Member
Allan D. Lundgren 55 Vice President, Secretary/Treasurer
and Director, Executive Committee Member
Richard W. Denman 47 Vice President - Sales and Marketing, Executive
Committee Member
Peter T. Beucke 39 Director of Design, Executive Committee Member
Laurie A. Vercnocke 48 Controller, Executive Committee Member
Michael A. Pflaum 53 Vice President - Land Development
Marc S. Anderson 49 Vice President - Land Development
Edmund M. Lundgren 59 Vice President and Director
Gerald T. Lundgren 58 Vice President
- --------------------
PETER PFLAUM has been President and a Director of the Company since
October 1972 and serves as the chief executive officer. In addition to his
executive duties, Mr. Pflaum supervises the land acquisition and land
development activities, negotiates the Company's credit facilities, manages the
Company's lot inventory, and supervises sales, marketing and product
development. He is the brother of Michael A. Pflaum, a vice president of the
Company.
TERRANCE M. FORBORD has served as President - Land Development Division
since August 1996 and Vice President - Land Development of the Company since
April 1988. In this position, he
<PAGE>
supervises the land acquisition and land zoning activities of the Company. Prior
to joining the Company, he was Vice President of Residential Development for the
Scotland Company and a sales manager/broker for Scott Realty and Coldwell
Banker's Scott Real Estate.
WILLIAM O. BURGESS has been Vice President - Purchasing since February
1997. In this position, he is responsible for purchasing, estimating and
overseeing the Company's Design Center and related operations. Prior to joining
the Company, Mr. Burgess was Director of Purchasing for Cambridge Homes, Inc. in
Chicago, Illinois, where he supervised the Purchasing and Estimating functions.
JAMES L. WEAVER has been Vice President - Construction since August 1995
and was a production manager from February 1994 to August 1995. In the position
of Vice President - Construction, he is responsible for daily construction
activities, coordination with project managers assigned to each community,
training and development of construction staff, and oversight of the service and
estimating departments. From October 1983 until March 1993, Mr. Weaver served in
various positions with Pulte Homes, most recently as a production manager. From
March 1993 until February 1994, Mr. Weaver worked as an independent contractor
and consultant doing building, remodeling and consulting on building projects.
ALLAN D. LUNDGREN has been Vice President and Secretary/Treasurer since
October 1972 and was previously Vice President - Purchasing and Construction. He
has been a Director of the Company since October 1972. He is the brother of
Edmund M. Lundgren and Gerald T. Lundgren.
RICHARD W. DENMAN has been Vice President - Sales and Marketing since
February 1998 and previously from August 1987 through February 1992. In this
position, he supervises all sales and marketing activities of the Company. Mr.
Denman has been with the Company as a sales representative and has participated
in the Company's product design since June 1982.
PETER T. BEUCKE has been a Director of Design since July 1995. In this
position, he is responsible for product design and coordination of product
implementation. From 1989 until 1995, Mr. Beucke was Regional Architectural
Manager for Kaufman & Broad in California.
LAURIE A. VERCNOCKE has been Controller since May 1996. In this capacity,
she is responsible for supervising the financial management, accounting,
information systems and office management. From 1987 until 1996, Ms. Vercnocke
was Controller for Cambridge Homes, Inc. in Chicago, Illinois, where she
supervised the accounting and finance areas. From 1982 until 1987, she was
Controller-Treasurer of Westfield Development Co., another Chicago area
homebuilder.
MICHAEL A. PFLAUM has been Vice President - Land Development of the
Company since January 1988. In this position, he supervises all of the
construction activities related to land development and also aids in the
approval process for such development. He is the brother of Peter Pflaum.
MARC S. ANDERSON has been Vice President - Land Development of the Company
since May 1997 and Director of Land Development from February 1994 to May 1997.
In the position of Vice President - Land Development, he is responsible for land
acquisition, governmental approvals and aids in project finance and land
development construction activities. From 1982 to 1994, Mr. Anderson served as
Real Estate Director at Opus Corporation in Minneapolis, MN.
<PAGE>
EDMUND M. LUNDGREN has been Vice President and a Director of the Company
since October 1972. In this capacity, he currently is involved with the
Company's quality control process. He is the brother of Gerald T. Lundgren and
Allan D.
Lundgren.
GERALD T. LUNDGREN has been Vice President of the Company since October
1972. In this capacity, he currently is a construction project manager. He also
served as a Director of the Company from October 1972 to December 1989. He is
the brother of Allan D. Lundgren and Edmund M. Lundgren.
The Executive Committee is a group of the senior management of the Company
that meets weekly to solve problems, make major decisions, formulate goals and
act on plans for the Company. Each member of the group is responsible for a
functional area of the Company.
The officers of the Company are elected annually and serve at the
discretion of the Board of Directors. None of the Company's officers is employed
pursuant to a written employment contract.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid by the Company to its
five most highly compensated executive officers for the last three fiscal years.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------------------------
NAME AND OTHER ANNUAL (1) ALL OTHER (2)
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) COMPENSATION ($)
- ------------------ ---- ---------- --------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Peter Pflaum 1997 200,000 0 3,968 2,000
President 1996 200,000 112,500 2,174 1,875
1995 191,848 380,000 0 1,875
Richard W. Denman 1997 185,000 0 3,000 0
Vice President- 1996 289,000 0 3,000 1,619
Sales and Marketing 1995 317,000 0 3,000 1,875
Terrance M. Forbord 1997 176,154 0 4,800 2,000
President - Land 1996 158,577 68,000 4,800 1,875
Development Division 1995 140,962 130,000 4,800 1,875
James L. Weaver 1997 110,000 0 718 1,699
Vice President - 1996 110,000 25,000 629 825
Construction 1995 96,926 40,000 6,000 0
William O. Burgess 1997 110,000 0 9,018 0
Vice President- 1996 0 0 0 0
Purchasing 1995 0 0 0 0
- -------------------------------------------
</TABLE>
(1) Consists of fringe benefits for annual car or house allowances, personal
use of Company-owned vehicles or insurance premiums paid on behalf of the
officer.
(2) Consists of a matching contribution by the Company to the Company's 401(k)
plan.
The Company traditionally pays bonuses to certain executive officers, as
specified in the Summary Compensation Table above. The amount of bonus paid an
officer is related to (a) the Company's performance and (b) that individual
officer's performance, for the fiscal year just ending. Therefore, the amount of
bonus paid to an individual officer, and the aggregate amount of bonuses paid,
will vary from year to year. The terms of the 1993 Senior Subordinated
Debentures of the Company restrict aggregate bonuses paid to executive officers
who are also shareholders in a year to 50 percent of the Company's income before
provision for income taxes and such bonuses for that year.
The Company does not have a Compensation or Audit Committee of the Board
of Directors. Peter Pflaum performs the functions equivalent to a Compensation
Committee in that he makes decisions and recommendations regarding compensation.
Directors of the Company are not compensated for their services as
directors.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership of
Lundgren's common stock as of December 31, 1997 by each person who is known by
Lundgren to beneficially own more than 5% of Lundgren's common stock, by each of
Lundgren's Directors, and by all Directors and executive officers as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS TITLE OF NUMBER OF SHARES PERCENT OF CLASS
OF BENEFICIAL OWNER CLASS BENEFICIALLY OWNED(1) OUTSTANDING(1)(2)
------------------- ----- --------------------- -----------------
<S> <C> <C> <C>
Peter Pflaum Voting Common 297 50.0%
935 East Wayzata Boulevard
Wayzata, MN 55391 Non-voting Common 4,166 41.5%
Patrick C. Wells
935 East Wayzata Boulevard Non-voting Common 1,845 18.4%
Wayzata, MN 55391
Edmund M. Lundgren Voting Common 99 16.7%
935 East Wayzata Boulevard
Wayzata, MN 55391 Non-voting Common 1,340 13.3%
Allan D. Lundgren Voting Common 99 16.7%
935 East Wayzata Boulevard
Wayzata, MN 55391 Non-voting Common 1,340 13.4%
Gerald T. Lundgren Voting Common 99 16.6%
935 East Wayzata Boulevard
Wayzata, MN 55391 Non-voting Common 1,340 13.4%
All officers and directors as a group Voting Common 594 100.0%
(8 persons) and total shares
outstanding Non-voting Common 10,031 100.0%
- ----------------------------------
</TABLE>
(1) Each person named has sole voting and investment power with respect to all
of his outstanding shares.
(2) The percentage calculation is based upon 594 shares of voting common stock
and 10,031 shares of non-voting common stock outstanding on December 31,
1997.
<PAGE>
STOCK PURCHASE AGREEMENT
The outstanding shares of common stock of the Company are subject to the
terms of the Amended and Restated Stock Purchase Agreement, dated February 1,
1993 (the "Agreement"), as amended on April 1, 1993 and January 1, 1994. The
Agreement provides that members of the "Lundgren Block" (Edmund M. Lundgren,
Gerald T. Lundgren and Allan D. Lundgren) have the first option to purchase
shares of other Lundgren Block members in the event of a voluntary sale,
involuntary transfer or termination of employment of other members of the
Lundgren Block, with the "Pflaum-Wells Block" and the Company having successive
options to purchase the shares if the previous option holders fail to do so.
Members of the "Pflaum-Wells Block" (Peter Pflaum and Patrick Wells) have a
similar first option to purchase shares of the other Pflaum-Wells Block member.
The Company must purchase the non-voting shares of any shareholder in the event
of a shareholder's disability or death. Members of a disabled or deceased
person's Block have the right to purchase such disabled or deceased Block
member's voting shares and, if the right is not exercised, the Company must do
so.
The purchase price for shares of stock under the Agreement is the lesser
of twice the book value per share or $282.35 per share, but shall not exceed
$658.82 per share in the event of a death or $470.58 per share in the event of
disability. A purchase by the Company in the event of disability or death is
fully funded by disability or life insurance, respectively, payable entirely at
closing or, in the event of Peter Pflaum's disability, a portion being payable
at closing with the balance of insurance payments being payable in 60 equal
monthly installments. The price per share payable by the Company in the event of
a shareholder's disability or death may never exceed the amount of insurance
proceeds the Company is to receive divided by the number of shares that it is
required to purchase. In the event of a voluntary sale, involuntary transfer or
termination of employment, twenty-five percent of the purchase price will be
paid at closing with the balance payable in 60 equal monthly installments.
An option held by any shareholder upon an occurrence giving rise to an
option is assignable with the consent of all shareholders.
On March 1, 1998, the Company, Patrick Wells and Peter Pflaum entered
into an agreement (the "Wells Option") whereby Mr. Wells has granted first to
Peter Pflaum and then to the Company the right and option to purchase his 1,845
shares of non-voting stock over a 7-year term expiring September 1, 2005. The
Wells Option creates the right, but not the obligation, first in Peter Pflaum,
and then in the Company, to purchase the shares. In order to keep the option
alive, the optionees must make certain minimum purchases per year. In 1998,
option payments will total just under $200,000. The initial purchase price for
the shares under the Wells Option is $696.30 per share, which is the book value
per share calculated as of December 31, 1996. The purchase price increases 6%
per year. The Wells Option also terminates a number of other provisions relating
to Patrick Wells' employment. He ceased employment as an officer and director of
the Company on January 2, 1997.
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leases its corporate office building from Glenbrook Office
Building Partnership ("Glenbrook") under a lease which expires March 31, 2009.
The annual rental payments made by the Company under this lease are
approximately $150,000, including property tax escrow payments. Peter Pflaum and
Patrick C. Wells are each general partners of Glenbrook, with partnership
interests of 3.75% and 1.5%, respectively. The limited partners in Glenbrook are
as follows: the Company owns 15.23%; Allan D. Lundgren, a director and officer
of the Company, owns 3.75%; Edmund M. Lundgren, a director and officer of the
Company, owns 3.75%; Gerald T. Lundgren, an officer of the Company, owns 3.75%;
Rosalynd C. Pflaum, the mother of Peter Pflaum, owns 47.26%; and Stuart Wells,
the brother of Patrick C. Wells, owns 21.01%.
The Company owns, as a limited partner, a 52.17% interest in Tealwood
Limited Partnership, a partnership of which Peter Pflaum and Patrick C. Wells
are general partners holding 10.16% and 6.78% interests, respectively. Gerald T.
Lundgren and Michael A. Pflaum, officers of the Company, each own 3.52%. The
balance is owned by unrelated third parties. This partnership currently holds
approximately $120,000 in cash and two parcels of land available for the
construction of four to six townhomes. This partnership has not been active
since 1987.
The shareholders of the Company have loaned money to the Company from time
to time. The Company has used the proceeds of such loans for working capital.
Such loans bear interest equal to the highest rate the Company is then paying
under its credit facilities with banks, institutional and specialized industry
lenders. The loans are generally repaid by the Company before the end of the
following fiscal year. In 1997, the shareholders did not loan money to the
Company. In 1996, the shareholders loaned an aggregate of $107,000. The
shareholders are not obligated to make any such loans to the Company in the
future. The Company currently has sufficient capacity under its Credit
Agreements to fund its operations without utilizing these loans.
The Company and its shareholders have entered into a Contribution
Agreement whereby each shareholder has agreed to contribute funds to the Company
in the event of the Company's default under certain of its unsecured
indebtedness, including the 1993 Subordinated Debentures and any Parity
Indebtedness (as defined in the Indenture under which the 1993 Subordinated
Debentures were issued). The obligations of the shareholders under the
Contribution Agreement terminated when the consolidated tangible net worth, as
defined, of the Company exceeded $4.5 million. This occurred as of December 31,
1994 when the consolidated tangible net worth of the Company was $4.7 million.
Thereafter, under the terms of the Contribution Agreement, during any period in
which the consolidated tangible net worth of the Company falls below $4.5
million, the Company will defer payment of bonuses to executive officers who are
also shareholders of the Company.
In May 1997, the Company sold approximately $1 million of undeveloped land
and related research costs to Marsh Pointe, L.L.C. ("Marsh Pointe") ,which is
owned by the shareholders of the Company, in exchange for a $768,000 note
receivable and Marsh Pointe assumed two land mortgages totaling $182,000. The
note receivable is due on demand and matures on December 31, 1999 with interest
payable at 1% above prime rate. The outstanding balance as of December 31, 1997
was $689,000. Marsh Pointe will develop the land and the Company has an option
agreements with Marsh Pointe that
<PAGE>
gives the Company exclusive rights, but no obligation, to purchase the developed
lots under terms similar to other agreements with non-related parties.
In September 1997, the Company sold approximately $377,000 of research
costs for a parcel of undeveloped land to Plum Tree 3rd, L.L.C. ("Plum Tree"),
which is owned by the Shareholders of the Company, in exchange for a $377,000
note receivable. The note receivable is due on demand and matures on December
31, 1999 with interest payable at 1% above prime rate. The outstanding balance
as of December 31, 1997 was $377,000. Plum Tree will develop the land and the
Company has an option agreements with Plum Tree that gives the Company exclusive
rights, but no obligation, to purchase the developed lots under terms similar to
other agreements with non-related parties.
<PAGE>
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this report:
1. Consolidated financial statements of the Company.
Report of Independent Accountants as of and for the year ended
December 31, 1997
Report of Independent Accountants as of and for the years
ended December 31, 1995 and 1996.
Consolidated Balance Sheets, December 31, 1996 and 1997
Consolidated Statements of Operations and Retained Earnings
for the Years Ended December 31, 1995, 1996 and 1997
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997
Notes to Consolidated Financial Statements
2. The following consolidated financial statement schedules of the
Company required to be filed by Item 8 and Paragraph (d) of this
Item 14:
None.
3. The following exhibits are hereby incorporated by reference or filed
herewith as indicated.
(1)3.1 Articles of Incorporation of Lundgren in effect on the date
hereof.
(1)3.2 Bylaws of Lundgren on the date hereof.
(1)4.1 Form of Debenture (included as Sections 202(A) and (B) of
Indenture filed as Exhibit 4.2 hereto).
(1)4.2 Form of Indenture by and between Lundgren and National City
Bank Minnesota, as Trustee, including a Form of Debenture.
(7)4.3 Form of Debenture (included as Sections 2.2(A) and (B) of
Indenture filed as Exhibit 4.4 hereto).
(7)4.4 Form of Indenture by and between Lundgren and National City
Bank Minnesota, National Association, as Trustee, including a
Form of Debenture.
(1)10.1 Lease by and among Lundgren, as lessor, Glenbrook Office
Building Partnership, and Peter Pflaum and Patrick C. Wells,
general partners, dated September 28, 1978.
(1)10.2 Amended and Restated Stock Purchase Agreement, dated February
1, 1993, by
<PAGE>
and among Lundgren, Peter Pflaum, Patrick Wells, Edmund M.
Lundgren, Gerald T. Lundgren and Allan D. Lundgren.
(3)10.3 Revolving Credit Line Agreement between the Company and
Builders Development & Finance, Inc., dated March 18, 1994.
(3)10.4 Mortgage Note, dated March 18, 1994, of the Company payable to
Builders Development & Finance, Inc.
(3)10.5 Combination Mortgage, Security Agreement and Fixture Financing
Statement between the Company and Builders Development &
Finance, Inc., dated March 18, 1994, including all amendments
thereto.
(1)10.6 Guaranty by Peter Pflaum, Patrick C. Wells, Allan D. Lundgren,
Edmund M. Lundgren and Gerald T. Lundgren for the benefit of
Builders Development & Finance, Inc., dated July 27, 1990.
(1)10.7 Demand Discretionary Revolving Credit Agreement between the
Company and Norwest Bank Minnesota, National Association,
dated November 30, 1990.
(1)10.8 First Amended and Restated Revolving Note, dated May 1, 1992,
of the Company payable to Norwest Bank Minnesota, National
Association.
(1)10.9 Assignment of Life Insurance Policy as Collateral by the
Company in favor of Norwest Bank Minnesota, National
Association, dated November 30, 1990.
(1)10.10 Assignment of Life Insurance Policy as Collateral by the
Company in favor of Norwest Bank Minnesota, National
Association, dated May 1, 1992.
(1)10.11 Guaranty by Peter Pflaum, Patrick C. Wells, Allan D. Lundgren,
Edmund M. Lundgren and Gerald T. Lundgren for the benefit of
Norwest Bank Minnesota, National Association, dated November
5, 1990 and all extensions thereof.
(5)10.12 Commercial Lease, dated June 1, 1995, by and between Koecheler
& Olson Leasing and Lundgren Bros. Plumbing.
(5)10.13 Lease Agreement, dated April 10, 1995, by and between B.M.
Acquisitions Corporation (Brush Masters, Inc.) and John J.
Day.
(1)10.14 Loan Agreement, dated as of May 8, 1992, by and between the
Company and Builders Development & Finance, Inc.
(1)10.15 First Mortgage Note, dated May 8, 1992, of the Company payable
to Builders Development & Finance, Inc.
(1)10.16 Second Mortgage Note, dated May 8, 1992, of the Company
payable to Builders Development & Finance, Inc.
(1)10.17 First Mortgage, dated May 8, 1992, by the Company in favor of
Builders Development & Finance, Inc.
(1)10.18 Second Mortgage, dated May 8, 1992, by the Company in favor of
Builders
<PAGE>
Development & Finance, Inc.
(1)10.19 Guaranty, dated as of May 8, 1992, by Peter Pflaum, Edmund M.
Lundgren, Gerald T. Lundgren, Allan D. Lundgren and Patrick C.
Wells for the benefit of Builders Development & Finance, Inc.
(1)10.20 Construction Loan Agreement, dated as of July 22, 1992, by and
between the Company and Scherer Bros. Financial Services Co.
(1)10.21 Mortgage and Security Agreement, dated July 22, 1992, between
the Company and Scherer Bros. Financial Services Co.
(1)10.22 Promissory Note, dated July 22, 1992, of the Company payable
to Scherer Bros. Financial Services Co.
(1)10.23 Guaranty, dated as of July 22, 1992, by Allan Lundgren for the
benefit of Scherer Bros. Financial Services Co.
(1)10.24 Guaranty, dated as of July 22, 1992, by Patrick Wells for the
benefit of Scherer Bros. Financial Services Co.
(1)10.25 Guaranty, dated as of July 22, 1992, by Peter Pflaum for the
benefit of Scherer Bros. Financial Services Co.
(1)10.26 Guaranty, dated as of July 22, 1992, by Edmund Lundgren for
the benefit of Scherer Bros. Financial Services Co.
(1)10.27 Guaranty, dated as of July 22, 1992, by Gerald Lundgren for
the benefit of Scherer Bros. Financial Services Co.
(1)10.28 Development Loan Agreement, dated May 15, 1992, by and between
the Company and Construction Mortgage Investors Co.
(1)10.29 First Mortgage Note, dated May 15, 1992, of the Company
payable to Construction Mortgage Investors Co.
(1)10.30 First Mortgage, dated May 15, 1992, by the Company in favor of
Construction Mortgage Investors Co.
(1)10.31 Guaranty, dated May 15, 1992, by Peter Pflaum, Patrick C.
Wells, Allan D. Lundgren, Edmund M. Lundgren and Gerald T.
Lundgren for the benefit of Construction Mortgage Investors
Co.
(1)10.32 Contribution Agreement, dated as of February 17, 1993, by and
among the Company, Peter Pflaum, Patrick C. Wells, Allan D.
Lundgren, Edmund M. Lundgren and Gerald T. Lundgren.
(5)10.33 Shopping Center Lease, dated February 9, 1994, by and between
Oakdale Mall Associates and Lundgren Bros. Construction, Inc.
d/b/a Lundgren Bros. Remodeling.
(1)10.34 Form of Option to Purchase Land.
(1)10.35 Form of Contingent Purchase Agreement.
<PAGE>
(5)10.36 Amendment No. 1 to Amended and Restated Stock Purchase
Agreement, dated April 1, 1993.
(2)10.37 Amended and Restated Demand Discretionary Revolving Credit
Agreement, dated March 18, 1994, by and between Norwest Bank
Minnesota, National Association and Lundgren Bros.
Construction, Inc.
(4)10.38 Fourth Amended and Restated Revolving Note (Demand), dated
March 14, 1995, of the Company payable to Norwest Bank
Minnesota, National Association.
(4)10.39 Consent and Reaffirmation of Guaranty, dated March 14, 1995,
by Peter Pflaum, Patrick C. Wells, Edmund M. Lundgren, Allan
D. Lundgren and Gerald T. Lundgren in favor of Norwest Bank
Minnesota, National Association.
(3)10.40 Satisfaction of Combination Mortgage, Security Agreement and
Fixture Financing Statement executed by Builders Development &
Finance, Inc. on March 29, 1994.
(3)10.41 Letter Agreement, dated February 17, 1994, between Builders
Funding Corporation and Lundgren Bros. Construction, Inc.
(4)10.42 Amendment, Extension and Reaffirmation Agreement, dated March
14, 1995, by and among Lundgren Bros. Construction, Inc.,
Patrick C. Wells, Peter Pflaum, Edmund M. Lundgren, Allan D.
Lundgren and Gerald T. Lundgren and Norwest Bank Minnesota,
National Association.
(4)10.43 Supplemental Assignment of Life Insurance Policies as
Collateral, dated March 14, 1995, by Lundgren Bros.
Construction, Inc. in favor of Norwest Bank Minnesota,
National Association.
(4)10.44 Second Supplemental Assignment of Life Insurance Policies as
Collateral, dated March 16, 1995, by Lundgren Bros.
Construction, Inc. in favor of Norwest Bank Minnesota,
National Association.
(5)10.45 Third Amendment to Combination Mortgage, Security Agreement
and Fixture Financing Statement and Amendment to Revolving
Credit Line Agreement, dated January 25, 1995, by Lundgren
Bros. Construction, Inc. and Builders Development & Finance,
Inc.
(6)10.46 Second Amended and Restated Mortgage Note, dated May 20, 1996,
of Lundgren Bros. Construction, Inc. payable to Builders
Development & Finance, Inc.
(6)10.47 Eighth Amendment to Combination Mortgage, Security Agreement
and Fixture Financing Statement and Second Amendment to
Revolving Credit Line Agreement and Reaffirmation Agreement,
dated May 20, 1996, by Lundgren Bros. Construction, Inc. and
Builders Development & Finance, Inc.
(6)10.48 Promissory Note, dated March 21, 1996, of Lundgren Bros.
Construction, Inc.
<PAGE>
payable to First Bank National Association.
(6)10.49 Letter Agreement, dated March 21, 1996, by Lundgren Bros.
Construction, Inc. and First Bank National Association.
(6)10.50 Pledge Agreement, dated March 21, 1996, by Lundgren Bros.
Construction, Inc. for the benefit of First Bank National
Association.
(6)10.51 Control Agreement (With Broker or other Securities
Intermediary), dated March 21, 1996, by Lundgren Bros.
Construction, Inc., First Bank National Association and FBS
Investment Services, Inc.
(6)10.52 Guaranty, dated March 12, 1996, by Edmund M. Lundgren for the
benefit of First Bank National Association.
(6)10.53 Guaranty, dated March 12, 1996, by Allan Lundgren for the
benefit of First Bank National Association.
(6)10.54 Guaranty, dated March 12, 1996, by Peter Pflaum for the
benefit of First Bank National Association.
(6)10.55 Guaranty, dated March 12, 1996, by Patrick C. Wells for the
benefit of First Bank National Association.
(6)10.56 Guaranty, dated March 12, 1996, by Gerald Lundgren for the
benefit of First Bank National Association.
(8)10.57 Fifth Amended and Restated Revolving Note (Demand), dated
February 24, 1997, of the Company payable to Norwest Bank
Minnesota, National Association.
(8)10.58 Consent and Reaffirmation of Guaranty, dated February 24,
1997, by Peter Pflaum, Patrick C. Wells, Edmund M. Lundgren,
Allan D. Lundgren and Gerald T. Lundgren in favor of Norwest
Bank Minnesota, National Association.
(8)10.59 Second Amendment, Extension and Reaffirmation Agreement, dated
February 24, 1997, by and among Lundgren, Patrick C. Wells,
Peter Pflaum, Edmund M. Lundgren, Allan D. Lundgren, Gerald T.
Lundgren and Norwest Bank Minnesota, National Association.
(8)10.60 Ninth Amendment to Combination Mortgage, Security Agreement
and Fixture Financing Statement, dated November 25, 1996, by
Lundgren Bros. Construction, Inc. and Builders Development &
Finance, Inc.
(9)10.61 Revolving Construction and Development Loan Agreement, dated
April 18, 1997, by and between Lundgren Bros. Construction,
Inc. and First Bank National Association.
(9)10.62 Revolving Credit Note, dated April 18, 1997, by Lundgren Bros.
Construction, Inc. in favor of First Bank National Association
(9)10.63 Mortgage and Security Agreement and Fixture Financing
Statement, dated
<PAGE>
April 18, 1997, by Lundgren Bros. Construction, Inc. in favor
of First Bank National Association.
(9)10.64 Guaranty, dated April 18, 1997, by and among Edmund M.
Lundgren, Allan D. Lundgren, Peter Pflaum, Patrick C. Wells
and Gerald T. Lundgren to First Bank National Association.
(9)10.65 Indemnity Agreement, dated April 18, 1997, by and among
Lundgren Bros. Construction, Inc., Edmund M. Lundgren, Allan
D. Lundgren, Peter Pflaum, Patrick C. Wells, and Gerald T.
Lundgren, and First Bank National Association.
(9)10.66 Amendment and Restatement of Promissory Note, including
Consent, dated March 21, 1997, by Lundgren Bros. Construction,
Inc. in favor of First Bank National Association.
10.67 Acquisition and Closing Agreement, dated as of May 16, 1997,
by and between the Company and Marsh Pointe L.L.C.
Incorporated by reference to the Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1997.
10.68 Form of Option Agreement between the company and Marsh Pointe
L.L.C. Incorporated by reference to the Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997.
10.69 Building Loan Agreement, dated as of June 26, 1997, by and
between the Company and CWM Mortgage Holdings, Inc., d/b/a
Construction Lending Corporation of America. Incorporated by
reference to the Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997.
10.70 Master Sale and Rental Agreement, dated as of May 27, 1997, by
and between the Company and National Model Homes, Inc.
Incorporated by reference to the Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1997.
10.71 Acquisition and Closing Agreement, dated as of June 10, 1997,
by and between the Company and BF Holding Company.
Incorporated by reference to the Exhibit 10.5 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1997.
10.72 Form of Option Agreement between the Company and BF Holding
Company. Incorporated by reference to the Exhibit 10.6 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997.
10.73 Loan Agreement, dated as of November 13, 1997, by and between
the Company and Norwest Bank Minnesota, National Association.
10.74 Revolving Real Estate Note, dated November 13, 1997 by the
Company in favor of Norwest Bank Minnesota, National
Association.
<PAGE>
10.75 Master Sale and Rental Agreement, dated as of December 31,
1997, by and between the Company and National Model Homes,
Inc.
10.76 Agreement, dated March 1, 1998, by and between the Company,
Patrick Wells and Peter Pflaum.
(4)18.1 Letter on accounting change, Coopers & Lybrand, LLP, dated May
12, 1995.
27 Financial Data Schedule.
(1) Incorporated by reference to the Exhibit of the same number to the
Company's Registration Statement on Form S-1, Registration No.
33-58934.
(2) Incorporated by reference to the Exhibit of the same number to the
Company's Annual Report on Form 10-K for the year ended December 31,
1993.
(3) Incorporated by reference to the Exhibit of the same number to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1994.
(4) Incorporated by reference to the Exhibit of the same number to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1995.
(5) Incorporated by reference to the Exhibit of the same number to the
Company's Annual Report on Form 10-K for the year ended December 31,
1995.
(6) Incorporated by reference to the Exhibit of the same number to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1996.
(7) Incorporated by reference to the Exhibit of the same number to the
Company's Registration Statement on Form S-1, Registration No.
333-12137.
(8) Incorporated by reference to the Exhibit of the same number to the
Company's Annual Report on Form 10-K for the year ended December 31,
1996.
(9) Incorporated by reference to the Exhibit of the same number to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1997.
(b) Reports on Form 8-K.
The Company filed two reports on Form 8-K: the first, filed on October 15,
1997 announced that the Company has dismissed Coopers & Lybrand L.L.P. as its
accountant, and the second, filed on November 21, 1997 announced that the
Company has engaged Deloitte & Touche L.L.P. as its independent auditors to
audit its financial statements for the year ended December 31, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LUNDGREN BROS. CONSTRUCTION, INC.
By: /s/ Peter Pflaum
Peter Pflaum
Its President
Date: March 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Peter Pflaum President and Director March 27, 1998
- ---------------- (Principal Executive Officer)
Peter Pflaum (Principal Financial Officer)
/s/ Edmund M. Lundgren Vice President and Director March 27, 1998
- ----------------------
Edmund M. Lundgren
/s/ Allan D. Lundgren Vice President, Secretary/ March 27, 1998
- --------------------- Treasurer and Director
Allan D. Lundgren
<PAGE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
As of the date of this filing, no annual reports or proxy material has
been sent to the holders of Lundgren's securities. At such time as annual
reports are sent to Lundgren's security holders, Lundgren will also file copies
of such reports with the Securities and Exchange Commission.
<PAGE>
LUNDGREN BROS. CONSTRUCTION, INC.
FORM 10-K
INDEX TO EXHIBITS
The following exhibits are hereby filed as part of this Annual Report
on Form 10-K:
Exhibit Page
- ------- ----
10.73 Loan Agreement, dated as of November 13, 1997, by and between
the Company and Norwest Bank Minnesota, National Association.
10.74 Revolving Real Estate Note, dated November 13, 1997 by the
Company in favor of Norwest Bank Minnesota, National
Association.
10.75 Master Sale and Rental Agreement, dated as of December 31,
1997, by and between the Company and National Model Homes,
Inc.
10.76 Agreement, dated March 1, 1998, by and between the Company,
Patrick Wells and Peter Pflaum.
<PAGE>
LUNDGREN BROS. CONSTRUCTION, INC.
AND SUBSIDIARIES
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORT AS OF DECEMBER 31, 1997
AND FOR THE YEAR ENDED DECEMBER 31, 1997 44
INDEPENDENT AUDITORS' REPORT AS OF DECEMBER 31, 1996
AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996 45
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets for the Years Ended December 31,
1996 and 1997 46
Consolidated Statements of Operations and Retained Earnings
for Years Ended December 31, 1995, 1996, and 1997 47
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996, and 1997 48
Notes to Consolidated Financial Statements 49-59
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Lundgren Bros. Construction, Inc.
We have audited the accompanying consolidated balance sheet of Lundgren Bros.
Construction, Inc. and Subsidiaries (the Company) as of December 31, 1997, and
the related consolidated statements of operations and retained earnings and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Lundgren Bros.
Construction, Inc. and Subsidiaries as of December 31, 1997, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Minneapolis, Minnesota
March 18, 1998
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Lundgren Bros. Construction, Inc.
We have audited the accompanying consolidated balance sheet of Lundgren Bros.
Construction, Inc. and Subsidiaries (the Company) as of December 31, 1996, and
the related consolidated statements of operations and retained earnings and cash
flows for the years ended December 31, 1995 and 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above presents fairly, in
all material respects, the consolidated financial position of Lundgren Bros.
Construction, Inc. and Subsidiaries as of December 31, 1996, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1995 and 1996, in conformity with generally accepted
accounting principles.
As discussed in Note 13 to the consolidated financial statements, the company
changed its method of accounting for capitalized land acquisition and
development costs effective January 1, 1995.
Coopers & Lybrand L.L.P.
Minneapolis, Minnesota
March 7, 1997
<PAGE>
LUNDGREN BROS. CONSTRUCTION, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- ------------------------------------------------------------------------------------------
1996 1997
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,253 $ 1,979
Restricted cash 1,072 1,947
Receivables, net 1,276 1,410
Notes receivable - affiliates -- 1,066
Deposits and prepaid expenses 3,663 3,042
Inventories 37,828 35,614
Income taxes receivable 32 334
Land option and earnest money deposits 795 1,138
Property and equipment, net 1,564 1,517
Deferred income taxes 130 206
Other assets 4,082 4,531
------- -------
$51,695 $52,784
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Obligations under bank lines of credit $ 2,987 $ 7,457
Debt obligations 30,673 27,730
Obligations under capital leases 499 447
Accounts payable 5,996 7,185
Cost to complete sold homes 995 469
Customer deposits 1,249 1,060
Accrued expenses 1,900 1,687
------- -------
44,299 46,035
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value; authorized, 12,000 shares; issued and
outstanding, 594 voting shares and 10,031 nonvoting shares
(all stock is redeemable) 99 99
Retained earnings 7,297 6,650
------- -------
7,396 6,749
------- -------
$51,695 $52,784
======= =======
</TABLE>
See notes to consolidated financial statements.
<PAGE>
LUNDGREN BROS. CONSTRUCTION, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- ----------------------------------------------------------------------------------------------
1995 1996 1997
<S> <C> <C> <C>
REVENUES $ 65,217 $ 69,798 $ 68,658
COST OF REVENUES 55,591 59,052 60,839
-------- -------- --------
Gross profit 9,626 10,746 7,819
OPERATING EXPENSES:
Selling 2,442 2,728 2,712
General and administrative 4,987 4,510 3,816
-------- -------- --------
2,197 3,508 1,291
OTHER INCOME (EXPENSES):
Interest (1,725) (1,811) (2,450)
Other, net 117 168 23
-------- -------- --------
Income (loss) from continuing operations before
income taxes 589 1,865 (1,136)
INCOME TAXES PROVISION (BENEFIT) 253 709 (489)
-------- -------- --------
Income (loss) from continuing operations 336 1,156 (647)
-------- -------- --------
CUMULATIVE EFFECT ON PRIOR YEARS OF CHANGE
IN ACCOUNTING METHOD, NET OF INCOME TAXES 763 -- --
DISCONTINUED OPERATIONS, NET OF INCOME TAXES:
Income (loss) from operations 86 (104) --
Estimated loss on disposal -- (41) --
-------- -------- --------
Income (loss) from discontinued operations 86 (145) --
-------- -------- --------
NET INCOME (LOSS) 1,185 1,011 (647)
RETAINED EARNINGS, BEGINNING OF PERIOD 5,101 6,286 7,297
-------- -------- --------
RETAINED EARNINGS, END OF PERIOD $ 6,286 $ 7,297 $ 6,650
======== ======== ========
INCOME (LOSS) PER SHARE - basic and diluted:
Continuing operations $ 32 $ 109 $ (61)
Cumulative effect of change in accounting method 72 -- --
Discontinued operations 8 (14) --
-------- -------- --------
Net income (loss) $ 112 $ 95 $ (61)
======== ======== ========
SHARES USED IN COMPUTING INCOME (LOSS)
PER SHARE - basic and diluted 10,625 10,625 10,625
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
LUNDGREN BROS. CONSTRUCTION, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
(IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------
1995 1996 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,185 $ 1,011 $ (647)
Cumulative effect of change in accounting method (763) -- --
(Income) loss from discontinued operations (86) 145 --
-------- -------- --------
Income (loss) from continuing operations 336 1,156 (647)
Adjustments to reconcile income (loss) from continuing operations to
net cash (used in) provided by continuing operating activities:
Depreciation and amortization 396 386 331
Amortization of debt issuance costs 51 68 120
Deferred income taxes 253 (55) (140)
Gain on disposal of property and equipment (35) (3) --
Gain on sale of investment -- (123) --
Changes in operating assets and liabilities (4,542) (2,084) 2,527
-------- -------- --------
Net cash (used in) provided by continuing
operating activities (3,541) (655) 2,191
Net cash provided by (used in) discontinued operations 553 (374) (115)
-------- -------- --------
Net cash (used in) provided by operating activities (2,988) (1,029) 2,076
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment (257) (343) (365)
Proceeds on disposal of property and equipment 95 4 57
Proceeds from sale of investment -- 159 --
Increase in cash surrender value of life insurance (368) (486) (440)
Other (44) 14 (8)
-------- -------- --------
Net cash used in investing activities (574) (652) (756)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank lines of credit 24,528 34,616 32,705
Payment of principal on bank lines of credit (21,644) (35,279) (28,235)
Proceeds from debt obligations 40,494 45,914 40,687
Payment of principal on debt obligations (40,133) (44,786) (45,669)
Payment of principal on capital lease obligations (17) (6) (52)
Payment of debt issuance costs -- (509) (30)
-------- -------- --------
Net cash provided by (used in) financing activities 3,228 (50) (594)
-------- -------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (334) (1,731) 726
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,318 2,984 1,253
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,984 $ 1,253 $ 1,979
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
LUNDGREN BROS. CONSTRUCTION, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
(IN THOUSANDS)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION - Lundgren Bros. Construction, Inc. and
Subsidiaries (the Company) are in the business of land acquisition and
development and single family home construction in the Minneapolis and
Saint Paul, Minnesota metropolitan area.
BASIS OF PRESENTATION - The accounting and reporting policies of the
Company conform to generally accepted accounting principles and general
practices within the land development and single family home
construction industry.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Lundgren Bros. Construction, Inc. and its wholly
owned subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation.
CASH EQUIVALENTS - The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.
RESTRICTED CASH - Restricted cash includes customer deposits maintained
in a restricted trust account and certain debt proceeds obtained for
specific development purposes. Customer deposits are held in a
restricted trust account until all purchase agreement contingencies are
cleared, at which time the customer deposit is transferred to the
Company's unrestricted cash account. The debt proceeds are maintained in
a restricted cash account and disbursed as certain development costs are
incurred and project approvals are obtained.
CONCENTRATION OF ASSETS AND CREDIT RISK - The Company holds
substantially all of its cash, cash equivalents, and restricted cash in
two financial institutions with approximately 88% and 99% of these funds
being held in the Company's principal banking institution at December
31, 1996 and 1997, respectively. At times, these balances may be in
excess of the FDIC insurance limit. In addition, substantially all of
the cash surrender value of life insurance policies is with one
insurance company.
Credit risk related to the Company's primary business of constructing
residential homes and sale of lots is not significant because the
Company generally requires earnest money deposits and payment is
received upon closing the sale of the property. For other business
activities, including painting, the Company retains a collateral
interest in the property until the receivable is collected in full.
The Company's business is impacted by local and national general
economic conditions and, in particular, by mortgage interest rates and
the availability of mortgage financing. Any substantial increase in
mortgage interest rates or decrease in consumer confidence levels could
cause a decrease in future home sales. Historically, the Company has
been able to pass increased
<PAGE>
development and construction costs onto its customers and expects to be
able to do so in the future; however, if costs increase substantially,
and at an accelerated rate, the Company may be unable to recover all of
the increased costs through higher sales prices.
INVENTORIES - Inventories consist principally of homes under
construction, lots held for sale and land, including land acquisition
and improvement costs, and are valued at lower of cost or market, with
cost determined on a specific identification basis.
DEBT ISSUANCE COSTS - Debt issuance costs associated with obtaining
subordinated debenture financing are deferred and amortized to interest
expense over the terms of the related debt using the straight-line
method, which approximates the effective interest rate method.
FORWARD COMMITMENT COSTS - Costs incurred in obtaining customer
financing to facilitate more favorable interest rates for home buyers
have been capitalized and are being amortized on the straight-line
method, which approximates the effective interest rate method, over the
shorter of the term of the forward commitment or the commitment of the
available mortgage funds.
Upon the sale of the related forward commitments, the unamortized cost
is removed from the accounts and any gain or loss thereon is included in
other income (expense) in the year of the sale.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost.
Depreciation and amortization are provided by charges to operations over
the estimated useful lives of the assets of three to ten years for
equipment and fifteen to thirty years for leasehold improvements, using
straight-line and accelerated methods.
The cost and related accumulated depreciation or amortization on asset
disposals are removed from the accounts and any gain or loss thereon is
included in operations in the year of disposal. Maintenance and repairs
are charged to expense as incurred.
REVENUES AND RELATED COSTS - Revenues and related costs of lot and home
sales are recognized on the closing date of the property sale. Costs to
complete sold homes, including costs of estimated warranty work, are
accrued and included in the cost of revenues at the same time.
Historically, warranty costs have not been significant. Customer
deposits received on home sales are reflected as liabilities until the
closing or completion of the project.
CAPITALIZED ACQUISITION, DEVELOPMENT AND CONSTRUCTION COSTS - Option,
land acquisition and development costs, which include direct land
acquisition and development employee payroll, are capitalized as land
project costs. Interest and real estate taxes are also capitalized as
inventory during the development period for land under development and
during the construction period of homes under construction. These
capitalized costs are included as cost of revenues when the lots and
homes are sold.
INCOME TAXES - Deferred income tax assets and liabilities are recognized
for the expected future tax consequences of differences between the
financial statement and tax bases of assets and liabilities using
currently enacted tax rates in effect for the years in which differences
are expected to reverse. Income tax expense/benefit is the tax
payable/receivable for the year and the change during the year in
deferred tax assets and liabilities.
<PAGE>
PER SHARE AMOUNTS - Per share amounts are computed by dividing net
income or loss by the weighted average number of shares of voting and
nonvoting common stock outstanding during each period. The number of
outstanding shares of common stock for the 1995, 1996, and 1997 are
10,625 shares. During the fourth quarter of 1997, the Company adopted
SFAS No. 128, EARNINGS PER SHARE. This statement establishes standards
for computing and presenting basic and diluted earnings per share (EPS).
The adoption of this statement did not effect the Company's reported EPS
for all periods presented.
USE OF ESTIMATES - The preparation of the Company's financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
The most significant areas which require the use of management estimates
relate to the determination of the cost to complete sold homes, land
development projects, and accrued unbilled construction costs.
RECLASSIFICATIONS - Certain reclassifications were made to the December
31, 1996 consolidated financial statements in order to conform to the
presentation of the December 31, 1997 consolidated financial statements.
These reclassifications had no impact on consolidated net income or
retained earnings as previously reported.
2. SELECTED FINANCIAL DATA
December 31
------------------
1996 1997
Receivables:
Trade $ 961 $ 1,014
Escrows 202 336
Contracts and notes 18 6
Employees and officers 11 37
Other 139 72
------- -------
1,331 1,465
Less allowance for doubtful accounts 55 55
------- -------
$ 1,276 $ 1,410
======= =======
Approximate amount of receivables due within one year $ 1,313 $ 1,410
======= =======
Inventories:
Homes under construction $11,939 $13,808
Model homes 3,783 492
Developed lots 15,069 12,338
Land under development 337 --
Land held for future development 6,700 8,976
------- -------
$37,828 $35,614
======= =======
<PAGE>
December 31
---------------
1996 1997
Property and equipment:
Land $ 193 $ 193
Building and leasehold improvements 1,437 1,427
Furniture and fixtures 915 1,080
Equipment 807 687
------ ------
3,352 3,387
Less accumulated depreciation and amortization 1,788 1,870
------ ------
$1,564 $1,517
====== ======
Other assets:
Cash surrender value of life insurance $3,105 $3,545
Debt issuance costs, net of accumulated amortization of
$200 and $320 at December 31, 1996 and 1997, respectively 848 758
Other 129 228
------ ------
$4,082 $4,531
====== ======
Accrued expenses:
Payroll, bonuses, and payroll taxes $ 958 $ 609
Other 942 1,078
------ ------
$1,900 $1,687
====== ======
December 31
-----------------------------
1995 1996 1997
Interest expense:
Interest $ 3,179 $ 3,578 $ 4,104
Less capitalized interest (1,505) (1,835) (1,774)
Amortization of debt issuance costs 51 68 120
------- ------- -------
$ 1,725 $ 1,811 $ 2,450
======= ======= =======
Other income:
Gain on sale of investment $ -- $ 123 $ --
Other, net 117 45 23
------- ------- -------
$ 117 $ 168 $ 23
======= ======= =======
<PAGE>
December 31
-----------------------------
1995 1996 1997
Changes in operating assets and liabilities:
Restricted cash $ (679) $ (256) $ (875)
Receivables (69) (229) (144)
Deposits and prepaid expenses 290 (871) (456)
Inventories (2,183) 420 4,203
Land option and earnest money deposits (198) 126 (343)
Other assets -- (11) (91)
Accounts payable (1,741) (1,294) 1,359
Cost to complete sold homes 676 (256) (486)
Customer deposits 444 (157) (189)
Accrued expenses (27) 431 (213)
Income taxes (1,055) 13 (238)
------- ------- -------
$(4,542) $(2,084) $ 2,527
======= ======= =======
Cash paid (received) for:
Interest, net of amount capitalized $ 1,619 $ 1,408 $ 2,224
Income taxes $ 790 $ 816 $ (112)
The Company acquired land for development under promissory notes with
the sellers aggregating $1,538, $4,318, and $2,242 for the years ended
December 31, 1995, 1996, and 1997, respectively.
3. DISCONTINUED OPERATIONS
Effective November 30, 1996, the Company adopted a plan to discontinue
operations of its remodeling division. Accordingly, the 1995 and 1996
statements of operations report separately the operating results of the
division.
Net assets of the discontinued operation at December 31, 1996, consisted
of current assets of approximately $96 and property and equipment of
approximately $29 after deducting an allowance for the estimated loss on
disposal, and liabilities of $218, including estimated operating losses
through the anticipated disposal date.
In 1996, the Company recognized a loss on disposal of $41, net of income
taxes of $25, consisting of an estimated loss on disposal of business
assets of $1 and a provision of $40 for anticipated operating losses
until disposal. The disposal of the discontinued operation was completed
in early 1997 without incurring additional losses.
The following is a summary of operating results of the discontinued
operation for the years ended December 31:
December 31
-----------------
1995 1996
Sales $ 4,443 $ 3,772
Income (loss) before income taxes 151 (169)
Income (loss) from discontinued operations 86 (104)
<PAGE>
4. RELATED PARTY TRANSACTIONS
In May and September 1997, the Company sold $1,330 of undeveloped land
and capitalized land development costs to two Limited Liability
Corporations (LLC) related through common ownership, in exchange for
$1,145 notes receivable and one LLC assumed two land mortgages totaling
$182. The notes receivable are due on demand and mature in December 31,
1999 with interest payable at 1% above the prime rate. The outstanding
balance as of December 31, 1997 was $1,066. The LLC's will develop the
land and the Company has option agreements with the LLC's that gives the
Company exclusive rights, but no obligation, to purchase the developed
lots under terms similar to other agreements with non-related parties.
5. EQUITY INVESTMENTS
At December 31, 1996 and 1997, the Company had a minority ownership
interest in a land investment partnership and a partnership which owns
the office building the Company leases (Note 7). During 1996, the
Company sold its minority interest in another land investment
partnership and recognized a gain of $123. These investments are
recorded on the equity method of accounting. The Company's aggregate
investment in these partnerships was approximately $128 and $136 at
December 31, 1996 and 1997, respectively. The Company's share of the
partnerships' operating results was approximately $21, $11, and $13 for
the years ended December 31, 1995, 1996, and 1997, respectively.
6. LINES OF CREDIT AND DEBT OBLIGATIONS
The Company has a working capital line of credit of $4,250 expiring May
31, 1998, with interest at 0.5% over the prime rate on borrowings up to
the aggregate net cash surrender value of life insurance policies
pledged and 1.25% over the prime rate on additional borrowings. At
December 31, 1997, borrowings under the line of credit are limited to
$4,045, which is the sum of the current amount of cash surrender value
of assigned life insurance plus $500. The line is due on demand, term
life insurance on the major stockholder and the cash surrender value of
other life insurance are pledged as collateral, and the line is
personally guaranteed by the stockholders. The Company had an
outstanding balance on the line of credit of $1,907 and $3,083 at
December 31, 1996 and 1997, respectively. The agreement prohibits the
payment of dividends and requires at least 90% of the Company's cash and
cash equivalents to be held in accounts of the lending financial
institution.
The Company also has a working capital line of credit, based on a
borrowing base formula of finished lots held in inventory not to exceed
$4,500, expiring April 1, 1998, with interest at 3% over the prime rate,
due on demand. At December 31, 1997, borrowings under the line of credit
are limited to $4,191 based on the borrowing base formula. Lots held in
inventory are pledged as collateral and this line also is personally
guaranteed by the stockholders. The line of credit is subordinated to
other debt on the lots held in inventory. The Company had an outstanding
balance on the line of credit of $300 and $3,344 at December 31, 1996
and 1997, respectively.
The Company also has obtained a working capital line of credit of
$1,500, due on demand, expiring March 21, 1998, with interest at 1% over
the prime rate. At December 31, 1997, borrowings under the line of
credit are limited to $1,352, which is the sum of the aggregate fair
market value of cash equivalents deposited at the financial institution
plus $300. The cash equivalents deposited at this financial institution
are pledged as collateral and this line is
<PAGE>
personally guaranteed by the stockholders. The Company had an
outstanding balance on the line of credit of $780 and $930 at December
31, 1996 and 1997, respectively.
A subsidiary of the Company has a working capital line of credit of $125
expiring April 15, 1998, with interest at 4.5% over the three-month U.S.
treasury bill interest rate (5.5% at December 31, 1996 and 1997), due on
demand. There were no outstanding borrowings on the line of credit at
December 31, 1996. The Company had an outstanding balance on the line of
credit of $100 at December 31, 1997.
The prime rate was 8.25% and 8.5% at December 31, 1996 and 1997,
respectively.
Other debt obligations at December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
December 31
----------------
1996 1997
<S> <C> <C>
Construction loans on single family homes, with interest at 1%
to 3% above the prime rate $10,692 $ 9,253
Development loans, with interest at 2% to 5% above the prime rate,
but not to be less than 8% or more than 18% 6,243 6,128
Promissory notes, with interest at 6% to 10.5% 5,231 4,658
1996 subordinated debenture series, with interest at 11% 3,000 3,000
1993 subordinated debenture series, with interest at 10% 2,951 2,945
Street, sewer, and water assessments on land under development
and lots held for sale, with interest at 7% to 11% 1,471 1,047
Installment loans, with interest from 5.9% to 11% 978 622
Other 107 77
------- -------
$30,673 $27,730
======= =======
</TABLE>
The construction loans, development loans, and promissory notes are
collateralized by substantially all of the Company's inventories, in
addition to the personal guarantees of all stockholders on the
development loans. The installment loans are collateralized by
transportation and computer equipment.
The 1996 subordinated debenture series is due in 2004 and includes terms
for early redemption by the Company after 1998. The indenture is
subordinated to all of the Company's senior indebtedness, as defined in
the agreement. Under terms of the indenture, the Company is prohibited
from declaring or paying any dividend on its stock or making any other
distribution on any equity securities of the Company. In addition, the
indenture includes covenants that require the Company to maintain a
minimum tangible net worth and a ratio of debt to tangible net worth as
defined in the indenture and certain restrictions on business mergers
and sale or acquisition of assets.
The 1993 subordinated debenture series is due in 2003 and includes terms
for early redemption by the Company. The indenture is subordinated to
all of the Company' senior indebtedness, as defined in the agreement.
Under terms of the indenture, the Company is prohibited from declaring
or paying any dividend on its stock or making any other distribution on
any equity securities of the Company. In addition, the indenture
includes certain restrictions on business mergers, sale or acquisition
of assets and compensation of executive officers.
<PAGE>
The weighted average interest rate on short-term borrowings was 10.48%
and 10.02% at December 31, 1996 and 1997, respectively.
The approximate principal payments on obligations, based on the
scheduled maturity dates at December 31, 1997, are set forth by year
below.
1998 $ 11,840
1999 5,023
2000 3,071
2001 558
2002 399
Thereafter 6,839
---------
$ 27,730
=========
The fair value of the debt obligations approximate their carrying value
at December 31, 1997.
7. LEASING ARRANGEMENTS
The Company is obligated for the rental of its primary office building
from an affiliated partnership (Note 5), other office and warehouse
buildings and certain equipment and software under noncancelable capital
and operating leases which expire at various dates to 2009. The rent on
the primary office building is escalated based on changes in the local
consumer price index.
CAPITAL LEASES - Minimum future lease obligations under capital leases
for the office building and equipment as of December 31, 1997, are as
follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1998 $ 117
1999 117
2000 117
2001 117
2002 117
2003 to 2009 799
---------
Total minimum lease payments 1,384
Less amount representing interest and consumer price index adjustment 937
---------
Present value of minimum lease payments $ 447
=========
</TABLE>
Capital lease and real estate tax payments to the affiliated partnership
were $135, $141, $150 for the years ended December 31, 1995, 1996, and
1997, respectively.
The cost and accumulated amortization of a building and equipment under
capital leases were $607 and $349 at December 31, 1996, and $607 and
$369 at December 31, 1997, respectively.
OPERATING LEASES - The Company leases model homes, agreements under
which the Company's committed to rentals of $307 and $83 in 1998 and
1999, respectively. The Company has an option to repurchase these homes
at the end of these rental periods. The Company also leases vehicles,
for which rentals are committed of $76 and $42 for 1998 and 1999,
respectively. In addition, the Company leases an office and warehouse
building with annual base rentals of approximately $36 through April
1998. Certain equipment and software are leased under operating leases
with terms
<PAGE>
of one year or less. Rental expense was approximately $251, $217, and
$397 for the years ended December 31, 1995, 1996, and 1997,
respectively.
8. LAND OPTION AND EARNEST MONEY DEPOSITS
The Company has entered into option and purchase agreements to acquire
lots in residential housing development and land for future development.
Payments and deposits made under these agreements are as follows:
December 31
----------------------
1996 1997
Option payments $ 665 $ 1,138
Earnest money deposits 130 --
-------- ---------
$ 795 $ 1,138
======== =========
On exercise of the option, option payments are generally applied to the
purchase price of land acquired in accordance with the terms of the
agreement.
Earnest money deposits are to be credited against future purchases. The
Company had contingent land purchase commitments totaling approximately
$1,486 at December 31, 1996, related to the earnest money deposits.
9. BENEFIT PLANS
DISCRETIONARY BONUS PLAN - The Company has discretionary bonus programs
for certain officers and key management employees. The executive
committee of the Board annually determines the amounts of the bonuses to
be paid. Bonuses paid under these programs were $800 and $260 for the
years ended December 31, 1995 and 1996, respectively. There were no
bonuses paid in 1997.
RETIREMENT PLAN - The Company has a qualified contributory retirement
plan (the Plan) under Section 401(k) of the Internal Revenue Code which
covers all full-time employees who meet certain eligibility
requirements. Voluntary contributions are made to the Plan by the
employees and Company matching contributions are made at the discretion
of the Board of Directors. Company matching contributions of
approximately $62, $54, and $45 were made for the years ended December
31, 1995, 1996, and 1997, respectively.
In addition, the Plan allows the Company to make discretionary
profit-sharing contributions to the Plan up to the maximum amount
deductible for income tax purposes. No profit-sharing contributions were
made for the years ended December 31, 1995, 1996, or 1997.
<PAGE>
10. INCOME TAXES
The components of the provision for income taxes for the years ended
December 31, 1995, 1996, and 1997 are as follows:
December 31
-----------------------
1995 1996 1997
Currently payable (receivable):
Federal $-- $ 579 $(355)
State -- 185 6
Deferred 253 (55) (140)
----- ----- -----
Income tax provision for continuing operations 253 709 (489)
Income tax provision for:
Change in accounting method 527 -- --
Discontinued operations 65 (90) --
----- ----- -----
$ 845 $ 619 $(489)
===== ===== =====
Net deferred income tax assets include the following:
Depreciation $ 106 $ 95 $ 97
Accrued bonus pay -- 38 --
Discontinued operations -- 25 --
Interest expensed on land mortgages (204) (259) (291)
Estimated costs to complete lots sold 54 90 108
Accrued vacation pay 26 44 48
Inventory capitalization 19 53 86
Allowance for doubtful accounts receivable 22 21 22
Accrued warranty 25 19 19
State net operating loss carryforward (expiring 2012) -- -- 115
Other 2 4 2
----- ----- -----
$ 50 $ 130 $ 206
===== ===== =====
The reconciliation of the statutory federal income tax rate with the
effective income tax rate for continuing operation is as follows:
December 31
-----------------------
1995 1996 1997
Statutory income tax rate 35.0% 35.0% (35.0)%
Increase (reduction) in tax resulting from:
State taxes, net of federal benefits 6.9 7.2 (9.8)
Increase in cash surrender value of life insurance
policies in excess of policy premiums paid (2.7) (3.6) (4.0)
Effect of graduated rate (1.0) (1.0) 1.0
Other 4.8 .4 4.8
---- ---- ----
43.0% 38.0% (43.0)%
==== ==== ====
<PAGE>
11. STOCK PURCHASE AGREEMENT
Under the terms of a stock purchase agreement, in the event of the death
or total disability of any stockholder, the Company is obligated to
purchase and the stockholder is obligated to sell all nonvoting stock
held by that stockholder for an amount that, subject to the limitations
described below, is the lesser of twice the book value per share or
$658.82 per share in the event of a death or $470.58 per share in the
event of disability. Certain other stockholders have the first option to
purchase not less than all of the voting stock held by a stockholder at
the time of death or total disability, and the Company is obligated to
purchase such voting shares only if those other stockholders fail to
exercise their option. Under the agreement, the amount payable by the
Company for voting and nonvoting stock is limited to the amount of
insurance proceeds received (after reductions, if necessary, because the
cash surrender value is pledged as collateral on a bank line of credit)
under policies owned by the Company covering the lives and possible
disability of each stockholder.
At any other time, the stockholder may offer his stock for sale to the
other stockholders or the Company at a formula price in accordance with
certain provisions of the agreement.
12. COMMITMENTS AND CONTINGENCIES
The Company is a defendant in a number of lawsuits arising out of the
normal course of business of the Company. In the opinion of management,
the ultimate resolution of such litigation will not result in any
material adverse impact to the financial position of the Company.
13. CHANGE IN ACCOUNTING METHOD
Effective January 1, 1995, the Company changed its method of accounting
for capitalized land acquisition and development costs to begin the
capitalization of interest and real estate taxes on land development
projects when initial activities to prepare the property for its
intended use commence, and to capitalize all option costs and land
acquisition and development employee payroll costs as land project
costs. The Company previously capitalized interest and real estate taxes
on land development projects when physical land development commenced,
and option costs (that do not apply to the purchase price of the land)
and land acquisition and development employee payroll costs were
accounted for as general and administrative expenses. The Company
believes that the new method better matches these costs with related
revenues. The adjustment for the cumulative effect of this change as of
January 1, 1995 of $763, net of income taxes of $527, is included in
1995 income. The effect of applying the new accounting method for the
year ended December 31, 1995, was to increase net income approximately
$210, net of income taxes of $144.
EXHIBIT 10.73
LOAN AGREEMENT
THIS AGREEMENT, made as of the ______ day of November, 1997, by and between
LUNDGREN BROS. CONSTRUCTION, INC., a Minnesota corporation (the "Borrower") and
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking association,
with its banking house located in Minneapolis, Minnesota (the "Lender").
W I T N E S S E T H :
WHEREAS, the Borrower has requested that the Lender extend a Three Million
Dollar ($3,000,000) revolving line of credit to provide financing for the
construction of pre-sold homes by the Borrower (the "Credit Facility"); and
WHEREAS, the Lender is willing to provide such a line of credit in accordance
with the terms and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants herein contained and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
1. LINE OF CREDIT. Upon the terms and subject to the conditions hereinafter set
forth, the Lender shall make advances to the Borrower for the purpose of
financing the construction of Acceptable Pre-Sold Homes (as defined below) by
the Borrower, from time to time until and including June 1, 1999 (the
"Expiration Date"), up to but not exceeding in the aggregate principal amount at
any one time outstanding the amount of Three Million and 00/100 Dollars
($3,000,000.00) (the "Construction Loan Amount"). So long as no Event of Default
(as defined herein) has occurred, the Borrower shall have the option to extend
the Expiration Date for two (2) additional periods of six months each (i.e.,
until December 1, 1999 and until June 1, 2000) provided (i) the Borrower gives
the Lender written notice of the Borrower's exercise of each such extension
option at least ten (10) days prior to the Expiration Date, and (ii) the
Borrower pays the Lender an extension fee of $15,000 contemporaneously with the
delivery of each such notice. The term "Expiration Date" shall include any date
to which the Credit Facility is so extended.
2. CONSTRUCTION LOANS. The terms (including, without limitation, interest rate,
payment amount and schedule, and maturity date) of the Credit Facility shall be
evidenced by a revolving real estate note (construction) in the original
principal amount of $3,000,000 of even date herewith executed by the Borrower
and made payable to the order of the Lender (the "Note"). "Acceptable Pre-Sold
Home" shall mean any home to be constructed by the Borrower on a single family
residential lot owned by the Borrower which has been pre-sold, as evidenced by
delivery to the Lender of a bona fide non-contingent purchase agreement in form
and substance acceptable to the Lender, executed by a qualified buyer, as
determined in the sole discretion of the Lender, providing for earnest money
payable to Borrower within fifteen (15) days after the date of the agreement in
an amount not less than five percent (5%) of the purchase price (an "Approved
Purchase Agreement"). The construction of no more than fifteen (15) Acceptable
Pre- Sold Homes may be financed under the Credit Facility at any one time. The
<PAGE>
maximum amount to be advanced by the Lender for the construction of any
Acceptable Pre-Sold Home shall not exceed the least of (a) sixty percent (60%)
of the appraised value of the Acceptable Pre-Sold Home plus the lot on which it
is situated pursuant to the appraisal, if any, obtained by the Lender pursuant
to Section 6 below; (b) sixty percent (60%) of the purchase price of the Project
being paid by the purchaser thereof pursuant to the Approved Purchase Agreement;
or (c) one hundred percent (100%) of the aggregate of (1) the retail purchase
price of the lot (i.e. the price paid by the purchaser thereof), and (2) amounts
paid or to be paid to contractors, subcontractors and material suppliers in
connection with the Project (the purchase price of the Lot plus such amounts
paid to contractors, subcontractors and material suppliers being hereinafter
collectively referred to as the "Hard Costs") (the least of (a), (b) or (c) is
referred to herein as the "Maximum Project Loan Amount").
3. CONDITIONS PRECEDENT - CREDIT FACILITY. As a condition precedent to the
establishment by the Lender of the Credit Facility, the following agreements,
documents, and other items shall have been executed and/or delivered to the
Lender, each of which agreements, documents and other items shall be in form and
substance acceptable to the Lender:
A. Note and Loan Agreement. The Borrower shall have executed and delivered
to the Lender this Agreement and the Note.
B. Personal Guaranty. Peter Pflaum, Patrick C. Wells, Allan D. Lundgren,
Edmund M. Lundgren and Gerald T. Lundgren (individually, a "Personal
Guarantor" and collectively, the "Personal Guarantors") shall have each
executed and delivered to the Lender a Personal Guaranty in form and
substance acceptable to the Lender.
C. Origination Fee. The Borrower shall have paid to the Lender a
non-refundable initial origination fee in an amount equal to $7,500.00. In
addition, the Borrower shall pay to the Lender a supplemental origination
fee of $16,250 on the earlier of (i) one year from the date hereof, or
(ii) the date on which the Borrower requests the first advance under the
Note.
D. Secretary's Certificate. The Borrower shall have delivered to the
Lender a certificate of the secretary of the Borrower, certifying as to
(i) the resolutions of the directors of the Borrower authorizing the
execution, delivery and performance of this Agreement and the documents
related hereto, (ii) the articles of incorporation and bylaws of the
Borrower, and (iii) signatures of the officers or agents of the Borrower
authorized to execute and deliver this Agreement, the documents related
hereto, and other instruments, agreements and certificates, including
advance requests, on behalf of the Borrower.
E. Opinion of Counsel. The Borrower shall have delivered an opinion of
counsel, addressed to the Lender, in form and substance acceptable to the
Lender.
F. UCC Search. The Lender shall have received and approved a UCC Search as
to the Borrower.
<PAGE>
G. Costs And Expenses. The Borrower shall have paid all reasonable costs
and expenses, including, without limitation, attorneys' fees, paid or
incurred by the Lender in connection with the closing and consummation of
the transaction contemplated hereby.
4. CONDITIONS PRECEDENT - INITIAL ADVANCES. As a condition precedent to the
making by the Lender of the initial (or any subsequent) advance under the Credit
Facility with respect to any Acceptable Pre-Sold Home or Project (as defined
below), the following agreements, documents and other items shall have been
executed and/or delivered to the Lender, each of which agreements, documents and
other items shall be in form and substance acceptable to the Lender.
A. Approved Purchase Agreement. The Approved Purchase Agreement, duly
executed by the Borrower and the purchaser of such Acceptable Pre-Sold
Home.
B. Mortgage. The Borrower shall have executed and delivered to the Lender
a mortgage, security agreement, fixture financing statement and assignment
of leases and rents pursuant to which the Borrower shall have granted a
mortgage and security interest in and to, and an assignment of leases and
rents with respect to, the Acceptable Pre-Sold Home and the property on
which it is situated (the Acceptable Pre-Sold Home together with the
property on which it is situated are hereinafter referred to as the
"Project"). With respect to any Project other than the first Project
financed hereunder located in each county, the Borrower shall have
executed and delivered to the Lender an Amendment to Mortgage with respect
to such Project in the form attached hereto as EXHIBIT A pursuant to which
the legal description of the property covered by the mortgage securing the
Note on file in such county is amended to add the legal description of the
Project thereto (said mortgage, as amended by any Amendment to Mortgage,
is hereinafter referred to as a "Mortgage"). The Lender agrees to
cooperate with the Borrower in good faith and as allowed by law to enable
the Borrower to avoid paying duplicative mortgage registry tax on the
Construction Loan Amount as a Mortgage is recorded in more than one
county.
C. Certificate of No Hazardous Material. With respect to the first Project
located in any subdivision, a certificate of no hazardous material with
respect to such subdivision, duly executed by the Borrower (a "Hazardous
Material Certificate").
D. Title Insurance. The Lender shall have received a fully paid ALTA
mortgagee's title insurance policy issued by Chicago Title Insurance
Company, or another title insurance company acceptable to the Lender
("Title") in form and substance satisfactory to the Lender, naming the
Lender as the insured, insuring the Mortgage to be a valid first lien on a
good and marketable fee simple title to the Project, in an amount not less
than the Maximum Project Loan Amount, and specifically insuring against
mechanic's liens, matters which would be disclosed by a comprehensive
survey, the rights of parties in possession and rights of the purchasers
under the Approved Purchase Agreement, and containing judgment, tax lien,
assessment and bankruptcy searches and such endorsements as shall be
requested by the Lender and with no pending disbursement clause.
<PAGE>
E. Insurance Certificates. The Borrower shall have delivered to the Lender
a certificate or certificates in form and substance acceptable to the
Lender evidencing hazard, builder's risk and liability insurance coverage
with respect to such Project in an amount acceptable to the Lender and
naming the Lender as mortgagee and loss payee, with respect to builder's
risk insurance and additional insured, with respect to liability
insurance. The Lender agrees to accept "blanket" insurance covering
multiple Projects, subject to compliance with other terms hereof.
F. Preliminary Cost Statements. The Borrower shall have executed and
delivered to the Lender a preliminary construction statement in form and
substance acceptable to the Lender duly executed by the Borrower showing
(if such advance related only to land acquisition costs), in summary form
the projected Hard Costs relating to such Project or (if such advance
includes payment of Hard Costs other than land acquisition costs), all
Hard Costs in detail relating to such Project (a "Project Cost
Statement").
G. Building Permit; Zoning Letter. The Lender shall have received
confirmation of the issuance of a building permit in connection with each
Project, along with satisfactory evidence of the Project zoning, and
compliance therewith, in form acceptable to the Lender.
H. Project Fee. The Borrower shall have paid to the Lender a nonrefundable
Project fee in the amount of $500.
5. CONDITIONS PRECEDENT - ALL ADVANCES. With respect to each advance, the
obligation of the Lender to make any advance in connection therewith shall be
subject to the further conditions precedent that on the date of such advance:
A. No Event of Default. No "Event of Default" (as defined herein), and no
event of which with the giving of notice or the lapse of time or both
would constitute an Event of Default (an "Event") shall have occurred and
be continuing, and all representations and warranties made by the Borrower
herein or in any document related hereto or required hereby shall continue
to be true and correct as of the date of such advance.
B. Compliance. The Borrower shall have provided to the Lender such
evidence of compliance with all of the provisions of this Agreement as the
Lender may reasonably request.
C. Government Approvals. No license or permit necessary for the
construction and installation of the improvements for a Project shall have
been revoked or the issuance of any such license or permit or the
authority of the Borrower to construct and install the improvements shall
have been subjected to challenger by or before any court or other
governmental authority having or asserting jurisdiction over such Project.
D. Tract Search. If requested by the Lender in the Lender's sole
discretion, a tract search from Title with respect to any Projects, which
shall be acceptable in substance to the Lender.
<PAGE>
E. Inspecting Architect Report. If the Lender so determines, in its sole
discretion, a report of an inspecting architect in form and substance
acceptable to the Lender.
F. Costs and Expenses. The Borrower shall have paid all costs and expenses
including, without limitation, title insurance fees, mortgage registration
tax, recording fees and attorney's fees, paid or incurred by the Lender in
connection with all Projects.
6. Appraisals. The Lender may, in its discretion and at its cost, obtain an
appraisal of any Project or Projects in connection with which advances are to be
made hereunder. Notwithstanding the foregoing, upon approval by the Lender of
all other documents required hereunder and satisfaction of all other conditions
set forth herein with respect to such Project, the Lender shall commence
advances in connection therewith prior to receipt of such appraisal.
7. TERMS OF ADVANCES UNDER CREDIT FACILITY. So long as no Event of Default has
occurred, advances made under the Credit Facility with respect to any Project
shall be made directly to the Borrower (other than the initial advance with
respect to any Project, which shall be made to Title) from time to time from and
after the date hereof in accordance with the terms hereof and prior to the
Expiration Date in an aggregate principal amount up to, but not exceeding, the
Construction Loan Amount, (and, with respect to each Project, in an aggregate
principal amount up to, but not exceeding, the Maximum Project Loan Amount) to
pay Hard Costs with respect to each Project.
8. DRAW REQUESTS FOR ADVANCES UNDER CONSTRUCTION LOANS.
A. Whenever the Borrower desires to obtain an advance with respect to any
Project, which shall be no more often than twice per month (each of which
may include requests for advances in connection with different Projects),
the Borrower shall submit to the Lender (and with respect to the first
advance for any Project, to Title) a draw request substantially in the
form attached hereto as EXHIBIT B (a "Draw Request") duly signed by the
Borrower, setting forth the information requested therein. Each Draw
Request shall constitute a representation and warranty by the Borrower
that all representations and warranties of the Borrower set forth in this
Agreement are true and correct as of the date of such Draw Request, that
no mechanic's or material supplier's liens have been filed with respect to
any Project and that no Event of Default or Event has occurred as of the
date of such Draw Request.
B. At the time of submission of each Draw Request, other than the final
Draw Request, the Borrower shall also submit to the Lender an update of
the Project Cost Statement in connection with such Project along with such
other documentation and information relating to such Project as the Lender
may request.
C. At the time of submission of the final Draw Request in connection with
any Project, which shall not be submitted until completion of such
Project, the Borrower shall also submit the following to the Lender and
Title:
<PAGE>
i) a final Project Cost Statement, in form and substance acceptable
to the Lender and Title; and
ii) such other supportive evidence as may reasonably be requested by
the Lender or Title to substantiate all payments which are to be
made out of such Draw Request and/or to substantiate all payments
then made with respect to such improvements.
D. If on the date an advance is desired, the Borrower has performed all of
its agreements and complied with all requirements theretofore to be
performed or complied with hereunder, the Lender shall (subject to the
conditions, representations and warranties of the Borrower pursuant to
this Agreement hereof and elsewhere herein) disburse the amount of the
requested advance to the Borrower (or, in the case of the initial advance
for any Project to Title) no later than the fifth (5th) day after receipt
by the Lender of the Draw Request; provided however, that the Lender shall
not be required to disburse any amount for payment for materials to be
stored off the Premises or ordered.
9. ESCROW ACCOUNT. In the event the closing of the sale of any Project does not
occur for any reason within the earlier of (i) ten (10) days after the closing
date set forth in the Approved Purchase Agreement executed in connection with
such Project, or if the purchasers under an Approved Purchase Agreement are in
default thereunder (including, without limitation, rejection of any mortgage
application by such purchasers) and remain in default for thirty (30) days; or
(ii) within six (6) months of the date of initial advance in connection with
such Project then the Lender may require that the Borrower provide evidence to
the Lender that such Project is "in balance". For purposes hereof, the term "in
balance" shall mean that the aggregate undisbursed amount of the Maximum Project
Loan Amount for the construction of such Project is sufficient to pay all costs
and expenses of any kind which reasonably may be anticipated in connection with
the completion of the improvements relating to such Project. Solely for purposes
of this Section 9, the term "Maximum Project Loan Amount" shall mean the lesser
of (i) sixty percent (60%) of the appraised value of the Project, or (ii) eighty
five percent (85%) of Hard Costs in connection with such Project. If such
Project is not in balance, the Lender shall thereupon send written notice
thereof to the Borrower specifying the amount required to be deposited by the
Borrower with the Lender to provide sufficient funds to complete such
improvements. The Borrower shall, within ten (10) calendar days of the receipt
of any such notice, deposit with the Lender the amount of funds specified in the
Lender's notice. In the event any funds have been deposited with the Lender
pursuant to this Section 9, and in the event the Borrower thereafter submits a
Draw Request to the Borrower with respect to such Project, and notwithstanding
anything contained herein to the contrary, disbursements thereafter with respect
to such Project shall be made by the Lender first from the funds deposited by
the Borrower with the Lender, which funds shall be placed in a non-interest
bearing escrow account to be established by the Lender in the name of the
Borrower but with respect to which the Lender shall have sole authority to make
withdrawals therefrom, into which any and all amounts required to be deposited
by the Borrower pursuant to this Agreement shall be deposited (the "Escrow
Account") and, second from proceeds of an advance with respect to such Project.
At the time the final advance with respect to any Project is made hereunder
pursuant to Section 8.D. hereof, and
<PAGE>
so long as no Event of Default or Event has occurred, the Lender shall, without
receipt of a Draw Request from the Borrower, return the then-remaining portion
of the funds deposited in the Escrow Account in connection with such Project to
the Borrower.
10. RELEASES. So long as no Event of Default has occurred, the Borrower shall
have the right to obtain the release of any Project from the lien of the
Mortgage upon payment to the Lender of a release price, which shall be in an
amount equal to 100% of the Bank's aggregate advances with respect to such
Project plus any accrued but unpaid interest related thereto.
11. REPRESENTATIONS. In order to induce the Lender to extend the Credit Facility
and to consider making advances hereunder, the Borrower hereby warrants and
represents to the Lender as follows:
A. Corporate Existence and Power. The Borrower is a corporation duly
organized and validly existing under the laws of the State of Minnesota,
and is duly qualified to do business and is in good standing in the State
of Minnesota and in every other jurisdiction where the nature of its
business or the character of its properties makes such qualification
necessary and where failure to be so qualified and in good standing would,
in the aggregate, have a material adverse affect on the business,
properties, operations, assets, liabilities or condition (financial or
otherwise), of the Borrower, and has all requisite power and authority to
carry on its business as now conducted and as presently proposed to be
conducted.
B. Authority of Borrower. The Borrower has full corporate power and
authority to execute and deliver this Agreement and the documents related
hereto and to incur and perform its obligations hereunder and thereunder;
the execution, delivery and performance by the Borrower of this Agreement
and any and all other documents and transactions contemplated hereby will
not violate any provision of any law, rule, regulation or court order or
result in the breach of, constitute a default under, or create or give
rise to any lien under, any indenture or other agreement or instrument to
which the Borrower is a party or by which the Borrower or its property may
be bound or affected.
C. Enforceability Against Borrower. This Agreement, the Note and the
documents related hereto each constitute the legal, valid and binding
obligations of the Borrower enforceable in accordance with their
respective terms (subject, as to enforceability, to limitations resulting
from bankruptcy, insolvency and other similar laws affecting creditors'
rights generally).
D. Financial Condition. The financial statements of the Borrower
heretofore furnished to the Lender are complete and correct in all
respects and fairly present the respective financial condition of the
Borrower at the date of such statement, and have been prepared in
accordance with generally accepted accounting principles, consistently
applied. Since the most recent set of financial statements delivered by
the Borrower to the Lender, there have been no material adverse changes in
the financial condition of the Borrower.
<PAGE>
E. Litigation. There is no action, suit or proceeding pending or, to the
knowledge of the Borrower, threatened against or affecting the Borrower
which, if adversely determined, would have a material adverse effect on
the condition (financial or otherwise), business, properties or assets of
the Borrower or which would question the validity of this Agreement or any
instrument, document or other agreement related hereto or required hereby,
or impair the ability of the Borrower to perform its obligations under the
foregoing agreements.
F. Licenses. The Borrower possesses adequate licenses, permits,
franchises, patents, copyrights, trademarks and trade names, or rights
thereto, to conduct their business substantially as now conducted and as
presently proposed to be conducted.
G. Default. The Borrower is not in default of a material provision under
any material agreement, instrument, decree or order to which it is a party
or by which it or its property is bound or affected.
H. Consents. No consent, approval, order or authorization of, or
registration, declaration or filing with, or notice to, any governmental
authority or any third party is required in connection with the execution
and delivery of this Agreement or any of the agreements or instruments
herein mentioned to which the Borrower is a party or the carrying out or
performance of any of the transactions required or contemplated hereby or
thereby or, if required, such consent, approval, order or authorization
has been obtained or such registration, declaration or filing has been
accomplished or such notice has been given prior to the date hereof.
I. Taxes. The Borrower has filed all tax returns required to be filed and
either paid all taxes shown thereon to be due, including interest and
penalties, which are not being contested in good faith and by appropriate
proceedings, or provided adequate reserves for payment thereof, and the
Borrower does not have any information or knowledge of any objections to
or claims for additional taxes in respect of federal income or excess
profits tax returns for prior years.
J. Title. The Borrower has or will have good, absolute and marketable
title to all Projects, free and clear of all liens, claims and
encumbrances, except the Mortgage.
12. COVENANTS OF THE BORROWER. On and after the date hereof and until the
payment in full of the Note, and the performance of all other obligations of the
Borrower hereunder, the Borrower agrees that, unless the Lender shall otherwise
consent in writing:
A. Financial Statements. During the term of the loan contemplated hereby,
the Borrower shall deliver to the Lender the following:
i) as soon as available and in any event within ninety (90) days
after the end of each fiscal year of the Borrower, annual audited
financial statements of the Borrower (balance sheet, statement of
income, and statement of cash flow), all in
<PAGE>
reasonable detail and prepared in accordance with generally accepted
accounting principles consistently applied;
ii) as soon as available and in any event within forty-five (45)
days after the end of each fiscal quarter of the Borrower,
unaudited/internal balance sheets and statements of income and
retained earnings of the Borrower as of the end of and for such
quarter and for the fiscal year to date period then ended, all in
reasonable detail and prepared in accordance with generally accepted
accounting principles consistently applied (subject only to year-end
audit adjustments);
iii) promptly after the sending or filing thereof, copies of all
regular and periodic financial reports which the Borrower shall file
with the Securities and Exchange Commission or any national
securities exchange;
iv) as soon as available and in any event within one hundred twenty
(120) days after the end of each calendar year, annual financial
statements for such year from the Personal Guarantors, all in
reasonable detail and prepared in accordance with generally accepted
accounting principles, consistently applied, and specifically noting
each and every contingent liability (including partnership and
guaranty obligations) of the Personal Guarantors; and
v) from time to time, with reasonable promptness, such further
information as the Lender may reasonably request regarding the
business, operations, properties, assets, liabilities (including
specifically, but not by way of limitation, all guaranty,
partnership, direct, indirect, contingent, absolute, joint and joint
and several, liabilities and obligations, whether matured or
unmatured), affairs and financial and other condition of the
Borrower, the Personal Guarantors, and the Projects.
B. Taxes and Claims. The Borrower shall pay and discharge all taxes,
assessments and governmental charges or levies imposed upon it or upon its
income or profits, or upon any of its assets or properties, prior to the
date on which penalties attach thereto, and all lawful claims which, if
unpaid, might become a lien or charge upon any Project or the other assets
of the Borrower.
C. Insurance. The Borrower shall maintain insurance coverage with respect
to the Projects with responsible insurance companies licensed to do
business in the State of Minnesota as required by the Mortgage. The
Borrower shall furnish to the Lender full information and written evidence
as to the insurance maintained by the Borrower.
D. Litigation. The Borrower shall promptly give to the Lender notice in
writing of all litigation and of all proceedings by or before any court or
governmental or regulatory agency affecting the Borrower or the Personal
Guarantors, except litigation or proceedings which, if adversely
determined, would not materially affect the financial condition or
business of the Borrower or the Personal Guarantors.
<PAGE>
E. Liens. The Borrower shall promptly provide written notice to the Lender
of the service on the Borrower or the filing of any mechanic's or material
suppliers lien on any Project.
F. Access to Books and Inspection. The Borrower shall at all times keep
proper books of record and accounts for itself, and, upon request of the
Lender, the Borrower shall provide any duly authorized representative of
the Lender access during normal business hours to, and permit such
representative to examine, copy or make extracts from, any and all books,
records and documents in the Borrower's or the Personal Guarantors'
possession or control relating to the Borrower's or the Personal
Guarantors' affairs, and to inspect any of their facilities and
properties; provided, however, that the Lender shall treat all such books
and records confidential and shall only be permitted to disclose the
information contained therein to its legal counsel, its independent public
accountants, any participating banks, or in connection with any action to
collect on any of the Notes or to enforce this Agreement or the documents
related hereto, or as otherwise permitted or required by law.
G. Access. The Borrower shall grant to the Lender's agents access to the
Projects at any reasonable time upon reasonable notice in order to inspect
the same and the Borrower's property and business.
H. Consolidated Tangible Net Worth. The Borrower will at all times during
the fiscal year ending on or about December 31, 1997, maintain
"Consolidated Tangible Net Worth" (as defined in the Indenture) in an
amount at least equal to the sum of $5,586,000 plus 50% of the Borrower's
fiscal year to date net income (calculated in accordance with generally
accepted accounting principles, consistently applied) calculated as of the
last day of each fiscal quarter ending or after June 30, 1997. The
Borrower will at all times during each fiscal year ending after December
31, 1997 maintain Consolidated Tangible Net Worth in an amount at least
equal to the sum of actual Consolidated Tangible Net Worth as of the last
day of the immediately preceding fiscal year plus 50% of fiscal year to
date net income (calculated in accordance with generally accepted
accounting principles consistently applied). The "Indenture" means that
certain Prospectus dated as of October 18, 1996 for the issuance of Senior
Subordinated Debentures Series 11% of Borrower, but not including any
amendments thereto unless such amendments are specifically approved in
writing by the Lender.
I. Ratio of Funded Debt to Consolidated Tangible Net Worth Plus
Shareholder's Subordinated Debt. The Borrower will at all times maintain a
ratio of Funded Debt to Consolidated Tangible Net Worth plus Shareholder
Subordinated Debt (as said terms are defined in the Indenture) calculated
quarterly, of not greater than 7.0 to 1.0.
13. ARBITRATION.
A. Application. Except for "Core Proceedings" under the United States
Bankruptcy Code, the Lender and the Borrower agree to submit to binding
arbitration all claims, disputes and controversies between or among them,
whether in tort, contract or otherwise
<PAGE>
(and their respective employees, officers, directors, attorneys, and other
agents) arising out of or relating to in any way (i) the Credit Facility
and related loan and security documents which are the subject of this
Agreement and its negotiation, execution, collateralization,
administration, repayment, modification, extension, substitution,
formation, inducement, enforcement, default or termination; or (ii)
requests for additional credit. Any arbitration proceeding will (i)
proceed in Minneapolis, Minnesota; (ii) be governed by the Federal
Arbitration Act (Title 9 of the United States Code); and (iii) be
conducted in accordance with the Commercial Arbitration rules of the
American Arbitration Association ("AAA").
B. Exclusions. The arbitration requirement does not limit the right of
either party to (i) foreclose against real or personal property
collateral; (ii) exercise self-help remedies relating to collateral or
proceeds of collateral such as setoff or repossession; or (iii) obtain
provisional ancillary remedies such as replevin, injunctive relief,
attachment or the appointment of a receiver, before, during or after the
pendency of any arbitration proceeding. This exclusion does not constitute
a waiver of the right or obligation of either party to submit any dispute
to arbitration, including those arising from the exercise of the actions
detailed in section (i), (ii) and (iii) of this paragraph.
C. Arbitrator. Any arbitration proceeding will be before a single
arbitrator selected according to the Commercial Arbitration Rules of the
AAA. The arbitrator will be a neutral attorney who has practiced in the
area of commercial law for a minimum of ten years. The arbitrator will
determine whether or not an issue is arbitratable and will give effect to
the statutes of limitation in determining any claim. Judgment upon the
award rendered by the arbitrator may be entered in any court having
jurisdiction.
D. Motion Practice. In any arbitration proceeding the arbitrator will
decide (by documents only or with a hearing at the arbitrator's
discretion) any pre-hearing motions which are similar to motions to
dismiss for failure to state a claim or motions for summary adjudication.
E. Discovery. In any arbitration proceeding discovery will be permitted
and will be governed by the Minnesota Rules of Civil Procedure. All
discovery must be completed no later than twenty (20) days before the
hearing date and within one hundred eighty (180) days of the commencement
of arbitration proceedings. Any requests for an extension of the discovery
periods, or any discovery disputes, will be subject to final determination
by the arbitrator upon a showing that the request for discovery is
essential for the party's presentation and that no alternative means for
obtaining the information is available.
14. As used herein, the term "Event of Default" shall mean and include any one
or more of the following events:
A. the Borrower or any of the Personal Guarantors shall fail to pay, when
due or within fifteen (15) days thereafter, any amounts required to be
paid by the Borrower
<PAGE>
under the Note or any other indebtedness of the Borrower or any of the
Personal Guarantors to the Lender, or the Borrower or any of the Personal
Guarantors shall fail to pay (i) within thirty (30) days of its due date
any indebtedness to any third party secured creditor or (ii) within one
hundred twenty (120) days of its due date any indebtedness to any other
third party, which is not being contested in good faith, whether any such
indebtedness is now existing or hereafter arises and whether direct or
indirect, due or to become due, absolute or contingent, primary or
secondary or joint or joint and several;
B. the Borrower shall fail to observe or perform any covenant, condition
or agreement to be observed or performed by it under the Note, this Loan
Agreement, the Mortgage, any Certificate of No Hazardous Material or any
other document related hereto or thereto (collectively, the "Borrower
Documents") or any other instrument, agreement or other documents executed
by the Borrower in favor of or with the Lender, whether related to the
Credit Facility or any other matter, for a period of thirty (30) days
after written notice, specifying such default and requesting that it be
remedied, given to the Borrower by the Lender;
C. any of the Personal Guarantors shall fail to observe or perform any
covenant, condition or agreement to be observed or performed by him under
the Personal Guaranty or any other instrument, agreement or other document
executed by such Personal Guarantor in favor of the Lender, whether
related to the Credit Facility or any other matter for a period of thirty
(30) days after written notice, specifying such default and requesting
that it be remedied, given to such Personal Guarantor by the Lender;
D. the Borrower or any of the Personal Guarantors shall file or have filed
against it a petition in bankruptcy or for reorganization or for an
arrangement pursuant to any present or future state or federal bankruptcy
act or under any similar federal or state law, or shall be adjudicated a
bankrupt or insolvent, or shall make a general assignment for the benefit
of its, his or her creditors, or shall be unable to pay its, his or her
debts generally as they become due; or if an order for relief under any
present or future federal bankruptcy act or similar state or federal law
shall be entered against the Borrower or any of the Personal Guarantors;
or if a petition or answer requesting or proposing the entry of such order
for relief or the adjudication of the Borrower or any of the Personal
Guarantors as a debtor or bankrupt or reorganization under any present or
future state or federal bankruptcy act or any similar federal or state law
shall be filed in any court and such petition or answer shall not be
discharged or denied within ninety (90) days after the filing thereof; or
if a receiver, trustee or liquidator of the Borrower or any of the
Personal Guarantors or of all or substantially all of the assets of the
Borrower or any of the Personal Guarantors, or of the property subject to
the Mortgage or any part thereof, shall be appointed in any proceeding
brought against the Borrower or any of the Personal Guarantors and shall
not be discharged within ninety (90) days of such appointment; or if the
Borrower or any of the Personal Guarantors shall consent to or acquiesce
in such appointment; or if any property of the Borrower or any of the
Personal Guarantors (including without limitation the estate or interest
of the Borrower in the property subject to the Mortgage or any part
thereof) shall be levied upon or attached in any proceeding;
<PAGE>
E. final judgment(s) for the payment of money in excess in the aggregate
of $50,000 shall be rendered against the Borrower or any of the Personal
Guarantors and shall remain undischarged for a period of thirty (30) days
during which execution shall not be effectively stayed;
F. the Borrower or Peter Pflaum shall be or become insolvent (whether in
the equity or bankruptcy sense) or Peter Pflaum shall die;
G. Peter Pflaum shall no longer be the chief executive officer of the
Borrower;
H. (i) twenty-five percent (25%) or more of the voting equity securities
of the Borrower shall be sold, transferred or otherwise disposed of in one
transaction or in a series of transactions occurring within a twelve (12)
month period (except for the redemption or repurchase by the Borrower of
shares of voting equity securities owned by Allan D. Lundgren, Edmund M.
Lundgren, Gerald T. Lundgren or Patrick C. Wells, or a transfer of
ownership as a result of the death of a shareholder of the Borrower); or
(ii) additional voting equity securities of the Borrower shall be issued
in one transaction or in a series of transactions occurring within a
twelve (12) month period which results in any person (other than Peter
Pflaum) or entity acquiring, directly or indirectly, more than forty
percent (40%) of the voting power of the Borrower (any of the foregoing
being referred to as a "Change of Control");
I. any representation or warranty made by the Borrower or any of the
Personal Guarantors herein or in the documents related hereto shall prove
to be untrue or misleading in any material respect, or any statement,
certificate or report furnished hereunder or under any of the foregoing
documents by or on behalf of the Borrower or any of the Personal
Guarantors shall prove to be untrue or misleading in any material respect
on the date when the facts set forth and recited therein are stated or
certified;
J. the Borrower or any of the Personal Guarantors shall liquidate,
dissolve, terminate or suspend its, his or her business operations, or
sell all or substantially all of its, his or her assets, without the prior
written consent of the Lender;
K. all or any portion of the property subject to the Mortgage, or the
legal, equitable or any other interest therein, shall be sold,
transferred, assigned, leased or otherwise disposed of unless the prior
written consent of the Lender is first obtained;
L. any Personal Guarantors shall repudiate, purport to revoke or fail to
perform any such Personal Guarantor's obligations under such Personal
Guarantor's Personal Guaranty; or
M. any breach, default, or event of default by or attributable to any
affiliate of the Borrower or any Personal Guarantor occurs under any
agreement between such affiliate and the Lender.
<PAGE>
15. REMEDIES. In addition to any other remedies provided for in the Note, the
Mortgage, and any of the other Borrower Documents or otherwise available at law
or in equity, upon the occurrence of an Event of Default, the Lender may, in its
sole discretion, refrain from making any further advances in connection with any
Project under the Credit Facility and/or terminate the Credit Facility.
16. NOTICES. All notices, consents, requests, demands and other communications
hereunder shall be given to or made upon the respective parties hereto at their
respective addresses specified below or, as to any party, at such other address
as may be designated by it in a written notice to the other party. All notices,
requests, consents and demands hereunder shall be effective when personally
delivered or duly deposited in the United States mails, certified or registered,
postage prepaid, or delivered via telecopier, addressed as follows:
17. IF TO THE LENDER:
Norwest Bank Minnesota, National Association
Old St. Anthony Office
425 East Hennepin Avenue
Minneapolis, Minnesota 55479
Attention: Commercial Real Estate Department
Telecopier: (612) 667-1344
18. IF TO THE BORROWER:
Lundgren Bros. Construction, Inc.
935 East Wayzata Boulevard
Wayzata, Minnesota 55391
Telecopier: (612) 473-7401
Attention: Peter Pflaum
19. MISCELLANEOUS.
A. Waivers, etc. No failure on the part of the Lender to exercise, and no
delay in exercising, any right or remedy hereunder or under applicable law
or any document or agreement related hereto shall operate as a waiver
thereof; nor shall any single or partial exercise of any such right or
remedy preclude any other or further exercise thereof or the exercise of
any other right or remedy. The remedies herein provided are cumulative and
not exclusive of any remedies provided by law.
B. Expenses. The Borrower shall reimburse the Lender for any and all costs
and expenses, including without limitation attorneys' fees, paid or
incurred by the Lender in connection with (i) the preparation of this
Agreement and any other document or agreement related hereto or thereto,
and the transactions contemplated hereby, which amount shall be paid prior
to the making of any advance hereunder; (ii) the closing and
<PAGE>
consummation of the transactions contemplated hereby; (iii) the
negotiation of any amendments, modifications or extensions to any of the
foregoing documents, instruments or agreements and the preparation of any
and all documents necessary or desirable to effect such amendments,
modifications or extensions; and (iv) the enforcement by the Lender during
the term hereof or thereafter of any of the rights or remedies of the
Lender under any of the foregoing documents, instruments or agreements
under applicable law, whether or not suit is filed with respect thereto.
The obligation of the Borrower to reimburse the Lender for attorneys' fees
shall be limited to reasonable attorneys' fees for purposes of subsections
(i), (ii) and (iii) above but shall not be so limited for purposes of
subsection (iv).
C. Amendments, etc. This Agreement and the Note may not be amended or
modified, nor may any of their terms (including without limitation, terms
affecting the maturity of or rate of interest on the Note) be modified or
waived, except by written instruments signed by the Lender and the
Borrower.
D. Entire Agreement; Assignment. This Agreement, together with the
documents related hereto, comprises the complete and integrated agreement
of the parties on the subject matter hereof and supersedes all prior
agreements, written or oral, on the subject matter hereof. This Agreement
shall be binding upon and inure to the benefit of the Borrower and the
Lender and their respective successors and assigns; provided, however,
that the Borrower may not transfer or assign its right to borrow hereunder
without the prior written consent of the Lender.
E. Offsets. Nothing in this Agreement shall be deemed a waiver or
prohibition of the Lender's right of banker's lien, offset, or
counterclaim, which right the Borrower hereby grants to the Lender.
F. Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one agreement,
and any of the parties hereto may execute this Agreement by signing any
such counterpart.
G. Governing Law. This Agreement and all other agreements related hereto,
shall be construed in accordance with and governed by the laws of the
State of Minnesota.
H. Headings. The descriptive headings for the several sections of this
Agreement are inserted for convenience only and shall not define or limit
any of the terms or provisions hereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed and delivered as of the day and year first above written.
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
By:
----------------------------------
Its:
-----------------------------
LUNDREN BROS. CONSTRUCTION,
INC.
By:
----------------------------------
Its: President
<PAGE>
EXHIBIT A
AMENDMENT TO MORTGAGE, SECURITY AGREEMENT,
FIXTURE FINANCING STATEMENT AND
ASSIGNMENT OF LEASES AND RENTS
THIS AMENDMENT TO MORTGAGE, SECURITY AGREEMENT, FIXTURE FINANCING STATEMENT AND
ASSIGNMENT OF LEASES AND RENTS, is made and entered into as of the ____ day of
_____, 1997, by and between LUNDGREN BROS. CONSTRUCTION, INC., a Minnesota
corporation (the "Mortgagor"), and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION,
a national banking association (the "Mortgagee").
W I T N E S S E T H:
WHEREAS, the Mortgagor and the Mortgagee entered into that certain Loan
Agreement dated as of ___________, 1997 (the "Loan Agreement"), concerning the
extension of a $3,000,000 revolving credit facility by the Mortgagee to the
Mortgagor (the "Loan"); and
WHEREAS, amounts outstanding under the Loan are evidenced by that certain Real
Estate Note (Construction) dated as of ___________, 1997 (the "Original Note"),
executed by the Mortgagor in favor of the Mortgagee in the maximum principal
amount of $3,000,000; and
WHEREAS, the Note is secured pursuant to that certain Mortgage, Security
Agreement, Fixture Financing Statement and Assignment of Leases and Rents dated
as of ___________, 1997 (as heretofore and hereafter amended from time to time
the "Mortgage"), encumbering property legally described therein; and
WHEREAS, the Mortgage was originally filed of record in the office of the ______
County ___________________ on ____________, 1997, as Document No. _____; and
WHEREAS, the Mortgage, or amendments thereto, may have also been filed of record
from time to time in various other counties as additional parcels of real
property were subjected to the lien of the Mortgage in order to allow the
Mortgagor to obtain additional advances under the Loan Agreement evidenced by
the Note with respect to said parcels; and
WHEREAS, the Mortgagee has agreed to subject the real property described on
Exhibit A to the lien of the Mortgage under the Loan Agreement and evidenced by
the Note with respect to said parcels; and
WHEREAS, mortgage registration tax was paid in connection with the recording of
the Mortgage in the amount of $________, as evidenced by the _________ County
Treasurer's Receipt No. ______.
<PAGE>
WHEREAS, the Mortgagor and the Mortgagee desire to enter into this Amendment to
Mortgage, Security Agreement, Fixture Financing Statement and Assignment of
Leases and Rents to secure the payment of all amounts outstanding under the
Note.
NOW, THEREFORE, in consideration of the foregoing recitals and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. The legal description of the land set forth on Exhibit A to the
Mortgage is hereby amended to also include the land legally described on
Exhibit A attached hereto (which land shall at all times hereafter be
included in the definition of "land" set forth in the Mortgage).
2. Except as expressly amended herein, the Mortgage shall be and remain in
full force and effect in accordance with its terms.
IN WITNESS WHEREOF, the parties hereto have made and entered into this Amendment
to Mortgage, Security Agreement, Fixture Financing Statement and Assignment of
Leases and Rents as of the day and year first above written.
LUNDGREN BROS. CONSTRUCTION,
INC.
By:
----------------------------------
Its:
-----------------------------
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
By:
----------------------------------
Its:
-----------------------------
STATE OF MINNESOTA )
) ss.
COUNTY OF )
The foregoing instrument was acknowledged before me this ____ day of November,
1997, by ________________________ the _____________________ of LUNDGREN BROS.
CONSTRUCTION, INC., a Minnesota corporation, for and on behalf of such
corporation.
--------------------------------------
Notary Public
<PAGE>
STATE OF MINNESOTA )
) ss.
COUNTY OF )
The foregoing instrument was acknowledged before me this ____ day of November,
1997, by ___________________________, the ____________________ of Norwest Bank
Minnesota, National Association, a national banking association, for and on
behalf of said association.
--------------------------------------
Notary Public
THIS INSTRUMENT WAS DRAFTED BY:
Winthrop & Weinstine, P.A. (TMH)
30 East Seventh Street
3200 Minnesota World Trade Center
St. Paul, MN 55101
<PAGE>
EXHIBIT B
(FORM OF DRAW REQUEST)
REVOLVING REAL ESTATE NOTE
(CONSTRUCTION)
$3,000,000 Minneapolis, Minnesota
November __, 1997
1. FOR VALUE RECEIVED, LUNDREN BROS. CONSTRUCTION, INC., a Minnesota corporation
(the "Borrower"), hereby promises to pay to the order of NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION, a national banking association, its successors and assigns
(the "Lender"), at its banking house located in Minneapolis, Minnesota, the
principal sum of Three Million and 00/100 Dollars ($3,000,000), or so much
thereof as may have been disbursed to or for the benefit of the Borrower in
lawful money of the United States and immediately available funds under and
pursuant to that certain Loan Agreement dated November __, 1997, by and between
the Borrower and the Lender (as the same may be amended and/or restated from
time to time, the "Loan Agreement"), together with interest on the unpaid
balance accruing as of the date hereof at a rate equal at all times to one
percent (1%) per annum in excess of the "Base Rate of Interest" (as that term is
defined herein), as the same may change from time to time and be adjusted in the
manner set forth herein. Subject to the terms and conditions set forth in the
Loan Agreement, the proceeds of this Note may be advanced, repaid and readvanced
hereunder so long as no Event or Event of Default (as those terms are defined in
the Loan Agreement) shall have occurred and be then continuing.
2. Accrued interest hereon shall be payable monthly commencing on November 1,
1997, and continuing on the first (1st) day of each calendar month thereafter
until this Note is paid in full. Accrued interest shall also be due and payable
on the Expiration Date (as defined in the Loan Agreement). The principal balance
of this Note shall be due and payable in full on the Expiration Date.
3. In all cases interest on this Note shall be calculated on the basis of a 360
day year but charged for actual days principal is unpaid.
4. As used herein, the term "Base Rate of Interest" shall mean the base rate of
interest (or equivalent successor rate) set or announced from time to time by
the Lender as its base rate, whether or not the Lender makes loans to other
borrowers at, above or below said rate.
5. The rate of interest due hereunder shall initially be determined as of the
date hereof and shall thereafter be adjusted, as and when, and on the same day
that, the Base Rate of Interest changes (each such day hereinafter being
referred to as an "Adjustment Date"). All such adjustments to said rate shall be
made and become effective as of the Adjustment Date and said rate as adjusted
shall remain in effect until and including the day immediately preceding the
next Adjustment Date.
6. The outstanding principal balance of this Note may be prepaid at any time at
the option of the Borrower, in whole or in part, without premium or penalty. All
payments made by the
<PAGE>
Borrower using proceeds derived by any insurance policy covering any property
securing this Note or from any condemnation award with respect thereto or from
the sale of any collateral securing this Note (whether or not with the consent
of the Lender) shall, unless otherwise agreed in writing, be deemed a prepayment
for purposes of this Note.
7. All payments and prepayments shall, at the option of the Lender, be applied
first to any costs of collection, second to any late charges, third to accrued
interest on this Note, and lastly to principal (and, with respect to
prepayments, to installments of principal in the inverse order of their
maturity).
8. Notwithstanding anything to the contrary contained herein, if the rate of
interest, or any other charges or fees due hereunder are determined by a court
of competent jurisdiction to be usurious, then said interest rate, fees and/or
charges shall be reduced to the maximum amount permissible under applicable
Minnesota law.
9. This Note is issued pursuant to the terms of the Loan Agreement, is
guaranteed by the Personal Guarantors (as defined in the Loan Agreement)
pursuant to certain Personal Guaranties of even date herewith executed by the
respective Personal Guarantors in favor of the Lender, and is secured by the
Mortgage (as defined in the Loan Agreement), and the Lender is entitled to all
of the benefits provided for in said documents.
10. Upon the occurrence of an Event of Default or at any time thereafter, the
outstanding principal balance hereof and accrued interest and all other amounts
due hereon shall, at the option of the Lender, become immediately due and
payable, without notice or demand.
11. Upon the occurrence of an Event of Default or any time thereafter, the
Lender shall have the right to set off any and all amounts due hereunder by the
Borrower to the Lender against any indebtedness or obligation of the Lender to
the Borrower.
12. Upon the occurrence at any time of an Event of Default or at any time
thereafter, the Borrower promises to pay all costs of collection of this Note,
including but not limited to attorneys' fees, paid or incurred by the Lender on
account of such collection, whether or not suit is filed with respect thereto
and whether such cost or expense is paid or incurred, or to be paid or incurred,
prior to or after the entry of judgment.
13. Demand, presentment, protest and notice of nonpayment and dishonor of this
Note are hereby waived.
14. This Note shall be governed by and construed in accordance with the laws of
the State of Minnesota.
15. The Borrower hereby irrevocably submits to the jurisdiction of any Minnesota
state or federal court over any action or proceeding arising out of or relating
to this Note, the Mortgage and any instrument, agreement or document related
thereto, and the Borrower hereby irrevocably agrees that all claims in respect
of such action or proceeding may be heard and determined in
<PAGE>
such Minnesota state or federal court. The Borrower hereby irrevocably waives,
to the fullest extent it may effectively do so, the defense of an inconvenient
forum to the maintenance of such action or proceeding. The Borrower irrevocably
consents to the service of copies of the summons and complaint and any other
process which may be served in any such action or proceeding by the mailing by
United States certified mail, return receipt requested, of copies of such
process to the Borrower's last known address. The Borrower agrees that judgment
final by appeal, or expiration of time to appeal without an appeal being taken,
in any such action or proceeding shall be conclusive and may be enforced in any
other jurisdictions by suit on the judgment or in any other manner provided by
law. Nothing in this Paragraph shall affect the right of the Lender to serve
legal process in any other manner permitted by law or affect the right of the
Lender to bring any action or proceeding against the Borrower or its property in
the courts of any other jurisdiction to the extent permitted by law.
BORROWER:
LUNDGREN BROS. CONSTRUCTION, INC.
By: ____________________________
Its President
STATE OF MINNESOTA )
) ss
COUNTY OF )
The foregoing instrument was acknowledged before me this ____ day of November,
1997, by Peter Pflaum, the President of LUNDGREN BROS. CONSTRUCTION, INC., a
Minnesota corporation, for and on behalf of such corporation.
_____________________________
Notary Public
EXHIBIT 10.75
Date of Execution: _______________
MASTER SALE AND RENTAL AGREEMENT
THIS MASTER SALE AND RENTAL AGREEMENT (the "Agreement ") is made and
entered into by and between Lundgren Bros. Construction, Inc., a Minnesota
corporation (the "Builder") and NATIONAL MODEL HOMES, INC., a Virginia
corporation (the "Company").
WHEREAS, Builder, who builds single-family residential houses, and in
conjunction with the marketing of houses, constructs Homes, wishes to sell
certain Homes to the Company and then lease the Homes back.
WHEREAS, the Company is in the business of purchasing model homes from
Builders and then leasing the same back to the Builders.
WHEREAS, the Company by the terms hereof shall purchase the Homes and
Builder shall lease back the Homes from the Company.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein contained and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
1. Definitions.
1.1 Defined Terms. Except where otherwise specifically stated,
capitalized terms used in this Agreement have the meanings assigned to them
below or elsewhere in this Agreement :
"Additional Homes" shall mean additional model homes, not
described herein, that Builder proposes to sell to the Company and lease back
under this Agreement, as further described in Section 2.4. Once an Additional
Home is added to the Schedule, such Additional Home shall thereafter be referred
to as a Home.
"Agreement" shall have the meaning given such term in the
introductory paragraph hereof. The lease terms of this Agreement may also be
referred to herein as the Lease. As used herein, Lease may sometimes refer to
this Agreement as applicable to the lease terms hereof as to particular Home or
as to all Homes.
"Business Day" shall mean any other day than a Saturday, a
Sunday or a day on which banks in Minnesota are authorized or obligated to close
their
<PAGE>
regular banking business.
"Closing" shall mean the closing of the purchase of Homes,
including, without limitation, (i) conveying fee title to the Homes to the
Company, (ii) issuing the Policy to the Company, (iii) delivering the Purchase
Price to Builder, and (iv) delivering executed copies of this Agreement and
other documents executed in connection with the sale and leaseback to the
parties. The date of the Closing is referred to herein as the "Closing Date";
the Closing Date is also the Commencement Date and as of that date all the
rights and duties of the parties under the Lease commence. Closing when used in
conjunction with the sale of the property to a third party at the termination of
the lease, will be defined as the moment when ownership has been successfully
and completely transferred to that new buyer from the Company.
"Commencement Date" shall mean the date the Home is purchased
and the simultaneous execution of this Agreement and the Closing Date. With
respect to Additional Homes, the Commencement Date shall be the date that this
Agreement is amended by adding such Additional Home to the Schedule.
"Default" shall mean any uncurrable, or any uncured (after the
giving of notice, the lapse of time or both, as applicable) Event of Default.
"Distributions" shall mean those monies paid to appropriate
parties as detailed in Section 7.4 hereof.
"Event of Default" shall mean the occurrence of any of the
conditions or events as described or referred to in Section 11.1.
"Expiration Date" shall mean the earlier of the expiration
date in the Schedule or the expiration date determined by Section 5.5 hereof.
"Hazardous Materials" shall mean any substance or material
that is described as a toxic or hazardous substance, waste or material or a
pollutant or contaminant, or words of similar import, in any of the
environmental laws, and includes asbestos, petroleum (including crude oil or any
fraction thereof, natural gas, natural gas liquids, liquefied natural gas, or
synthetic gas usable for fuel, or any mixture thereof), petroleum products,
polychlorinated biphenyls, urea formaldehyde, radon gas, radioactive matter,
medical waste, and chemicals which may cause cancer or reproductive toxicity.
"Homes" shall mean (i) with respect to single-family detached
homes, town homes or condominiums, the underlying realty and all the
improvements located thereon, including without limitation, the landscaping,
irrigation equipment, sidewalks, walls and the house, and (ii) with respect to
condominiums, an undivided interest in the undivided realty and all common
improvements located thereon, plus title to the subject individual dwelling unit
as defined in the governing documents applicable thereto. Fixtures located
within the Homes which cannot be
<PAGE>
removed without damage to the Homes, the draperies and drapery hardware, the
built-in appliances located in the Homes as of the Commencement Date, and
built-in or custom cabinetry or woodworking are deemed to be a part of the
Homes. The term "Homes" does not include furniture (unless built-in),
accessories such as vases, paintings, and other art and decorating objects,
office furniture and equipment, or office fixtures located in the Homes (unless
otherwise specified on the Schedule).
"LIBOR" shall mean the London InterBank Offered Rates
("LIBOR") for a one-month period as publicly quoted in the Wall Street Journal.
"Lien" shall mean any lien, mortgage, deed of trust, pledge,
security interest, charge or encumbrance of any kind (including any conditional
sale or other title retention agreement, any lease in the nature thereof and any
agreement to give any security interest).
"Minimum Amount" shall mean the proceeds, net of all closing
costs, to the Company from a sale of a Home concurrent with an early termination
of this Lease as to such Home to be paid to the Company which proceeds must in
all cases equal or exceed one hundred and two percent (102%) of such Home's
Purchase Price per Schedule A.
"Notice" shall mean the written notice from Builder to the
Company of Builder's intent to exercise of any termination right described in
Section 5.5 hereof. Such notice, substantially in the form of Exhibit C as
attached hereto, must be received by the Company at least ninety (90) days prior
the requested termination date.
"Past Due Rate" shall mean the rate of interest on any
obligation not paid when due, from the date due until paid in full such rate
shall equal the sum of the Lease Rate plus four percent (4%).
"Person" shall mean any corporation, limited liability
company, natural person, firm, joint venture, partnerships, trust or
unincorporated organization or any other entity.
"Personal Property Taxes" shall mean all taxes assessed
against and levied upon trade fixtures, furnishings, equipment and all other
personal property of Builder contained in the Homes. When possible, Builder
shall cause said trade fixtures, furnishings, equipment and all other personal
property to be assessed and billed separately from the real property of the
Company.
"Policy" shall mean an ALTA (extended coverage) or equivalent
form
<PAGE>
Policy, including all riders or endorsements thereto, in an amount not less than
the Purchase Price of the Home, insuring the Company, or its assigns and
successors, clear title to the Home, subject only to (i) liens for real estate
taxes and government improvement assessments not delinquent or (ii) easements
and restrictions that do not adversely affect the marketability of title to the
Home or prohibit or interfere with the use of the Home as a single-family
residential dwelling.
"Preliminary Title Report" shall mean a title report prepared
by a company qualified to issue the Policy that sets forth (i) the legal
description of the Homes and (ii) the complete status of title as to the Homes.
"Purchase Price" shall mean the total purchase price for the
Homes described in the Schedule.
"Real Property Taxes" shall mean any form of assessment, levy,
penalty or tax (other than inheritance, estate, net income or franchise taxes)
imposed by any authority having the direct or indirect power to tax, including
any city, county, state or federal government or any school, agricultural,
lighting, drainage or other improvement district thereof, whether such tax is
(i) upon, allocable to or measured by the area or value of the Home or the
rental payable hereunder, including without limitation any gross rental tax or
sales tax levied by the state, city or federal government or any political
subdivision thereof, being assessed with respect to the receipt of such rental,
or (ii) upon or with respect to the possession, leasing, operation, management,
maintenance, alteration, repair, use or occupancy by Builder of the Home(s) or
any portion thereof, or (iii) upon or measured by the value of Builder's
personal property, equipment or fixtures located in the Home(s), or (iv) upon
this transaction or any document to which Builder is a party creating or
transferring an interest or an estate in the Homes, and (v) whether or not any
such tax is now customary or within the contemplation of the parties.
"Rent" shall mean the monthly installments of rental payments
under this Agreement for each of the Homes as calculated pursuant to Section
5.2.
"Retrofit" (and all other derivatives) shall mean (i)
obtaining a certificate of occupancy (or its equivalent in the subject
jurisdiction) for the Home, (ii) completing any other work required to remove
special improvements installed for marketing purposes, and (iii) generally
transforming the Home to an ordinary, habitable, fully functioning, single
family residential home. The Retrofit standard shall mean, without limitation,
that (a) all structural components (including roof, walls, floors, foundation)
of the Home shall be sound and in good condition, (b) all areas of the Home
(including painted walls, wallpaper, carpets, linoleum, tile and all other
flooring) shall be thoroughly clean, without signs of physical blemish or damage
or signs of unperformed maintenance, warping, tears, cuts, cracking or other
physical damage, (such repairs to include repainting with matching paint,
replacement of damaged wall paper, replacement of damaged carpet with new carpet
and pad of equal grade with matching color and (c) equipment, and appliances
(including, without limitation, HVAC system, ranges, ovens,
<PAGE>
dishwashers, ceiling fans, and all lights) shall be in good working order, and
properly functioning, without physical blemish or other signs of unperformed
maintenance or physical damage. Retrofit shall further include removing and
properly disposing of all asphalt from the applicable model lot used as a
parking lot, transforming all garages used as offices into garages, removing all
railings, fencing, walls, sidewalks and other devices which were installed to
direct sales traffic to said Home, removing all sales signs and other sales
equipment and fixtures, removing all of Builder's property from the Home.
"Sales Reports" shall mean the quarterly reports to be
delivered by Builder to the Company in accordance with Section 10.14 summarizing
the activity in each project using the Home as a sales center (the "Project"),
in such form as Company may reasonably require.
"Schedule" shall mean a schedule which describes the Homes
sold to the Company and leased back to Builder pursuant to this Agreement
attached as Exhibit A hereto. The Schedule as used herein shall mean the
Schedule as revised from time to time in accordance with the terms hereof.
"Term" shall mean the period of time that the Homes are
subject to the terms and conditions of the Lease.
"Title Company" shall mean a company, selected by the Company,
qualified to issue the Policy and shall be Chicago Title.
"Total Portfolio Value" shall mean the total appraised value
of Homes on Exhibit A as the same may be revised from time to time to reflect
additional Homes added to the Lease and Homes removed from the Lease upon resale
to third parties.
2. Purchase.
2.1 Purchase Price. The purchase price by the Company will be 84% of
the appraised value of the models as described in Exhibit A of this Agreement.
2.2 Closing Costs. Builder shall pay all escrow fees, recorded plat,
Title Company charges and all other costs of Closing including all costs
reflected on all settlement statements for Closing the Homes plus a document
preparation fee payable to the Company in the amount of $250 per home.
2.3 Additional Homes. From time to time, Builder or the Company may, in
their discretion, propose subjecting additional homes not described herein
("Additional Homes") to this Agreement. The Company is under no obligation to
purchase and lease back Additional Homes; Builder is under no obligation to sell
and lease back Additional Homes. In the event the Company and Builder agree to
<PAGE>
sale/leaseback Additional Homes, at the time of Closing and conveyance of fee
title to the Company of such Additional Homes, the Schedule shall be revised as
agreed upon by the parties and the Lease portions hereof shall become
immediately effective as to such Additional Homes.
3. Conditions Precedent.
3.1 Initial Purchase of Homes. The obligation of the Company to
purchase the Homes and lease the Homes back to Builder hereunder is subject to
and conditioned upon the receipt by the Company, on or before the Commencement
Date, of each and all of the following, in form and content reasonably
satisfactory to the Company:
(a) A duly executed copy of this Agreement;
(b) Intentionally left blank;
(c) A certificate, dated no less recently than one (1) month
prior to the Commencement Date, of the Secretary of State of the State of
Minnesota, certifying that Builder is in good standing;
(d) Copies of resolutions of the board of directors of
Builder, certified by the corporate secretary, authorizing the execution,
delivery and performance by Builder of this Agreement;
(e) Fee simple title (or marketable if appropriate in the
state where the Homes are located) to the Homes or Additional Homes shall be
conveyed to the Company in the customary form of deed used in the jurisdiction
in which the Homes or Additional Homes are located, which shall be prepared by
the Title Company in a form acceptable to Company;
(f) All liens and encumbrances on the Homes representing
monies owed, other than non-delinquent real property taxes and assessments, are
hereby disapproved and shall be paid or satisfied by Builder on or prior to the
Closing Date and therefore need not be further disapproved by the Company. To
the extent Builder fails to pay or satisfy such liens and encumbrances, the same
shall be satisfied with the cash proceeds of the Purchase Price as of the
Closing Date;
(g) At Closing, Builder at its sole cost and expense shall
deliver to the Company with respect to each Home a Policy issued by the Title
Company, in the amount of the purchase price, insuring title in the Company in
the condition described herein, together with and subject to routine
sub-division covenants, conditions, restrictions and easements;
(h) At Closing, with respect to each Home, a certificate of
occupancy or like document (or temporary COA by jurisdiction), from the
applicable
<PAGE>
governmental jurisdiction;
(i) Copies of all insurance policies, or certificates of
insurance or binders, as required by Sections 10.3 and hereof, naming the
Company and its assigns as additional insureds and primary insureds as the case
may be;
(j) Intentionally left blank;
(k) Certificate for each Home from an independent third party
specializing in such evaluations or an appraiser that such Home does not
currently lie in a FEMA flood zone; and
(l) A set of duplicate keys for each Home;
(m) Delivery to the Title Company pursuant to the Escrow
Agreement for deposit in the Retrofit Escrow Account the sum representing $4500
for each home that has been identified as needing Retrofit
3.2 Additional Homes. Subject to Section 2.4, the obligation of the
Company to purchase and lease Additional Homes back to Builder hereunder is
further subject to and conditioned upon, but not limited to, the receipt by the
Company of the following:
(a) The representations and warranties of Builder contained in
this Agreement shall be accurate and complete in all respects as if made on and
as of the date of closing of the Additional Homes;
(b) A duly executed amendment to this Agreement which revises
the Schedule for the inclusion of the Additional Homes;
(c) With respect to each Additional Home(s), the documents
required by Section 3.1 (e) through (h), (k) through (n);
(d) the delivery of additional funds, if necessary, so that
the Retrofit Escrow Account contains $4,500 for each Retrofit Home required by
Section 3.1(m);
(e) Current financial information in accordance with Section
10.15.
4. Closing.
The parties shall Close this transaction at the offices of the Title
Company, on the Closing Date.
4.1 No Proration of Recurring Taxes. Builder shall be solely
responsible for payment of all recurring property taxes, special taxes and
assessments which are
<PAGE>
assessed against the Homes (or Additional Homes, if any); accordingly, there
shall be no proration of taxes and assessments between the parties at Closing.
Builder's responsibility for all taxes and assessments shall survive the Closing
and continue for each Home until the applicable Expiration Date. Real estate
taxes and other items due in a calendar year shall be attributed to that
calendar year.
4.2 Payment of Non-Recurring Taxes Arising Out of Transaction. At the
Closing, all non-recurring state and local taxes, special taxes, assessments,
surcharges, and fees imposed by applicable jurisdictions upon the transaction
shall be paid by Builder to the extent same are then due and payable. This
specifically includes, but is not limited to, documentary taxes, deed taxes,
mortgage taxes incurred by the Company, intangible taxes, transfer taxes,
recording taxes and filing fees for affidavits of value.
4.3 Sale / Leaseback Closing Documents. At the closing of every sale /
leaseback transaction between the Builder and the Company:
a) The Builder shall execute and deliver to the Company a general
warranty deed conveying marketable fee simple title in the Homes(s) to the
Company;
b) The Title Company shall issue to the Company a Title Policy
complying with Section 3.1(d) of this agreement;
c) The Company shall deliver the Purchase Price through the Title
Company to the Builder by certified check, cashier's check or wire transfer
d) The Builder and the Company shall execute all customary minor
closing documents deemed reasonably necessary by the Title Company.
4.4 Resale Closing Documents. At the closing of every resale of a Home
from the Company to a third party:
a) The Company and the Builder shall execute and deliver to the third
party their respective limited warranty deeds, which together shall convey
marketable fee simple title in the Home to the third party;
b) The Title Company shall issue to the third party a title insurance
policy complying with the terms of the Purchase Ageement between the Company and
the third party;
c) The Builder, the Company and the third party shall execute all
customary minor closing documents deemed reasonably necessary by the Title
Company;
d) The Builder shall deliver to the third part buyer a copy of the
warranty attached hereto as Exhibit E.
<PAGE>
5. Lease Terms.
5.1 Demise. The Company now hereby leases back on an absolutely net
basis the Homes to peaceably have, hold and enjoy to Builder pursuant to the
terms and conditions of this Lease. This Lease is applicable to each Home
described on the Schedule, the same as if each of the Homes, respectively were
the only property subject to this Agreement. Neither the Retrofit nor the resale
of a Home shall affect the validity and enforceability of this Lease with
respect to the remaining Homes.
5.2 Lease Payments. Builder shall pay Rent in advance on the first day
of each calendar month without deduction, offset, prior notice or demand, in
lawful money of the United States. Rent shall be paid commencing on the
Commencement Date and until the Expiration Date for the respective Homes. If the
Commencement Date for a Home is not the first day of a month, Builder shall,
respectively, pay a prorated Rent for that month upon the effective date of this
Agreement for such Home. In addition, if the Commencement Date is on or after
the 20th of a calendar month, Rent shall also be paid for the next calendar
month. As Rent is prepaid the next monthly payment of Rent to the Company shall
be equitably adjusted for any Home which had its Expiration Date during the
prior month. The first full monthly installment of Rent payable by Builder
pursuant to this Agreement shall be paid to the Company on February 1, 1998.
(a) Rental. The monthly Rent due for all Homes for each
calendar month of the Term shall be equal to the quotient of: (x) the product of
(i) the 1-month LIBOR on the fifteenth day of the immediately preceding calendar
month if a Business Day or if not a Business Day the Business Day immediately
preceding the fifteenth, plus five and one quarter percent (5.25%) ("Lease
Rate"), times (ii) the Purchase Price of all Homes then covered by this Lease on
the first day of the applicable calendar month divided by (y) twelve.
5.3 Late Charges. Builder agrees and acknowledges that late payment of
Rent and other sums due hereunder will cause the Company to incur costs not
contemplated by this Agreement, the exact amount of which will be extremely
difficult, if not impossible, to ascertain. Such costs include, but are not
limited to, processing and accounting charges and late charges which may be
imposed on the Company by the terms of any finance documents, mortgage or trust
deed covering the Homes. Accordingly, if any installment of Rent or any other
amount due from Builder shall not be received by the Company or its designee
when due, Builder shall pay to the Company a late charge equal to five percent
(5%) of such overdue amount. Builder acknowledges that such late charge will be
due and payable if payment is delivered more than ten (10) days late. The
parties hereby agree that such late charge represents a fair and reasonable
estimate of the costs the Company will incur by reason of a late payment.
Acceptance of such late charge by the Company shall in no event prevent the
Company from exercising any of the other rights and remedies granted hereunder.
<PAGE>
5.4 Term. The Term for the Homes (including the Additional Homes) shall
commence on the Commencement Date for such Home, and shall expire on the
applicable Expiration Date as set forth on the Schedule except that in no case
shall the Lease or the obligation to pay Rent terminate as to any Home which has
not been Retrofitted.
5.5 Builder Election for Early Termination. Builder may cause early
termination of the Term for a particular Home as set forth in this Section.
Builder may elect to terminate the Lease prior to the Expiration Date for that
Home if circumstances change such that there is no longer any business purpose
served by the continued use of such Home as a model. In order to terminate the
Lease prior to the Expiration Date, Builder shall give Notice to the Company of
the desire to terminate early. If at least ninety (90) days before the
originally scheduled Expiration Date a purchase agreement has been signed that
will close on or before the scheduled Expiration Date, then Builder shall
guarantee that at the closing the Company shall receive the Minimum Amount.
Unless and until termination or expiration, Builder shall continue to comply
with all provisions of this agreement as to such home, including, without
limitation, the payment of rent, continued maintenance and retrofit
requirements, and under no circumstances may a Lease terminate prior to
completion of the retrofit.
5.6 Monthly Extensions. Builder may, subject to the prior approval of
the Company (which approval shall not be unreasonably withheld), elect to extend
the Term, with respect to each Home, on a month to month basis, provided
however, that Builder provides the ninety (90) day Notice and Builder is
complying with all other provisions herein or causes to happen a closing to a
third party netting the Company at least the Purchase Price
5.7 Holding Over. If Builder remains in possession of all or any part
of any Home after the expiration of the Term hereof, with or without the express
or implied consent of the Company, such tenancy shall be from month to month
only, and not a renewal hereof or an extension for any further term, and in such
case, Rent and other monetary sums due hereunder shall be payable in the amount
and at the time specified in this Agreement and such month to month tenancy
shall be subject to every other term, covenant and agreement contained herein.
Notwithstanding the foregoing, after the expiration of the Term with respect to
any Home, the Company may terminate any holdover tenancy in that Home upon
giving Builder thirty (30) days written notice.
5.8 Notice Requirement Beginning not less than one hundred (100) days
prior to the expected Expiration Date, Builder shall give written Notice of the
date it intends to terminate its lease.
6. Retrofit Obligation; Remodeling.
6.1 Retrofitting. Not earlier than twenty (20) days before the
Expiration
<PAGE>
Date for each Home, Builder shall, at Builder's sole cost and expense, Retrofit
such Home as put forth in the definition of Retrofit. Without limiting the other
requirements herein, the Lease for a Home shall not terminate prior to its
Retrofit.
6.2 Remodeling. The Builder may at any time elect to remodel, redesign
and / or expand (herein collectively "Remodel") a Home, upon giving the Company
ten days advance notice of the same, together with a) a good faith estimate of
the cost of the Remodeling, and b) a good faith estimate of the value added by
the remodeling upon the completion of the same. Remodeling may occur during the
middle of the Lease; near the end of the Lease in anticipation of sale to a
third party; or at any other time during the Term of the Lease. Upon completion
of the remodeling, Builder shall provide to the Company an accounting of the
actual cost of the Remodeling and a revised good faith estimate of the value
added by the remodeling.
7. Intentionally Left Blank
8. Representations and Warranties of Builder.
Builder hereby warrants and represents that the facts set forth in this
Section 8 and any other representations and warranties of Builder set forth
elsewhere in this Agreement are true and correct as of the date hereof and shall
be true and correct as of the Closing Date. Furthermore, the Company's
obligation to close this transaction for the purchase of the Homes or Additional
Homes is expressly conditioned on Builder's representations and warranties being
true and correct as of the Closing Date.
8.1 Existence and Authority. The Builder (i) is duly organized, validly
existing and in good standing under the laws of the state in which it is
incorporated or organized, as the case may be, and is qualified to do business
in the jurisdictions in which its ownership of property or conduct of business
requires such authorization, and has full power, authority and legal right to
own and operate its property and to conduct its business as presently conducted;
and (ii) has the full corporate power and authority to execute and deliver this
Agreement and to perform in accordance herewith.
8.2 Title to Homes. The Builder is the owner of fee simple (or
marketable if appropriate in the applicable state) title in and to the Homes and
any Additional Homes. The permission and consent of no other person or entity is
required to approve this Agreement and convey the Homes to the Company.
8.3 Used as Homes. Unless specifically waived in writing by the
Company, each Home has been used and occupied by Builder only as model homes
and/or as sales offices for the marketing of other model homes in the respective
Projects in compliance with applicable laws and ordinances and for no other
purpose. Builder is the party which constructed the Homes and agrees that they
are in every way suitable for the use which Builder intends to make of them.
<PAGE>
8.4 Payment of Taxes. The Builder has paid all taxes due pursuant to
any assessment received by Builder, except such taxes, the payment of which is
not yet due, or which if due, is not yet delinquent or is being contested in
good faith or which has not been fully determined.
8.5 Withholding of Taxes. Builder hereby represents and warrants and
certifies, that withholding of federal and state income taxes is not required as
a result of the sale of the Homes or Additional Homes to the Company. Builder
acknowledges that the Company is relying upon this certification in determining
not to withhold taxes. Builder shall indemnify and hold the Company harmless
from all cost, liability, and expense if withholding is required.
8.6 Pending Disputes. To the best of Builder's knowledge, there are not
any pending disputes concerning the Homes, or concerning the obligations or
rights of Builder or other persons in and to the Homes.
8.7 No Liens or Encumbrances. There are no liens or encumbrances on, or
claims to, or covenants, conditions and restrictions, easements, rights of way
or other matters which may adversely affect the marketability of title to the
Homes, except as disclosed in the Preliminary Title Report for the Homes or
Additional Homes. Builder shall not encumber the Homes or Additional Homes or
allow the Homes or Additional Homes to be further encumbered without the prior
written consent of the Company.
8.8 Sales in Projects. Except for normal seasonal changes, Builder has
no plans to curtail or reduce (i) the number of hours or days open for sales, or
(ii) the amount of advertising in the projects for which the Homes or Additional
Homes are being used during the Term. As of the date of this Agreement, Builder
intends to continue to sell the production units in the projects for which the
Homes or Additional Homes are being used until sales of all such production
units have been completed, and intends to use the Homes for that purpose.
8.9 Studies. Copies of all studies, documents, reports and other
correspondence pertaining to the Homes or Additional Homes which have been
previously delivered to the Company are true and correct copies of the originals
and Builder is not aware of material errors in any of the same.
8.10 Construction in Compliance with Laws. The construction of the
Homes or Additional Homes and all other improvements in the project have been
completed in compliance with applicable federal, state and local laws,
ordinances, regulations and codes.
8.11 No Defaults. Builder and any related party of Builder are not in
default under any of their respective agreements concerning the projects,
including but not limited to agreements with any lender(s), nor is Builder or
any related party of Builder in default under any publicly issued bond financing
requirements or under
<PAGE>
any documents related thereto.
8.12 Continued Operations. Builder has no intention at this time of
discontinuing building operations in the states in which the Homes are located.
8.13 Survival. All representations and warranties made by Builder
herein or in any certificate delivered pursuant hereto shall survive the Closing
hereunder and the execution and delivery of this Agreement.
In the event that the Company discovers a breach of representation and
warranty set forth in this Section that materially and adversely affects the
value of the Homes or the interest of the Company therein, the Company shall
give prompt notice to Builder. Builder shall have thirty (30) days, after
receipt of notice of such breach in which to cure in all material respects such
breach. In the event that Builder is unable to cure in all material respects a
breach of representation and warranty set forth in this Section as to any Home,
then Builder shall promptly repurchase each affected Home in its current
condition (i.e., as is, where is, with all faults) at a price equal to the
Purchase Price. Failure by Builder to repurchase any affected Home will
constitute an Event of Default under this Agreement.
9. Representations and Warranties of the Company.
The Company hereby warrants and represents that the facts set forth in
this Section and any other representations and warranties of the Company set
forth elsewhere in this Agreement are true and correct as of the date hereof and
shall be true and correct as of the Closing Date. Furthermore, Builder's
obligation to close this transaction for the purchase of the Homes or Additional
Homes is expressly conditioned on the Company's representations and warranties
being true and correct as of the Closing Date.
9.1 Organization. The Company is duly organized and validly existing
and in good standing under the laws of the Commonwealth of Virginia and has full
right, power and authority to enter into and perform its obligations under this
Agreement.
9.2 No Defaults. The Company is not in default under any of its
respective agreements concerning this transaction.
9.3 Authority. The permission and consent of no other person or entity
is required to approve this agreement or this transaction other than as
disclosed to Builder.
9.4 Confidentiality. The Company shall keep confidential all sales
information obtained from Builder and shall disclose it only to those who (i)
reasonably require such information from the Company as a condition to doing
business with the Company, and (ii) who likewise enter into written agreements
covenanting to keep such information confidential unless the prior written
consent
<PAGE>
of Builder is first obtained. Under no circumstances shall the Company disclose
sales information to any homebuilder or developer.
Company's warranties will survive close of escrow.
10. Further Builder Covenants, Agreements and Representations.
10.1 Absolute Obligation to Pay Rent. Builder is obligated to pay the
Rent until the termination of the Term for each Home, which obligation is a
separate, absolute, unconditional and independent covenant to be performed
notwithstanding any other conditions. The Builder shall have no right to
terminate except as provided herein, or to be relieved of any obligation to pay
the Rent for any reason whatsoever not expressly set forth herein, including
without limitation:
(a) any set off, counterclaim, defense or other right which
the Builder may have against the Company;
(b) any defect in the condition, design, operation or fitness
for use of, or any damage or loss or destruction of the Homes or any portion
thereof (including any environmental condition or contamination even if the
Builder is not responsible or liable under this Agreement for such condition or
contamination);
(c) any interruption or cessation in the use or possession of
the Homes by Builder for any reason whatsoever; with the exception of the
Company deciding not to rebuild a Home catastrophically damaged thus depriving
the Builder the ability to use the Home for which it was intended. In such a
circumstance, Builder's responsibility to pay Rent will cease ninety (90) days
following the occurrence of damage or closing on the sale of the remaining
assets, whichever occurs first.
(d) the existence of any Liens against the Homes;
(e) any insolvency, bankruptcy, reorganization or similar
proceedings by or against the Company or Builder;
(f) any default by the Company under this Agreement or under
any instrument to which the Company may be a party;
(g) any change in tax or other laws of the United States, or
any state thereof, or any political subdivision of any of them;
(h) any title defect or encumbrance or any eviction from the
Homes or any part thereof by title paramount or otherwise, provided, however,
Builder shall have a right to terminate with respect to those material title
defects, encumbrances or evictions which are caused by Company;
<PAGE>
(i) any change, waiver, extension, indulgence or failure to
perform or comply with, or other action or omission in respect of, any
obligation or liability of the Company contained in this Lease; or
Except for any overpayments of Rent (which overpayments shall be credited
against the next installment of Rent then becoming due), each payment of the
Rent shall be final, and Builder shall have no right to seek to recover all or
any part of such payment from the Company for any reason whatsoever, with the
exception of the final payment which shall be refunded. It is the purpose and
intent of the parties that the Rent paid shall be net to the Company and that
all costs and expenses and charges related to the Homes as set forth herein,
except for debt service and general overhead of the Company, shall be paid by
Builder.
Any language herein to the contrary notwithstanding, in the event the Company
fails to close on the resale of a Home to a third party buyer in the manner
provided herein, the Rent otherwise payable hereunder shall, on the date
otherwise appointed for the closing for such sale, cease to be owed hereunder
and the Lease shall expire with regard to the Home.
10.2 Taxes. Builder shall pay before delinquency all Real Property
Taxes and Personal Property Taxes due on or applicable to the Homes and property
contained therein. Builder shall provide evidence of payment satisfactory to the
Company. If payment of the taxes has not been made ten (10) days before
delinquency date, the Company, at any time thereafter as long as still unpaid,
shall have the right, but not the obligation, to pay the same after delivery of
reasonable prior notice to Builder, in which case Builder shall immediately
reimburse the Company together with interest at the Past Due Rate. Real Property
Taxes for any partial year shall be prorated as appropriate.
10.3 Insurance. Builder shall, at its sole cost and expense, procure
and maintain at all times during the Term policies as described below issued by
companies rated by A. M. Best with an "A" designation:
(a) a policy of commercial general liability insurance
insuring Builder, and naming the Company, or its assigns, as an additional
insured, against any liability arising out of the ownership, use, occupancy, or
maintenance of the Homes and appurtenant areas. Such insurance shall at all
times be in an amount of not less than One Million Dollars ($1,000,000) for
injury to or death of any one, or more than one, person in any one accident or
occurrence, and in an amount of not less than Five Hundred Thousand Dollars
($500,000) for liability for property damage. Builder shall provide the Company
with certificates of insurance evidencing such insurance coverage prior to the
applicable Commencement Date and whenever reasonably requested. No policy of
liability insurance procured by or on behalf of Builder as required hereunder
shall be cancelable or subject to reduction of coverage or other modification
except at Builder's expense after thirty (30) days prior written notice to the
Company by the insurer. All such policies shall be written as primary policies,
not contributing with and not in excess of coverage
<PAGE>
which the Company may carry. Builder shall, within thirty (30) days prior to the
expiration of such policy, furnish the Company with evidence of renewals or
binders. Builder shall have the right to provide such insurance coverage
pursuant to blanket policies obtained by Builder provided such blanket policies
expressly afford coverage for the Homes and to Builder as required by this
Lease, and
(b) a policy or policies of insurance covering loss or damage
to the Homes in the amount of the full replacement value thereof (exclusive of
Builder's trade fixtures and equipment but including all options, extras and
upgrades) providing protection against all perils included within the
classification of fire, extended coverage, vandalism, malicious mischief,
sprinkler leakage and special extended peril (all-risk). Certificates evidencing
such insurance shall be delivered to the Company prior to the Commencement Date.
Such insurance shall provide for direct payment of loss thereunder to the
Company or its successors and assigns.
10.4 Casualty Repairs. If any Home is damaged by any casualty
(including, without limitation, flood, earthquake, mud slides or any other like
act of God whether insured or not) at any time during the Term, Builder shall
repair such damage and rebuild the Home at Builder's sole cost and expense
(after access to applicable insurance proceeds, if any) as soon as reasonably
possible and the Lease for such Home shall continue in full force and effect. In
any event, there shall be no abatement of Rent during any period of repair or
reconstruction unless caused by the Company. Furthermore, the Home shall be
reconstructed to the same plans and specifications as originally constructed and
finished in first class, lien free and new condition.
10.5 Utilities and Services. Builder shall pay, before delinquency, all
costs of water, gas, heat, light, power, telephone, sewage, air conditioning and
ventilating, janitorial, landscaping and all other materials, services and all
other utilities of every kind and nature supplied to the Homes.
10.6 Maintenance and Repairs. The Homes shall be maintained in like new
condition. Builder, at its sole expense, shall keep in good order, condition and
repair the foundations, exterior walls and the exterior roof of the Homes. The
Builder shall also maintain the exterior and the interior surfaces of the Homes
and maintain all walls, windows, doors and plate glass, and maintain all
plumbing, heating, air conditioning, ventilating, electrical and lighting
facilities and equipment within the Homes and all sidewalks, driveways, parking
lots, fences and signs located in the areas which are adjacent to and included
with the Homes. If Builder fails to promptly begin and diligently prosecute to
completion any maintenance failures within ten (10) Business Days after written
notice to Builder with reasonable detail of the maintenance problems, then the
Company shall have the right (but not the obligation) to do such acts and expend
such funds as are reasonably required to perform such work at the expense of
Builder. Any amount so expended by the Company shall be paid by Builder within
five (5) Business Days after written demand with interest at the Past Due Rate
from the date of such work. If Builder is in breach of its repair and
maintenance obligations and the
<PAGE>
Company elects to perform the same, Builder hereby waives any claim for
abatement of Rent or for damages for any injury or inconvenience to or
interference with Builder's business, any loss of occupancy or quiet enjoyment
of the Homes, and any other loss occasioned thereby.
10.7 Liens. Builder shall keep each Home free from any liens arising
out of work performed, materials furnished or obligations incurred by or on
behalf of Builder. If Builder fails to obtain the release of the lien within
thirty (30) days of its imposition, the Company may require Builder to post a
bond equal to the greater of (i) one hundred percent (100%) of the amount of the
lien or encumbrance or (ii) such amount as may be required by applicable law in
order to dispute the imposition of the lien. If Builder has posted the required
security under (ii) in the prior sections to challenge the imposition of a lien
of the type described above and so long as Builder is pursuing the challenge in
a diligent manner which does not create a risk that the lien shall be foreclosed
or which prevents the Company from selling the Home(s) in question, the Company
shall allow Builder to prosecute such challenge. However, the Company's
cooperation with Builder's challenge shall not constitute a waiver or release of
any right of the Company against Builder and Builder shall be directly
responsible in all respects for any and all direct and actual damages suffered
by the Company as a result of Builder's challenge, whether in excess of the bond
and without pursing the bond. If Builder fails to post the bond, the Company
may, at its option, cause the lien to be released by such means as it shall deem
proper, including payment of the claim giving rise to such lien notwithstanding
the fault or relative fault of the parties. All such sums paid by the Company
and all expenses incurred by it in connection therewith including attorney's
fees and costs shall be payable to the Company by Builder on demand with
interest at the Past Due Rate.
10.8 Use. The Homes shall be used only as models and/or as sales
offices for the marketing of other homes and for no other purpose. Builder is
the party which designed and constructed the Homes and represents that they
comply with applicable laws and are in every way suitable for the use which
Builder intends to make of them.
10.9 Builder Warranty. When the company sells a Home to a third party
hereunder, the Builder shall, at the closing thereon, deliver to such third
party purchaser the Builder's standard warranty program then provided by the
Builder on sales of new homes to its customers. The period of time from
warranties will run thereunder shall commence as of the date of closing on the
sale to such third parties. The Builder's current warranty program is attached
hereto as Exhibit E.
10.10 Intentionally omitted.
10.11 Entry for Inspection. Builder shall allow the Company and its
agents, during regular business hours, to enter the Homes to inspect the Homes
or to show the Homes to prospective purchasers or lenders in accordance with the
terms of this Agreement.
<PAGE>
10.12 Assignment and Subletting. Builder shall not assign, transfer,
mortgage, pledge, hypothecate or encumber (referred to collectively as
"Assignment") this Agreement or any Lease or any interest herein, and shall not
sublet the Homes or any part thereof, without the prior written consent of the
Company, which may be withheld in its sole discretion, and any attempt to do so
without such consent being first had and obtained shall be wholly void and shall
constitute an Event of Default; provided however, the Company's consent shall
not be required for assignment to a parent, sister, or subsidiary corporation so
long as Builder provides prior notice of the assignment so long as the Builder
also remains liable in accordance with Section 5.2. Further, as long as no
direct or indirect violation of Section 10.13 occurs, the Company shall not
unreasonably withhold or delay its consent to any collateral assignment or other
encumbrance of this Agreement by Builder to any and all institutional lenders
with loans secured by interests in the subdivision from time to time.
10.13 Recording. Builder shall not record this Agreement nor a
memorandum of this Agreement or Lease, and such recordation shall, at the option
of the Company, constitute a non-curable Default of Builder hereunder.
10.14 Sales Reports. The Builder shall mail quarterly sales reports to
the Company. The sales reports to be delivered shall include lot absorption,
remaining lots, sales prices (net of concessions and other costs), firm and
contingent sales, and cancellations. At any time reasonably requested in writing
the Builder shall provide the Company with additional sales reports routinely
prepared by the Builder.
10.15 During the Term, the Builder will furnish to the Company a copy
of the Builder's annual report on S.E.C. Form 10-k, and the Builder's quarterly
reports on S.E.C. Form 10-Q, each within 30 days of filing the same with the
Securities and Exchange Commission.
10.16 HOA Dues. Without limiting any other payment obligation of
Builder hereunder, Builder shall pay before delinquency all homeowner
association and other like dues, fees and assessments.
10.17 Keys. To the extent locks are replaced on any Home, Builder shall
provide the Company with a duplicate set within ten (10) days.
11. Events of Default.
11.1 Default. The occurrence of any of the following with respect to
any Home (an "Event of Default") shall constitute a Default hereunder by Builder
with respect to that Home, or, at the election of the Company, with respect to
all the Homes:
(a) Builder shall fail to pay the Rent on any Home when due.
<PAGE>
(b) Builder shall abandon or vacate a Home without the
Company's prior written consent; however, if Builder promptly provides the
Company with a Notice in connection with such vacation or abandonment, Builder
shall have the right to terminate the Lease for the Home in question, pursuant
and subject to the provisions of Section 5.5, in which event Builder shall not
be in Default hereunder so long as (i) Builder pays the Company the appropriate
Minimum Amount for such Home, if applicable, and (ii) Builder remains obligated
to pay Rent for such Home (with the Lease for such Home to remain in effect)
until the earlier of (A) the Closing Date of the sale of the Home, (B) the Term
of this Agreement (applicable to said Home) or (C) ninety (90) days after the
Notice was received by the Company.
(c) Builder shall fail to observe and perform any other
material provisions of this Agreement to be observed or performed by Builder
with respect to any Home, which failure continues for fifteen (15) calendar
days, (unless specified otherwise, elsewhere in this contract), after written
notification from the Company to Builder of Builder's failure to observe or
perform the obligation in question; provided, however, if the nature of such
Event of Default is such that the same cannot reasonably be cured within such
fifteen (15) calendar day period, Builder shall not be deemed to be in Default
if Builder, within such period, commences such cure and thereafter diligently
prosecutes the same to completion.
(d) Builder shall make any general assignment or general
arrangement for the benefit of creditors, the filing by or against Builder of a
petition to have Builder adjudged a bankrupt or of a petition for reorganization
or arrangement under any law relating to bankruptcy (unless, in the case of a
petition filed against Builder, the same is dismissed within sixty (60) days),
the appointment of a trustee or receiver to take possession of substantially all
of Builder's assets or of Builder's interest in this Agreement, where possession
is not restored to Builder within thirty (30) days, or the attachment, execution
or other judicial seizure of substantially all of Builder's assets or of
Builder's interest in this Agreement where such seizure is not discharged within
thirty (30) days.
11.2 Cross Default. As this Agreement governs and affects only those
Homes or Additional Home(s) which are described on the Schedule, as same may be
amended from time to time, a Default under this Agreement with respect to any
Home described on the Schedule (including any Additional Homes subsequently
added to the Schedule) shall, constitute a Default with respect to all Homes
covered by the Agreement.
11.3 Cure Period. In the event either party fails to perform any of its
obligations required under this Agreement, such party shall not be in Default
under this agreement unless such failure continues for more than fifteen
calendar days after written notification from the other party of such failure;
provided, however, if the nature of such Default is such that the same cannot
reasonably be cured within such fifteen calendar day period but can be cured
within a sixty (60) day period, defaulting party shall not be deemed to be in
default for purposes of this Agreement
<PAGE>
or the Guarantee if such party commences such cure within such period and
thereafter diligently prosecutes the same to completion. Notwithstanding the
provisions of this Section, there will be no cure period for a Default under
Sections 11.1(a) or 11.1(d) except as otherwise provided.
11.4 Cure or Waiver. If: (i) an Event of Default shall occur but
subsequently either (x) in the reasonable judgment of the Company, Builder shall
fully cure it and all of its material effects within any cure period specified
in this Agreement for the cure of such Event of Default or (y) the Company shall
waive the Event of Default and its rights to exercise remedies on account of its
waiver (whether temporarily or permanently and whether conditionally or
absolutely) provided that the Company shall have no obligation to do so, and
(ii) Builder shall request in writing that the Company declare to have been
cured or waived whichever of those events has occurred, then the Company shall
make such declaration in writing and shall deliver a copy of the declaration to
Builder.
11.5 Remedies. In the event of any such Default by Builder with respect
to any Home, the Company may, at any time after any applicable grace period has
expired, exercise any of the following rights and remedies with respect to that
Home or with respect to all Homes, with or without notice and demand, and
without limiting the Company in the exercise of any right or remedy at law or in
equity which the Company may have by reason of such Default or breach:
(a) Cure by Company. Company may, at Company's option but
without obligation to do so, and without releasing Builder from any obligations
under this Agreement, after giving any applicable notice hereunder, make any
payment or take any action as Company deems necessary or desirable to cure any
Event of Default in such manner and to such extent as Company deems necessary or
desirable. Builder will pay Company, upon demand, all advances, costs and
expenses of Company in connection with making any such payment or taking any
such action, including reasonable attorneys' fees, together with interest at the
Past Due Rate from the date of payment of any such advances, costs and expenses
by Company.
(b) Termination of Lease and Damages. Company may terminate
this Agreement or any individual Lease as to any Home, effective at such time as
may be specified by notice to Builder, and demand (and, if such demand is
refused, recover) possession of the Home(s) from Builder. In such event, Company
will be entitled to recover from Builder, as damages for loss of the bargain and
not as a penalty, an aggregate sum equal to (i) all unpaid Rent and all other
sums due hereunder for any period prior to the termination date (including
interest from the due date to the date of payment at the Past Due Rate); plus
(ii) the present value at the time of termination (calculated by discounting on
a monthly basis at a discount rate equal to the rate payable on U.S. Treasury
securities offered at the time of such calculation having a maturity closest to
the date on which the Term would have expired but for such termination) of the
amount, if any, by which (A) the aggregate of the Rent and all other sums
payable by Builder that would have
<PAGE>
accrued for the balance of the Term after termination, exceeds (B) the amount of
such Rent and other sums payable hereunder which could reasonably be recovered
(less customary leasing commissions and other reasonable costs of leasing), if
any, by reletting the Homes for the remainder of the Term at the then current
fair rental value; plus (iii) interest on the amount described in (ii) above
from the termination date to the date of the payment at the Past Due Rate.
(c) Repossession and Reletting. Company may reenter and take
possession of all or any part of the Homes, without additional demand or notice,
and repossess the same and expel Builder and any party claiming by, through or
under Builder, and remove the effects of both using such force for such purposes
as may be necessary, without being liable for prosecution for such action or
being deemed guilty of any manner of trespass, and without prejudice to any
remedies for arrears of Rent or right to bring any proceeding for any other
breach or Default. No such reentry or taking possession of the Homes by Company
will be construed as an election by Company to terminate this Agreement or a
Lease as to any Home unless a notice of such intention is given to Builder. No
notice from Company or notice given under a forcible entry and detainer statute
or similar laws will constitute an election by Company to terminate this Lease
as to any Home unless such notice specifically so states. Company reserves the
right, following any reentry or reletting, to exercise its right to terminate
this Lease as to any Home by giving Builder written notice of the termination.
After recovering possession of the Homes, Company may, at its option, relet the
Homes on such terms and conditions as the Company deems desirable. Company may
make such repairs, alterations or improvements as Company considers appropriate
to accomplish such reletting, and Builder will reimburse Company upon demand for
all reasonable costs and expenses, including attorneys' fees, which Company may
incur in connection with such reletting. Company may collect and receive the
rents for such reletting but Company will in no way be responsible or liable for
any inability to relet the Homes or to collect any rent due upon such reletting.
Regardless of Company's recovery of possession of the Homes, so long as not
terminated, Builder will continue to pay, on the dates specified, the Rent and
other sums due which would be payable if such repossession had not occurred,
less a credit for the net amounts, if any, actually received by Company through
any reletting of the Homes.
(d) Bankruptcy Relief. Nothing contained in this Agreement
will limit or prejudice Company's right to prove and obtain as liquidated
damages in any bankruptcy, insolvency, receivership, reorganization or
dissolution proceeding, an amount equal to the maximum allowable by any Laws
governing such proceeding in effect at the time when such damages are to be
proved, whether or not such amount be greater than, equal to or less than the
amount recoverable, either as damages or Rent, under this Agreement.
(e) Remedies Cumulative. Any and all remedies hereunder may be
exercised by Company as to any single Home or multiple Homes without the
requirement that such remedy including, without limitation, termination, be
applied against all Home(s). To this end, at Company's sole option to be
exercised in its
<PAGE>
sole and absolute discretion, this Agreement can be treated as a separate Lease
or several Leases for one or more Homes. All remedies are cumulative and
concurrent and no remedy is exclusive of any other remedy. Each remedy may be
exercised at any time a Default has occurred and is continuing and may be
exercised from time to time. No remedy shall be exhausted by any exercise
thereof. Notwithstanding anything to the contrary herein contained, in lieu of
or in addition to any of the foregoing remedies and damages, Company may
exercise any remedies and collect any damages available to it at law or in
equity. If Company is unable to obtain full satisfaction pursuant to the
exercise of any remedy, it may pursue any other remedy which it has hereunder or
at law or in equity.
(f) Recovery of Enforcement Costs. All costs and expenses,
including attorneys' fees and disbursements, incurred by either the Company or
the Builder in connection with the exercise of any permitted remedy, or the
enforcement of the provisions of this Agreement, together with interest thereon
at the Past Due Rate from the date incurred, shall be paid to the prevailing
party upon demand.
(g) No Mitigation. Company shall not be required to mitigate
any of its damages hereunder unless required to by applicable law. If any law
shall validly limit the amount of any damages provided for herein to an amount
which is less than the amount agreed to herein, Company shall be entitled to the
maximum amount available under such law.
(h) No Waiver. No failure of Company (i) to insist at any time
upon the strict performance of any provision of this Agreement or (ii) to
exercise any option, right, power or remedy contained in this Agreement shall be
construed as a waiver, modification or relinquishment thereof. A receipt by
Company of any sum in satisfaction of any obligation with knowledge of the
breach of any provision hereof shall not be deemed a waiver of such breach, and
no waiver by Company of any provision hereof shall be deemed to have been made
unless expressed in a writing signed by Company.
11.6 Right of Offset. Cumulative of all other rights of offset and
without limiting any of the Company's rights under this Agreement, Builder
hereby grants to the Company a right of offset, to secure repayment of the Rent
and all other obligations hereunder, upon any and all monies, securities or
other property of Builder (including the Net Proceeds and Deposit), and the
proceeds from it now or hereafter held or received by or in transit to the
Company. Upon the occurrence of any Event of Default, the Company is hereby
authorized at any time and from time to time, without notice to Builder, to
offset, appropriate and apply any and all items referred to in this Section
against the obligations.
11.7 Default by the Company. The Company shall not be in default unless
it fails to perform its obligations after receiving notification of such failure
from Builder. However, if the cure of the default cannot be completed
immediately, the Company shall have a reasonable period of time to complete the
cure of such
<PAGE>
default. A reasonable period of time should not normally exceed fifteen (15)
calendar days provided that (i) the Company commences to cure such default
immediately upon receipt of Builders notice, and (ii) the Company diligently and
without interruption pursues such cure to completion.
12. Mandatory Mediation/Arbitration.
Any controversy or claim between or among the parties, their agents,
employees and affiliates, including but not limited to those arising out of or
relating to this agreement or any related agreements or instruments (the
"Subject Documents"), including without limitation any claim based on or arising
from an alleged tort, shall be submitted to binding arbitration, using the
American Arbitration Association ("AAA") in Minneapolis, MN, in accordance with
the Construction Industry Arbitration Rules of the AAA before a single
arbitrator chosen by the parties, or, if the parties cannot agree upon the same
with thirty days of the day one party notifies the other of a dispute hereunder
and demands arbitration of the same in writing, then by a single arbitrator
chosen by the Chief Judge of the Hennepin County District Court. The arbitrator
shall prepare written reasons for the award. Judgment upon the award rendered
may be entered in any court having jurisdiction. The expenses of the
mediator/arbitrator and related costs of mediation/ arbitration (excluding fees
of counsel and other professional fees, experts, etc. for each party) shall be
borne equally by the parties.
13. Notices.
All demands, notices and communications hereunder shall be in writing
and shall be deemed to have been duly given (i) when mailed by registered or
certified mail, return receipt requested or (ii) sent by nationally recognized
courier service. The parties may deliver notice to each other by electronically
transmitted facsimile copies ("Fax") provided that such notice is followed
within twenty-four (24) hours by any type of notice otherwise provided for in
this Section. Fax notice shall be deemed given upon confirmed transmission
thereof. Any notice shall be duly addressed to the parties as follows:
If to Builder:
President
Lundgren Bros. Construction, Inc.
935 East Wayzata Boulevard
Wayzata, MN 55391
Phone: (612) 473-1231
If to the Company:
<PAGE>
National Model Homes, Inc.
10900 Nuckols Road
Glen Allen, Virginia 23060
Attn: Thomas R. Kranz
Phone: (804) 217-5878
Fax: (804) 217-5859
14. Miscellaneous Provisions.
14.1 Broker Commissions. Builder and the Company hereby represent and
warrant to each other that no broker, agent or finder, licensed or otherwise,
has been engaged by it in connection with the transaction contemplated by this
Agreement. In the event of any claim for a broker's, agent's or finder's fee or
commission in connection with this transaction, the party upon whose alleged
statement, representation or agreement such claim or liability arises shall
indemnify, save, hold harmless and defend the other party from and against such
claim and liability.
14.2 No Release of Builder. No consent by the Company to any assignment
or subletting by Builder, nor any Assignment to an affiliate of Builder, shall
relieve Builder of any obligation to be performed by the Builder under this
Agreement, whether occurring before or after such consent, assignment,
subletting or after Assignment to an affiliate of Builder. The consent by the
Company to any assignment or subletting shall not relieve Builder from the
obligation to obtain the Company's express written consent to any other
assignment or subletting. The acceptance of Rent by the Company from any other
person shall not be deemed to be a waiver by the Company of any provision of
this Agreement or to be a consent to any assignment, subletting or other
transfer. Consent to one assignment, subletting or other transfer shall not be
deemed to constitute consent to any subsequent assignment, subletting or other
transfer.
14.3 Collateral Assignment by the Company. The Company shall have the
right, without obtaining the consent of Builder, to assign this Agreement as
collateral to secure repayment of financing obtained by the Company, so long as
said assignment creates no direct and documented costs or material impact to the
Builder. Such an assignment for collateral purposes shall not affect any of the
rights and duties of the parties hereunder. Any funding obtained by the Company
that encumbers the title must not exceed the Purchase Price, the payments
associated with the funding may not exceed the lease payments and must allow
individual releases without penalty.
14.4 Subordination. The Company, provided it complies with the
provisions of Section 14.3 above and this Section 14.4, may subject and
subordinate this Agreement to the lien of a mortgage in any amount, provided the
individual release price per Home under said mortgage does not exceed the
Purchase Price, and the
<PAGE>
Builder is able to obtain such release without additional cost, upon complying
with this Agreement. In order to subordinate this Agreement to a mortgage, the
secured party thereunder shall agree in writing to release the same per Home
upon fulfillment by the Builder of the Builder's obligations hereunder, and
shall execute a non-disturbance and attornment agreement with the Builder
reasonable satisfactory to the Builder.
14.5 Non-Disturbance. Builder covenants and agrees to execute and
deliver upon demand without charge therefore such further instruments evidencing
such subordination of this Agreement to such mortgages or deeds of trust as may
be required by the Company so long as said delivery creates no direct and
documented costs of material impact to the Builder. If requested, the Company
shall provide Builder with non-disturbance and attornment agreements from
secured parties for Builder's execution.
14.6 Appointment as Agent. Builder agrees to cooperate with the Company
and provide such information as may be required by law in order for the Company
to timely and accurately file governmental reports.
14.7 Amendment. This Agreement may not be amended or terms or
provisions hereof waived unless such amendment or waiver is in writing and
signed by Builder and the Company.
14.8 Entire Agreement. This Agreement and the documents and agreements
referred to herein embody the entire agreement and understanding between the
parties hereto and supersede all prior agreements and understandings relating to
the subject matter hereof and thereof.
14.9 Survival. The terms and provisions of this Agreement shall survive
the Expiration Date and shall continue to be binding on the parties.
14.10 Binding Effect. This Agreement shall be binding upon, and inure
to the benefit of, the parties hereto, and their successors and assigns.
14.11 Further Assurances. The parties hereby agree to execute such
other documents and take such other actions as may be reasonably required to
give effect to the intent and agreements of the parties as set forth in this
Agreement.
14.12 Headings. The headings of the sections of this Agreement are
inserted for convenience only and shall not be deemed to constitute thereof.
14.13 Severability. Whenever possible each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be or become
prohibited or invalid under applicable law, such provision shall be ineffective
to the extent of such prohibition or invalidity without invalidating the
remainder of such provision or the remaining provisions of this Agreement.
<PAGE>
14.14 Governing Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the state of Minnesota, notwithstanding any
Virginia or other choice of law provisions to the contrary.
14.15 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which shall
constitute one and the same instrument.
14.16 Intentionally Left Blank.
14.17 Indemnification by Builder. Builder shall indemnify and hold the
Company, officers, directors, employees, financial partners, and lenders (the
"Indemnified Persons") and the homes harmless from and against any and all
claims of liability for any injury or damage to any person or property arising
from Builder's ownership and/or use of the homes, or from the conduct of
Builder's business, or from any activity, work or thing done, permitted or
suffered by Builder in or about the homes,
<PAGE>
the projects designated within the schedule or elsewhere with respect to the
homes. Builder shall further indemnify and hold the Indemnified Persons and the
homes harmless from and against any and all claims arising from any breach or
default in the performance of any obligation of Builder to be performed under
this agreement, or arising from any negligence of Builder or Builder's agents,
contractors or employees, and from and against all costs, attorney's fees,
expenses and liabilities incurred in the defense of any such claim or any action
or proceeding brought thereon. In the event any action or proceeding is brought
against the Indemnified Persons by reason of any such claim, Builder, upon
written notice from the Indemnified Persons shall defend same at Builder's
expense by counsel (or insurance counsel if available) reasonably satisfactory
to the Indemnified Persons. Builder, as a material part of the consideration to
the Indemnified Persons, hereby assumes all risk of damage to property or injury
to persons, in, upon or about the homes arising from any cause except the
intentional misconduct or negligence of the Indemnified Persons or its
contractors or employees. Builder hereby indemnifies, defends and agrees to hold
the Indemnified Persons harmless from any and all liability arising out of the
ownership of the homes during the term of the agreement. In addition to the
foregoing, Builder shall indemnify and hold the Indemnified Persons and their
successors and assigns harmless from and against any and all claims, demands,
causes of action, damages, costs, expenses, lawsuits and liabilities, at law or
in equity, of every kind or nature whatsoever, directly or indirectly arising
out of or attributable to, with respect to the projects, hazardous and toxic
materials as defined by applicable laws including the use, generation, storage,
release, threatened release, discharge, disposal or presence of hazardous
materials on, under or about the homes whether occurring prior to or during the
term of the ownership of the homes and whether caused by Builder or any
predecessor in title or any owner of land adjacent to the homes or any other
third party, or any employee, agent, tenant, contractor or subcontractor of
Builder, or any predecessor in title or any such adjacent land owner or any
third person not affiliated with the Indemnified Persons including, without
limitation:
(a) claims of third parties (including governmental agencies)
for injury to or death of any person or for damage to or destruction of any
property;
(b) claims for response costs, clean-up costs, costs and
expenses of removal and restoration, including fees of attorneys and experts,
and costs of determining the existence of hazardous materials and reporting same
to any governmental agency;
(c) any and all other claims for expenses or obligations,
including attorneys' fees, costs, and other expenses related to hazardous
materials and the homes;
(d) any and all penalties threatened, sought or imposed on
account of a violation of any hazardous materials laws; and
(e) any loss occasioned and actually realized by diminution in
the value
<PAGE>
of the homes which may result from: (i) soils settlement, soils subsidence, and
other soils problem and defects, or (ii) mechanics lien claims and claims for
damages to property or injuries to persons arising out of Builder's use of the
homes. Builder's indemnification obligations set forth in this section and
elsewhere in this agreement shall survive the settlement.
14.18 Notwithstanding the provisions of section 14.17, Builder's indemnification
and defense obligations to the Indemnified Persons as set forth in this section
shall not apply to any liability arising out of the acts, including, but not
limited to, negligent or intentional acts or failures to act, of the Indemnified
Persons, or the Company's contractors or employees.
IN WITNESS WHEREOF, the Company and Builder have each executed this
Agreement as of the date first indicated above.
LUNDGREN BROS. CONSTRUCTION, INC.
By: __________________________
Name: ________________________
Title: _______________________
NATIONAL MODEL HOMES, INC.
By: __________________________
Name: ________________________
Title: _______________________
<PAGE>
LIST OF EXHIBITS
Exhibit A - Schedule (Homes, Purchase Price, Term/Termination Schedule)
Exhibit C - Form of Notice
Exhibit D - Additional Homes Addendum
Exhibit E - Form of Warranty offered to third party buyer
<PAGE>
Exhibit A to Master Sale and Rental Agreement
DATE: __/__/__
SCHEDULE
Home Purchase Expiration
Home Address Price Date
- ---- ------- ----- ----
<PAGE>
Exhibit C to Master Sale and Rental Agreement
FORM OF NOTICE
{Date}
National Model Homes, Inc.
10900 Nuckols Road
Glen Allen, Virginia 23060
Attn: Senior Vice President
Dear _______:
Pursuant to Section 5.5 of the Master Sale and Rental Agreement between National
Model Homes, Inc. (the "Company") and Lundgren Bros. Construction, Inc.
("Builder") dated as of ___________________, 199_ (the "Agreement"), Builder
hereby notifies the Company of its desire to terminate the Lease(s) prior to the
Expiration Date, as described on Schedule 1 attached hereto.
As a condition to the Company consenting to the Early Termination, Builder
represents and warrants that:
(i) Builder shall deliver this Notice in the appropriate amount of time
prior to the requested termination date;
(ii) Builder shall Retrofit the Home(s) beginning not earlier than 20
days prior to lease expiration;
(iii) Builder shall, on behalf of the Company, commence marketing such
Home(s) at a price sufficient to net to the Company (after all costs of closing,
including, without limitation, sales commissions, the Minimum Amount (where
applicable per section 5.5 of the Agreement); and
(iv) Builder shall continue to comply with all provision of the
Agreement as to such Home(s), including, without limitation, the payment of
Rent, continued maintenance (including the payment of all applicable taxes and
insurance) and
<PAGE>
(v) Retrofit requirements, when due, until the Home(s) are sold
pursuant to (iii) above or the original Expiration Date.
Further, Builder understands that no Lease for Home(s) may terminate early
unless and until that Home has been sold and the Minimum Amount has been
received by the Company.
Sincerely,
{Builder Name}
{Name and Title of Authorized Officer}
<PAGE>
Schedule 1 to
Exhibit C to Master Sale and Rental Agreement
FORM OF NOTICE
Early Termination Original Expiration Minimum
Home Home Address Date Date Amount
- ---- ------------ ----------------- ------------------- ------
<PAGE>
EXHIBIT D
ADDENDUM TO
MASTER SALE AND RENTAL AGREEMENT
"ADDITIONAL HOMES"
According to the provisions of section 2.4 of the document entitled Master Sale
and Rental Agreement, (AGREEMENT) signed by National Model Homes, Inc., (the
"Company"), and Lundgren Bros. Construction Inc., (the "Builder"), on June 28,
1996, the Builder has agreed to sell and lease back "Additional Homes" from the
Company, and the Company has agreed to purchase and lease back these same homes,
as detailed in the attached and revised "Schedule," Exhibit A.
It is understood that all the terms and conditions in regard to the sale and
leasing of these "Additional Homes" detailed in the section of the AGREEMENT
referred to in the above paragraph, will apply to these "Additional Homes."
___________________________ Date: ____/____/____
Thomas R. Kranz
Senior Vice President
National Model Homes, Inc.
___________________________ Date: ____/____/____
Builder Officer
EXHIBIT 10.76
AGREEMENT
THIS AGREEMENT ("Agreement") is made as of this first day of March,
1998, by and among Patrick C. Wells, a Minnesota resident ("Wells"), Peter
Pflaum, a Minnesota resident ("Pflaum"), and Lundgren Bros. Construction, Inc.,
a Minnesota corporation ("Lundgren").
RECITALS
A. On January 2, 1997, Wells resigned as an officer, director and full-time
employee of Lundgren. Since January 2, 1997, Wells has continued to serve
Lundgren as a part-time independent consultant.
B. Wells owns no voting common shares of Lundgren; Wells owns 1,845 non-voting
common shares of Lundgren (the "Shares"). The Shares owned by Wells represent
17.37% of all issued and outstanding shares of Lundgren, including both voting
and non-voting common shares.
C. Wells and Lundgren wish to document the severance of Wells' relationship with
Lundgren.
D. Wells desires to sell the Shares to Pflaum and to Lundgren, and will grant to
Pflaum and to Lundgren an option to purchase the Shares on the terms and
conditions herein contained. Pflaum and Lundgren are referred to collectively
herein as the "Optionees."
E. The Optionees desire to purchase the Shares, and are prepared to purchase the
Shares on the terms and conditions herein, as a condition to maintaining an
option to purchase said Shares.
AGREEMENT
1. TERMINATION OF CONSULTING RELATIONSHIP.
1.1 Wells and Lundgren agree that:
a. Wells resigned as an officer, director and employee on January 2,
1997;
b. on January 2, 1997, Wells commenced working as a part-time
independent consultant to Lundgren;
c. on September 25, 1997, Wells terminated his consulting relationship
with Lundgren;
<PAGE>
d. Lundgren has paid Wells in full for his services as an independent
consultant for the period January 2, 1997 through September 25, 1997; and
e. Wells is responsible for reporting and paying state and federal
withholding taxes and charges on Wells' consulting income for such period.
Wells acknowledges that Lundgren has no further obligations to Wells
resulting from Wells' resignation as an officer and employee of Lundgren, and
Wells' services as an independent consultant from January 2, 1997 to and through
September 25, 1997.
1.2 Lundgren agrees to sell to Wells the company truck that Wells has used to
date for business purposes, for the sum of $6,900, on March 2, 1998. Lundgren is
electing to apply the $6,900 purchase price of the truck to the option payment
of $16,900 due under paragraph 2.1.e. hereunder on said date.
1.3 As a shareholder of Lundgren, Wells was the beneficiary of certain life
insurance policies, the disposition of which the parties hereto agree as
follows:
a. Wells, together with the other shareholders of Lundgren, is a
participant in and beneficiary of that certain Amended and Restated Lundgren
Bros. Construction, Inc. Stock Purchase Agreement dated February 1, 1993, as
amended ("Stock Purchase Agreement"). Lundgren has purchased and maintains life
insurance on each of the shareholders of Lundgren pursuant to the Stock Purchase
Agreement to fund the repurchase by Lundgren pursuant to the Stock Purchase
Agreement of the shares of such shareholder in the event of that shareholder's
death. Lundgren is the owner and beneficiary of all such insurance policies
purchased by Lundgren to fund Lundgren's obligations under the Stock Purchase
Agreement. Lundgren currently pays all of the premiums on the insurance detailed
on Exhibit A to this Agreement on the life of Wells ("Wells Insurance").
Lundgren agrees, so long as Lundgren pays the premiums on life insurance for the
other shareholders of Lundgren pursuant to the Stock Purchase Agreement,
Lundgren will pay the premiums on the Wells Insurance, and continue to be the
owner and beneficiary of the Wells Insurance. In the event of Wells' death,
Lundgren will use the Wells insurance to purchase, pursuant to the Stock
Purchase Agreement, all of the Shares not previously sold to either Lundgren or
Pflaum pursuant to the option contained herein, at the price, and on the terms
provided in the Stock Purchase Agreement.
b. Lundgren maintains so-called "split dollar plan" life insurance on
Wells and on the other shareholders of Lundgren. The Lundgren split dollar
insurance insuring Wells is detailed on Exhibit B to this Agreement ("Wells
Split Dollar Insurance"). The premiums on the Wells Split Dollar Insurance are
divided between Lundgren and Wells, with Wells paying a portion of the annual
premium equal to the then economic benefit cost. The Wells Split Dollar
Insurance is owned by Wells, and is subject to a collateral assignment of the
portion of the cash value and death benefit thereof equal to the lesser of the
total premiums paid or the net cash surrender value of the policies. The cash
value of the Wells Split Dollar Insurance (and the Wells Insurance) is owned by
Lundgren and is used by Lundgren as collateral for Lundgren's working capital
credit facility. At any time on or after the date hereof, Lundgren may elect to
(i)
<PAGE>
convert the Wells Split Dollar Insurance to either term or whole-life insurance
on the life of Wells, wholly owned by Lundgren, or (ii) terminate the Wells
Split Dollar Insurance.
c. Lundgren pays the premiums on, and holds title to, disability
insurance on Wells, as detailed on Exhibit C hereto ("Wells Disability
Insurance"). The Wells Disability Insurance is maintained to fund the purchase
of the Shares in the event of Wells' permanent disability as defined in the
Stock Purchase Agreement, while Wells is a full-time employee of Lundgren.
Inasmuch as Wells has terminated his employment with Lundgren, the parties
hereto agree that the Stock Purchase Agreement will be amended in the form
attached hereto as Exhibit D to eliminate Wells from the disability provisions
of the Stock Purchase Agreement. Lundgren will continue to pay the premiums on
the Wells Disability Insurance to and through the first anniversary of this
Agreement ("Anniversary Date"). At any time on or before the Anniversary Date,
Wells may elect, by so informing Lundgren in writing, to assume the Disability
Insurance, by agreeing to pay all future premiums due thereon. In the event
Wells does not elect to assume the Wells Disability Insurance, any premiums paid
by Lundgren thereunder shall remain the property of Lundgren.
1.4 Wells, as a shareholder of Lundgren, will remain personally liable on
guarantees made by him to date on Lundgren's indebtedness to financial
institutions. Lundgren will exclude Wells from any such future guarantees. From
and after the date hereof, Wells will not participate in any partnerships or
companies (i) consisting otherwise exclusively of Lundgren shareholders, and
(ii) doing business with Lundgren.
2. OPTION TO PURCHASE SHARES
2.1 Wells hereby grants first to Pflaum, and then to Lundgren, the right and
option to purchase the Shares for $1,284,685, or $696.30 per share, on the
following terms and conditions:
a. The term of the option hereby granted shall run from the date hereof
to and through September 1, 2005 (the "Term"), subject to the terms and
conditions set forth below.
b. The initial price per share for each Share purchased pursuant to
this Agreement is $696.30 per share. The purchase price per Share shall increase
at the rate of 6% per annum during the Term, computed as of each anniversary
date of this Agreement. In the event any Shares are purchased between
anniversary dates of this Agreement, the price per share shall be adjusted PRO
RATA to reflect the portion of the year lapsed since the preceding anniversary
date.
c. All payments made pursuant to this Agreement for the purchase of
Shares pursuant to this Section 2 of the Agreement shall be applied to the
purchase of Shares, and Wells shall assign and transfer to Pflaum or to
Lundgren, as the case may be, Shares equivalent to the payment then made, on the
date such payment is made.
d. From September 26, 1997 to and through December 31 1997, Optionees
made bi-weekly payments of $3,269.23, in total payments of $22,884.61, as option
payments. From
<PAGE>
January 2, 1998 to and through February 27, 1998, Optionees have made bi-weekly
payments of $3,269.23, in total payments of $16,346.15, as option payments. On
February 27, 1998, Wells had received total payments of $39,230.76 as option
payments made pursuant to this paragraph.
e. In order to maintain this option, Optionees must make the following
additional option payments to Wells in 1998: on March 12, 1998, $16,900; on
April 1, 1998, $10,000; on each of May 1, 1998, June 1, 1998 and July 1, 1998,
$20,000; and on August 3, 1998, $23,653.85. On payment of the final payment
provided by the preceding sentence, Wells will have received an additional
$110,553.85 as option payments made pursuant to this paragraph, and received a
total of $149,784.61 under paragraphs 2.1. d and e of this Agreement as option
payments.
f. In the event, but only in the event, that all of the payments
described in paragraph 2.1.e have been made by Optionees to Wells on or before
the scheduled dates for the same, then on August 3, 1998 Wells shall assign and
transfer to either Pflaum or Lundgren, as the case may be, 215.12 Shares. In the
event the Optionees fail to make any of the option payments required under
paragraph 2.1.e no shares will be sold or conveyed by Wells hereunder, and the
options hereby granted by Wells to the Optionees shall immediately lapse on the
date a scheduled payment is not made hereunder.
g. From and after September 1, 1998, and provided the Optionees have
made the option payments provided under paragraph 2.1.e, Optionees shall have
the right and option, but not the obligation, to make additional payments to
Wells and thereby to purchase additional Shares. Neither Pflaum nor Lundgren
shall be obligated to make any additional payments, and/or to purchase any
additional Shares after September 1, 1998. However, in the event the Optionees
fail to purchase Shares on the following schedule, the option hereby granted by
Wells to the Optionees shall immediately lapse as of the date a scheduled
payment is not made hereunder, all without the requirement of any further
documentation. The Optionees may at any time purchase more Shares than the
minimum purchases provided hereunder. In the event the Optionees elect to
purchase more than the minimum Shares required to keep this option in full force
and effect, the additional payments and purchases so made will not reduce the
number of Shares the Optionees must purchase on the next payment dates hereunder
in order to keep this option in full force and effect.
h. In order to maintain this option, Optionees must make the following
additional purchases of Shares on the following schedule:
(1) On or before September 1, 1998, $67,115.39 to purchase 90.93
Shares;
(2) on or before September 1, 1999, $241,712.75 to purchase
308.95 Shares;
(3) on or before September 1, 2000, $100,000 to purchase 120.58
Shares;
(4) on or before September 1, 2001, $100,000 to purchase 113.76
Shares;
(5) on or before September 1, 2002, $354,700.98 to purchase
380.66 Shares;
(6) on or before September 1, 2003, $100,000 to purchase 101.24
Shares;
(7) on or before September 1, 2004, $100,000 to purchase 95.51
Shares; and
<PAGE>
(8) on or before September 1, 2005, $464,164.79 (the
then-balance of the purchase price) to purchase 418.24
Shares (the then-balance of the Shares).
i. In order to exercise his option in each year that the above option
runs, Pflaum shall give written notice of his intent to exercise his option that
year to Lundgren and to the other shareholders of Lundgren (except Wells) on or
before August 1 of that year. In the event Pflaum fails to give such written
notice, Pflaum shall have waived Pflaum's right to exercise any portion of the
option granted hereunder for that respective year. Pflaum's rights to exercise
the option in any subsequent year hereunder shall not be affected by such
failure to give notice.
2.2 Wells hereby represents and warrants to the Optionees that he has good and
marketable title to the Shares, and that the same are free of any liens,
charges, security interests or other encumbrances of any kind or nature. Wells
hereby covenants and represents to the Optionees that he will maintain good and
marketable title in the Shares, and that the same will remain free and clear of
any liens, charges, security interests or other encumbrances of any kind or
nature, during the Term. Wells further represents and warrants that, during the
Term, he will not sell, assign or transfer any of the Shares. Provided
nevertheless, and any language in this paragraph 2.2 to the contrary
notwithstanding, in the event the option granted to the Optionees hereunder
lapses as a result of the Optionees' failure to purchase Shares in accordance
with the schedule set forth in subparagraph 2.1(g) above, Wells shall be free to
sell, assign, transfer or otherwise encumber any of the Shares not then sold
hereunder.
2.3 In the event, at any time from the date hereof to and through the third
anniversary date of the date hereof, a third party acquires from the then
shareholders of Lundgren all of the common shares of Lundgren not covered by
this option ("Other Shares"), Wells agrees to sell, and Lundgren and Pflaum
agree to cause such third party to purchase, the then-remaining Shares at the
price to be paid for such Other Shares, and on the terms and conditions for
payment of the Other Shares.
2.4 In the event, at any time from the date hereof to and through the second
anniversary date of the date hereof, one or more of the existing shareholders of
Lundgren enters into an agreement to sell to the Optionees all of his then
shares of Lundgren, for a price, and/or on terms and conditions which are more
favorable than those provided Wells under this Agreement, the parties shall
amend this Agreement as to the remaining number of Shares subject to this
option, to provide Wells the benefit of the more favorable price and/or terms
and conditions so provided to the shareholder then selling his shares. Provided,
nevertheless, and any language in this paragraph 2.4 to the contrary
notwithstanding, there shall be no adjustment to the price per Share paid to
Wells hereunder in the event one or more of the existing shareholders of
Lundgren enters into an agreement to sell to the Optionees all of his then
shares of Lundgren for a price that does not exceed the then book value per
share, as computed by the independent public accountants then serving Lundgren.
<PAGE>
3. AGREEMENTS NOT TO COMPETE
3.1 a. As used in this Section 3.1, "Proprietary Information" means all
information with respect to the conduct or details of the single family home
building business and operations of Lundgren, including without limitation
methods of operation, customers and customer lists, details of contracts with
customers, consultants, suppliers or employees, products, proposed products,
former products, proposed prices and pricing policies, costs, plans, designs,
drawings, blueprints, layouts, specifications, models, and any and all
memoranda, whether written or electronic, trade secrets, know-how, software and
marketing methods of Lundgren.
b. Wells acknowledges and agrees that all of the Proprietary
Information is the exclusive property of Lundgren. Wells hereby covenants and
agrees that for a term ("Term") equal to the period of time the option under
Section 2 hereof is in effect, Wells shall keep completely confidential and
shall not directly or indirectly disclose, communicate or divulge to any person
or to any business entity or organization, or use for the benefit of any such
person or business entity or organization, any of the Proprietary Information.
The restriction contained in the preceding sentence shall not apply to any
Proprietary Information that (i) is a matter of public knowledge on the date
hereof, (ii) becomes a matter of public knowledge after the date hereof solely
from a source other than Wells, or (iii) is required by law or by the order of
any court or government agency, or in any litigation or similar proceeding to be
disclosed.
3.2 During the Term, Wells shall not invest in, own, manage or control, or share
in the ownership, management or control of, any business or enterprise that
either engages or proposes to engage in a business which is in competition with
the single family home building business of Lundgren within a one hundred fifty
(150) mile radius of Lundgren's corporate offices in Wayzata, Minnesota.
3.3 During the Term, Wells shall not directly or indirectly solicit, divert or
accept business from or otherwise take away or interfere with, any customer of
or supplier to Lundgren, or any distributor or seller of products of Lundgren.
4. DISPUTE RESOLUTION
4.1 In the event any dispute arises out of or relates to this Agreement, and
cannot be resolved by mutual agreement of the parties hereto, all matters so
disputed shall be submitted to a single arbitrator (herein, the "Arbitrator")
selected by the presiding officer of the American Arbitration Association in
Minneapolis, Minnesota, for binding arbitration in accordance, where applicable,
with this Agreement, and otherwise in accordance with the then rules of the
American Arbitration Association. Such arbitration shall take place in
Minneapolis, Minnesota.
4.2 The Arbitrator shall be requested by the parties to make his or its
determination as soon as possible after the matter or matters in dispute are
submitted to the same, and such determination shall be final and binding upon
the parties hereto. All fees and disbursements of the Arbitrator shall be paid
in accordance with the decision of the Arbitrator. Any payment
<PAGE>
required to be made as a consequence of the decision of the Arbitrator shall be
made by the party hereto then obligated to pay the same, not later than 30 days
after the receipt of such decision.
4.3 The Arbitrator shall have the authority to award any remedy or relief that a
court of the State of Minnesota could order or grant, including, without
limitation, equitable remedies, rescission, or specific performance of any
obligation created under this Agreement, the issuance of an injunction, or the
imposition of sanctions for abuse or frustration of the arbitration process,
provided, however, that punitive or exemplary damages shall not be awarded by
the Arbitrator or by any court.
5. MISCELLANEOUS
5.1 Disclaimer. Wells hereby acknowledges that Wells has had the opportunity to
obtain, and has obtained, advice from his own professional tax advisors
regarding the tax consequences of the transactions described in this Agreement;
and that Wells has not received from Lundgren, Pflaum, or any other
representatives of Lundgren, and is not relying upon, any advice regarding the
tax consequences of such transactions.
5.2 Survival. All representations and warranties of Wells contained in this
Agreement shall continue to and through the sale and transfer of the last of the
Shares to Optionees hereunder, or the termination of the Term, whichever first
occurs.
5.3 Notices. All notices and other communications hereunder shall be in writing,
and may be delivered personally (including by courier) or by first class
registered or certified mail, postage pre-paid, addressed to the parties at the
following addresses, or to such other addresses as may be furnished in writing
by one party to the other:
a. If to Pflaum and to Lundgren:
Lundgren Bros. Construction, Inc.
935 E. Wayzata Boulevard
Wayzata, MN 55391
with a copy to:
Leonard, Street and Deinard
Attn: Stephen R. Pflaum, Esquire
150 South Fifth Street
Suite 2300
Minneapolis, MN 55402
<PAGE>
b. If to Wells:
Patrick C. Wells
11217 Old Rockford Road
Plymouth, MN 55441
with a copy to:
---------------------------------
---------------------------------
---------------------------------
---------------------------------
Service of any such notice or other communication so made by mail shall
be deemed to be complete on the day of actual delivery thereof as shown by
addressee's registry or certification receipt.
5.4 Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Minnesota, without regard to such
jurisdiction's conflicts of law principles.
5.5 Modification; Waiver. This Agreement shall not be altered or otherwise
amended except by an instrument in writing signed by all of the parties hereto.
Any party hereto may waive any covenant, obligation or agreement of any other
party, provided that mere inaction or failure to exercise any right, remedy or
option under this Agreement or delaying the exercise of the same, will not
operate as, nor be construed as, a waiver, and no waiver will be effective
unless set forth in writing, and only to the extent specifically stated therein.
5.6 Entire Agreement. This Agreement and the Exhibits hereto constitute the
entire agreement of the parties hereto with respect to the matters contemplated
hereby, and supersede all previous written or oral negotiations, commitments,
representations and agreements.
5.7 Assignment. This Agreement may not be assigned by any party hereto without
the prior written consent of the other parties.
5.8 Severability. The provisions of this Agreement are severable, and in the
event any one or more provisions are deemed illegal or unenforceable, the
remaining provisions shall remain in full force and effect.
5.9 Third-Party Beneficiaries. Notwithstanding paragraph 4.6 regarding
non-assignability of this Agreement, this Agreement shall inure to the benefit
of, and be binding upon, the heirs of Wells and the successors of the other
parties hereto.
<PAGE>
5.10 Execution in Counterpart. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
LUNDGREN BROS. CONSTRUCTION, INC.
By
---------------------------------------
Peter Pflaum, President
-----------------------------------------
Peter Pflaum
-----------------------------------------
Patrick C. Wells
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<PERIOD-START> JAN-01-1997
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