SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------
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, 1998
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 nonaffiliates
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 nonaffiliates 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 April 15, 1999, 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......................................................15
Item 3. LEGAL PROCEEDINGS...............................................15
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............15
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY 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.............................17
Item 7A. QUANTITAVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK............................................................27
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................27
Item 9. CHANGES IN, AND DISAGREEMENTS WITH ACCOUNTANTS ON,
ACCOUNTING AND FINANCIAL DISCLOSURE.............................27
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT......................................................28
Item 11. EXECUTIVE COMPENSATION..........................................31
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT..................................................33
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................35
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K 37
SIGNATURES 46
EXHIBIT INDEX 47
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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 2,893 lots. On December 31, 1998, the Company controlled 17 parcels of
land under Land Acquisition Agreements for future development of an estimated
1,490 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 $140,000 to $800,000 for both the home and lot, with an
average selling price of approximately $311,000 in 1998. 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 2,934 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 282 homes in 1998, and as of December 31, 1998, had purchase agreements
for the sale of 115 homes, representing approximately $38.7 million in sales. In
1997, the Company closed the sales of 204 homes, and as of December 31, 1997,
had contracts for the sale of 70 homes, representing approximately $21.5 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.
The Company was incorporated as a Minnesota corporation on October 29,
1970. The Company's offices are located in Wayzata, Minnesota.
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OPERATING STRATEGY
The Company's operating strategy is to attempt to achieve the following
interrelated 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 homebuyers 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 homebuyers 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 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
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efforts on the western and southwestern suburbs of Minneapolis, in the
communities of Eden Prairie, Chanhassen, Chaska, Minnetonka, Medina,
Minnetrista, Plymouth, Shorewood, Maple Grove, Eagan, Watertown and Elko. 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. In some cases, 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 non-recourse
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.
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
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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 that 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 controls 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 anticipated land
requirements for the next two to three years, and attempts to control land
sufficient for its anticipated 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 2 counties in Wisconsin, in
that it is involved in both land development and home building. Land development
has been historically the most profitable portion of the Company's business and
an essential element to the success of the Company's home building business.
During 1998, 62.8% of the homes delivered by Lundgren were built on lots
developed by Lundgren, compared to 79.9% in 1997 and 84.8% in 1996. 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 122 residential subdivisions,
ranging in size from 2 to 94 lots, in the Twin Cities MSA. In 1997, the Company
commenced the development of five new residential subdivisions and, in 1998,
commenced the development of nine new subdivisions.
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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 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 predevelopment costs
substantially reduces the risks of greater costs and capital expenditures
associated with owning land that cannot be developed. 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, water main, storm sewer, 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 those 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, 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 2,893 lots, for which the sales
of 2,591, or 89.6%, had been closed as of December 31, 1998. The remaining lots
are subject to purchase agreements or are available for sale. The development of
all but 33 lots is substantially complete. The Company expects to complete the
33 lots in 1999.
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HOME BUILDING AND HOME SALES
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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1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(Dollars in thousands, except numbers of homes closed)
Homes Closed 247 202 198 204 282
Average Selling Price
of Homes(1) $ 297 $ 311 $ 339 $ 321 $ 311
Total Volume of Closed
Homes $ 73,471 $ 62,796 $ 67,079 $ 65,549 $ 87,541
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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, 1999 will
be higher compared to 1998.
- --------------------------------------------------------------------------------
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, television, illustrated
brochures, billboards, on-site displays, realtor programs and furnished model
homes. Based on 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
with a vast number of pre-priced options, some of which 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
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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 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
usually have limited or no experience. Accordingly, the Company has developed a
system to educate its customers as to the Company's procedures and a 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 appropriate 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
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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 homebuyers. The Company is currently
implementing a system whereby it will telephone its homebuyers at four different
times during the term of its relationship with the homebuyers. These telephone
calls are designed to get the homebuyers' 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 homebuyer.
(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.
In order to provide home customers the price advantage of a standardized
product line while still providing them with some flexibility to customize their
homes before the final plan review, the Company has integrated its construction
process with a schedule for the customers' required decision-making, contained
in the book "Building a New Home with Lundgren Bros." The book coordinates the
customers' 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 pre-construction meeting; a pre-drywall
orientation; a pre-closing 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 homebuyers
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
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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 $140,000 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 pre-priced
options, 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 that 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.
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 homebuyer. 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
cabinetmaker 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 departments may seek the advice of
suppliers and subcontractors with respect to
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better or more cost efficient ways to design and build the home so as to create
more value for the homebuyer. 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 that 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
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 the reason 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.
Over the last year and a half, Lundgren Bros. has developed an Intranet
based system that will allow all Lundgren Bros. employees the ability to access
a secure, central database from any
10
<PAGE>
point within the Company and via the Internet using a standard web browser. This
central database will store information from the initial point of customer
contact, during the build cycle and on through warranty and service. Each user
is defined in the security module and given access via a graphical user
interface to the areas they need to perform their job. The system will allow
interaction with real-time data in a format that requires minimum user training
and PC configuration. Some of the major benefits of this system will be the move
from a paper based system to fully electronic exchange of information. For
example, a change during construction was previously handled by using several
paper forms and routing them through manually via hand, fax, mail, etc. The new
system allows the user to initiate the change electronically. The system then
forwards the information through the proper approvals and returns it to the
initiator for customer review with full details (i.e., pricing, drawings, etc.)
all without using paper. If the change is approved, the information will be
communicated to the field via an electronic notice, thus creating a more
efficient and traceable route through the Company. Other benefits include less
administrative maintenance for distributing changes (new lots, base and option
prices, etc.) because as soon as the information is entered it is available to
all who need it; previously, time-intensive distribution routines were
necessary. This system allows a continuos flow of information into and out of
one data system as opposed to tracking information through many separate
sub-systems. It prevents duplication of data and increases speed, security, and
accuracy.
(e) DESIGN CENTER.
All of the Company's homebuyers can choose from the Company's various base
floor plans and elevation combinations or design a custom plan for themselves.
Homebuyers can further customize their homes 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 homebuyers can visit this
center as many times as they like. The Company employs interior designers 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 homebuyers on an
appointment basis when it is convenient for the homebuyers to make selections,
or homebuyers can visit the design center, which is open weekdays as well as
during convenient evening and weekend hours. Normally, homebuyers purchasing
homes 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 homebuyers will receive at each of these
different suppliers. The Company's homebuyers 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.
11
<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 nonrecourse 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 or
two 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 homebuyers. 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, 1998, the Company had 40 houses built or under
construction to be held as inventory which represents 33.1% 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 40 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 40 houses in inventory as of December 31, 1998 were located in 21
different subdivisions. Houses in inventory are generally marketed to transferee
homebuyers. Transferee homebuyers 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 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 homebuyers 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.
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.
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<PAGE>
Brush Masters currently services approximately 21 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 52.2% of Brush Masters' sales in 1998.
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. Home Corporation (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 developer 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.
EMPLOYEES
At December 31, 1998, the Company employed 216 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
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<PAGE>
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.
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.
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<PAGE>
RECENT DEVELOPMENT
On February 16, 1999, the Company's shareholders entered into a nonbinding
agreement with a third party to sell all of the issued and outstanding shares of
the Company. Among other things, the transaction is subject to the execution of
a definitive agreement and satisfactory completion of due diligence. There can
be no assurance that the transaction will be completed as contemplated.
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 3,330(1) 4/30/99
- --------------------------------------------------------------------------------
(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
There were no matters submitted to a vote of the Company's shareholders
during the three-month period ended December 31, 1998.
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<PAGE>
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, 1998. 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, 1994, 1995, 1996, 1997, and 1998 are
derived from consolidated financial statements of the Company. The report of
independent accountants on the consolidated financial statements for the year
ended December 31, 1996 of PricewaterhouseCoopers LLP, and independent auditors'
report on the consolidated financial statements as of December 31, 1998 and 1997
and for the years then ended of Deloitte & Touche LLP 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, 1998, and the selected
consolidated balance sheet data, as of December 31, 1997 and 1998, 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,
--------------------------------------------------------
1994(3) 1995(3) 1996 1997 1998
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
SELECTED STATEMENT OF OPERATIONS DATA:
Revenues(2) ........................................ $ 75,814 $ 65,217 $ 69,798 $ 68,658 $ 91,296
Cost of revenues ................................... 64,004 55,591 59,052 60,839 80,323
-------- -------- -------- -------- --------
Gross profit ....................................... 11,810 9,626 10,746 7,819 10,973
Operating expenses ................................. 7,216 7,429 7,238 6,528 7,816
-------- -------- -------- -------- --------
Operating income ................................... 4,594 2,197 3,508 1,291 3,157
Other income (expense), net ........................ (706) (1,608) (1,643) (2,427) (2,072)
-------- -------- -------- -------- --------
Income (loss) from continuing operations
before income taxes ............................. 3,888 589 1,865 (1,136) 1,085
Income tax provision (benefit) for
continuing operations ........................... 1,308 253 709 (489) 372
-------- -------- -------- -------- --------
Income (loss) from continuing operations ........... 2,580 336 1,156 (647) 713
Income (loss) from discontinued
operations(1) ................................... (740) 86 (145) -- --
-------- -------- -------- -------- --------
Net income (loss) .................................. $ 1,840 $ 422 $ 1,011 $ (647) $ 713
======== ======== ======== ======== ========
Income (loss) per share (basic and diluted):
Continuing operations ........................... $ 243 $ 32 $ 109 $ (61) $ 67
Discontinued operations ......................... (70) 8 (14) -- --
-------- -------- -------- -------- --------
Net income (loss) ............................ $ 173 $ 40 $ 95 $ (61) $ 67
======== ======== ======== ======== ========
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1994(3) 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Inventories ........................................ $ 30,246 $ 34,166 $ 37,828 $ 35,614 $ 39,601
Total assets ....................................... 43,703 47,763 51,695 52,784 59,487
Long-term debt ..................................... 10,664 10,766 15,739 16,337 14,714
Total liabilities .................................. 37,861 41,378 44,299 46,035 52,025
Stockholders' equity ............................... 5,842 6,385 7,396 6,749 7,462
</TABLE>
(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 to the Consolidated Financial Statements.
(3) 1994 and 1995 are restated to retroactively reflect for periods prior to
January 1, 1995 a change in accounting method for capitalized land
acquisition and development costs. The impact of the retroactive
restatement is as follows:
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Income from continuing operations .............................. $642 $ --
Cumulative effective of change in accounting ................... -- (763)
---- -----
Net income ..................................................... $642 $(763)
==== =====
Income (loss) per share (basic and diluted):
Continuing Operations ....................................... $ 60 $ --
Cumulative effect of change of accounting ................... -- (72)
---- -----
Net Income (loss) ........................................... $ 60 $ (72)
==== =====
</TABLE>
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, 1997 and 1998, and for the years
ended December 31, 1996, 1997, and 1998 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 segment, which includes
land acquisition and development, home building and home sales, inventory
management and painting, staining and drywall services. In 1996 and prior, 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 1998, home construction and lot revenues were
$87.6 million or 96% of total revenues. Revenues from painting, staining and
drywall (excluding those to the Company's new home construction operations) were
$3.7 million or 4% of total revenues. The 1998 percentages are consistent with
the percentages for 1997. 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 1998, 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 1998 was $9.8 million or 90% of the total gross profit. Of the $9.8 million
gross profit, $7.8 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 were historically higher on lot revenues than on home
construction revenues when the lot and house are sold together, but in 1998 they
moved
17
<PAGE>
closer together. In 1998 the gross profit margin on home construction revenues
was 11%, while the gross profit margin on lot revenues was 11%. 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
31% in 1998.
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,
1998, the Company had signed purchase agreements for the sale of 115 homes,
compared to 70 homes at December 31, 1997. The 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 1997. 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
1998 Compared to 1997
Revenues increased $22.6 million or 32.0% in 1998 compared to 1997. The
Company closed on sales of 282 homes in 1998, compared to 204 closings in 1997.
The average selling price of homes closed decreased by 3.1% in 1998 from the
average selling price of homes closed in 1997. The decrease in average selling
price is due to a change in the mix of homes closed in 1998 compared to 1997.
Gross profit margin increased to 12.0% in 1998, compared to 11.4% in 1997.
The Company believes that this increase in gross profit margin is primarily due
a decrease in sales incentives given to homebuyers due to a strong housing
market slightly offset by higher land costs.
Operating expenses (which include selling, general and administrative
expenses) increased by $1,288,000 in 1998 compared to 1997. The increase is
mainly due to a $726,000 increase in discretionary bonuses to substantially all
employees, an increase in rental expense of $258,000, increase in staffing due
to increased volume, and an increase in legal and consulting fees in 1998. As a
percentage of revenues, these expenses decreased to 8.0% in 1998 compared to
9.0% in 1997 due to the substantially higher increase in revenues than the
increase in operating expenses.
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<PAGE>
OTHER INCOME (EXPENSE), NET
Interest expense decreased by $182,000 in 1998 compared to 1997. The
decrease is mainly due to lower interest rates and decreased borrowings for land
acquisition and development due to purchasing finished lots from other
developers.
Other income (expense), net increased $173,000 in 1998 from 1997. The
increase is mainly due to an increase in interest income.
INCOME (LOSS) FROM CONTINUING OPERATIONS
Income from continuing operations in 1998 was $713,000 compared to loss
from continuing operations of $647,000 in 1997. This increase in 1998 is
primarily due to increases in both revenues and gross profit.
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.
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<PAGE>
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 an increase in
interest income.
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 the decline in revenues, together with a decrease in gross
profit margins and increase in interest expense in 1997.
NET INCOME (LOSS)
Net loss in 1997 was $647,000, a decrease of $1.7 million from $1.0
million of net income in 1996. This decrease is mainly due to a decrease in
sales of $1.1 million, a decrease in gross profit margins of $2.9 million, a
decrease in operating expenses of $710,000, an increase in interest expense of
$639,000, and a decrease in tax provision of $1.2 million which are offset by a
decrease in loss in 1996 from the discontinued operations of the Company's
remodeling division of $145,000.
LIQUIDITY AND CAPITAL RESOURCES
1998 Compared to 1997
Cash increased $278,000 to $2.3 million in 1998 from $2.0 million in 1997.
Cash flows provided by operating activities were $1.7 million in 1998,
which was approximately equal to the $1.6 million provided in 1997. In 1998,
cash was provided by a $713,000 profit from continuing operations, a $1.4
million increase in accounts payable, a $0.2 million increase in estimated cost
to complete sold homes, a $1.0 million increase in accrued expenses, a $1.1
million increase in income tax payable, a $1.1 million increase in customer
deposits and $399,000 related to other changes in operating assets and
liabilities. These cash provisions were partially offset by cash used for an
increase in restricted cash of $715,000; a $3.1 million increase in land and
model home inventories; and a $746,000 increase in land options and earnest
money deposits on land.
Cash flows used in investing activities were $510,000 in 1998, an increase
of approximately $194,000 from $316,000 cash used in 1997. The increase was
primarily due to an increase in expenditures for property and equipment.
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<PAGE>
Cash flows used in financing activities were $884,000 in 1998, an increase
of approximately $290,000 from the $594,000 used in financing activities in
1997. The increase was primarily due to a $3.1 million increase in repayment of
borrowings on the Company's bank lines of credit offset by a $4.0 million
increase in borrowings for land acquisition, land development and home
construction.
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 $1.6 million in 1997, an
increase of approximately $3.1 million from the $1.5 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 $316,000 in 1997, an increase
of approximately $150,000 from $166,000 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 in 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.
Financing
The Company believes that internally generated funds, amounts available
under its four lines of credit and borrowing arrangements, including the 1993
and 1996 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 1998, the Company entered into an
arrangement involving the sale of raw land to a non-affiliated entity 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 $9.9 million, subject
to a borrowing base. At December 31, 1998, the
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<PAGE>
aggregate maximum credit available under the lines of credit was $8.9 million,
of which $3.5 million was utilized and $5.4 million was available.
The Company's outstanding indebtedness, as of December 31, 1998, included
$20.7 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. The Company benefited from low mortgage interest rates
from mid-year 1995 through early 1996, and then again in late 1997 through 1998.
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 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, REPORTING
COMPREHENSIVE INCOME. Comprehensive
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income includes net income and several other items that current accounting
standards require to be recognized outside of net income. This standard requires
enterprises to display comprehensive income and its components in financial
statements, to classify items of comprehensive income by their nature in
financial statements, and to display the accumulated balances of other
comprehensive income in stockholders' equity separately from retained earnings
and additional paid-in capital. The Company adopted SFAS No. 130 during 1998,
and there were no items of other comprehensive income for all periods presented.
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION, replacing SFAS No. 14 and its amendments.
This standard requires enterprises to report certain information about products
and services, activities in different geographic areas, reliance on major
customers, and to disclose certain operating segment information in their
financial statements. Operating segments are components of an enterprise for
which financial information is available and evaluated by the enterprises chief
operating decision-maker in allocating resources and assessing performance. The
Company adopted SFAS No. 131 during 1998. The Company has determined that it
operates in one segment. In addition, all long lived assets are located in, and
all revenue is derived from, customers within Minnesota.
During 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which is effective for the Company in 2000.
The Company is currently evaluating the impact, if any, of this statement.
YEAR-2000 COMPLIANCE
PROJECT PHASES
The Company's IS department has developed a year-2000 (Y2K) Project Plan
consisting of four phases:
Phase 1. Inventory and Assessment involves identifying all date-impacted systems
and equipment and establishing procedures for modifying and maintaining a
current inventory of equipment. This phase is complete, other than the ongoing
assessment of new systems and gathering final data from vendors.
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<PAGE>
Phase 2. Detection involves identifying compliance status of all date-impacted
systems and equipment, identifying connections between the Company and its
business partners, setting priorities on systems and equipment based on business
risk, developing a plan and cost estimate to repair, retire or replace each
noncompliant system and product and establishing a testing approach. This phase
is complete, except for the ongoing assessment of new systems and the phaseout
of noncompliant hardware.
Phase 3. Correction involves repairing, retiring or replacing noncompliant
systems and products, preparing detailed testing plans and cost estimates,
establishing testing organization and environment, conducting unit testing and
preparing integration testing plans. The Company has completed this phase, and
has scheduled a full audit by an outside technology firm to be conducted in May
1999.
Phase 4. Testing involves conducting internal integration testing of hardware
and software. The Company is currently in this phase and is on schedule to be
substantially completed by May 31, 1999. This phase also includes maintaining
compliance throughout 1999 to insure our year-2000 preparedness remains intact.
Testing will be done with various tools such as the Ymark 2K test and other test
software and equipment provided by outside manufacturers.
Total compliance with a status of "ready for live test" will be completed by May
31, 1999. The Company has scheduled an outside company to facilitate the "live"
test during the first week of June, 1999. Any issues found as a result of these
tests will be dealt with in the same manner as items found during the original
inventory.
PROJECT DETAILS
The following details outline the standings of the Company's information systems
regarding the year-2000 rollover with regard to each aspect.
Levels of Compliance
Hardware/System BIOS level
Servers - All netware and NT 4.0 Servers have been addressed and current
patch levels are continually applied, which address remaining minor
year-2000 issues. Netware Client 32/Intranetware has been updated on all
client workstations. All hardware is compliant.
Plan: Continue to keep current on version and patch levels as they are
released from Novell and Microsoft.
Client/User Computers - 90% of all networked computers are compliant. The
remaining computers are older and have only a BIOS level issue that is
currently being upgraded or replaced. Compaq has issued a compliance
statement for all computers purchased after October 1997, the 10% still
outstanding are those purchased before this date.
Plan: Compaq has issued BIOS upgrades at no cost for some of these models.
The computers that fall within the noncompliant range will get either a
bypass chip or a upgraded BIOS prior to May 31, 1999.
Communications/Voice Equipment - The primary phone system in use by the Company
was upgraded in the Fall of 1998 to meet Y2K compliance levels. This
upgrade also included the voicemail system.
Plan: Fax machines and stand alone phone equipment verification is in
process and will be addressed as needed to meet compliance levels prior to
May 31, 1999.
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<PAGE>
Operating System Level:
Servers - All Netware and NT 4.0 Servers have been addressed an current
patch levels are continually applied, which address remaining minor
Year-2000 issues. Netware Client 32/Intranetware has been updated on all
client workstations. All hardware is compliant.
Plan: Continue to keep current on version and patch levels as they are
released from Novell and Microsoft.
Client/User Computers - 98% of all networked computers are compliant.
There are 6 computers on the Company's network that are operating at DOS
levels that are not compliant. All other computers are running Operating
Systems that are compliant (Windows 95, Windows NT 4.0).
Plan: The noncompliant machines will be replaced before May 31, 1999 with
new compliant machines running a compliant operating system as part of a
departmental upgrade.
Peripherals - All Network printers are compliant (HP LaserJet, InkJet,
DesignJet). The Company uses Jet-Direct cards to allow these printers to
interact over our network and these are also compliant. The software used
to manage these printers is also compliant. All stand-alone printers are
also compliant including those with fax, scan and copy capability.
Plan: Compliant; no outstanding issues.
Communications/Voice Equipment - The primary phone system in use by the
Company was upgraded in the Fall of 1998 to meet Y2K compliance levels.
This upgrade also included the voicemail system hardware and software.
Plan: Fax machines and stand-alone phone equipment verification is still
in process and will be addressed as needed to meet compliance levels.
Data Connection/Routers - All Cisco routers used at the Company are
compliant. Cisco has confirmed that all IOS software releases at 11.0 or
higher are Y2K compliant.
Software Compliance:
Server Level:
Email/Collaboration - MS Mail and Exchange Server are fully compliant with
regard to components being used by the Company.
Database Systems - SQL Server 6.5 is fully compliant.
Inoculation/Anti-Virus Systems - McAfee Netshield and Virusscan are fully
compliant as long as systems that software is run on are compliant. Date
and time tracking is noncritical to software function.
Backup Systems - Arcserve 6.5 is fully compliant on both NT and Netware
Servers.
System Management - Current system management is run through default and
standard interfaces provided by software manufacturer. No compliance
issues at this point.
Middleware - Allaire ColdFusion is the only middleware used that is
related to Company applications. It is compliant with no issues.
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Software Level:
TOM System (fully integrated Accounting, Estimating, Purchase Order,
Warranty system) - The Company will install the latest release in April
1999 that will bring the entire system to a Y2K compliant level.
Microsoft Office 4.3 and 97 - The Company is in the process of evaluating
Excel worksheets for potential date formula issues and those will be dealt
with on an individual basis.
HomeBase Intranet System - Fully compliant with no issues.
Monticello Estimating Interface with TOM - The Company received the latest
release and will implement in April 1999.
ADP Payroll - Compliant, the system was upgraded in 1998 to latest
version.
Norwest Bankties - Compliant.
Other Non-Critical Software - The Company uses Adobe Photoshop, Allaire
Homesite, CD Writing Software and other miscellaneous scanning and media
software that is not impacted by date/time issues related to Y2K.
All costs incurred to date by the Company have been expensed
(approximately $2,000). The Company anticipates future costs to be less than
$5,000, including hardware costs of less than $500, with the exception of 6 PCs
that are being updated primarily for other reasons, audit and related testing
costs of less than $1,000 in total, and no additional software costs, as all
patches are free of charge and others are included in support agreements.
The Company is in the process of identifying and assessing third party
relationships that could have an impact on the Company's operations. The Company
has identified certain relationships, such as with title companies, banks and
lumber suppliers, that if they were unable to perform in January 2000, could
have a material impact on the Company. The impact would not be loss of revenue,
but postponement of revenue recognition to possibly the second quarter of 1999,
and therefore the cost would be related to cost of funds. The Company has not
yet quantified this amount. Beginning in May 1999 all purchase agreements
between the Company and homebuyers will include a disclaimer relating to
possible delays caused by Y2K events. The Company therefore anticipates no
potential liability due to legal actions for breach of contract or other harm.
The Company has formed a Y2K Committee represented by employees from various
departments in the Company, who will investigate third party relationships and
will establish contingency plans.
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<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is subject to interest rate risk on its long-term debt and
runs the risk of interest rate fluctuations. At December 31, 1998, the Company
has fixed and variable rate debt of approximately $9.4 million and $26.0
million, respectively. The interest rates for the Company's variable rate debt
are based on the respective lender's base rate, plus an additional percentage
rate ranging from 0.5% to 5.0% at December 31, 1998. A one percentage point
increase or decrease in the respective lender's base rate would increase or
decrease annual interest expense by approximately $260,000 at December 31, 1998.
The Company believes that fair value approximates recorded values for such
financial instruments as cash and cash equivalents, trade receivables and
payables, short-term debt and option deposits because of the typically liquid,
short-term nature, market rate terms and lack of specific concentration of these
instruments. The fair value of the 1993 and 1996 subordinated debentures cannot
be readily determined as they are not actively traded on the open market.
The Company does not have any transactions denominated in foreign
currencies and does not purchase or hold any derivative financial instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 and Index to Consolidated Financial Statements beginning on
page 37.
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.
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<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 56 President and Director, Executive Committee Member
Terrance M. Forbord 48 President - Land Development Division, Executive
Committee Member
William O. Burgess 34 Vice President - Purchasing, Executive Committee
Member
James L. Weaver 45 Vice President - Construction, Executive Committee
Member
Allan D. Lundgren 56 Vice President, Secretary/Treasurer
and Director, Executive Committee Member
Richard W. Denman 48 Vice President - Sales and Marketing, Executive
Committee Member
Peter T. Beucke 40 Director of Design, Executive Committee Member
Laurie A. Vercnocke 49 Vice President of Finance, Executive Committee
Member
Michael A. Pflaum 54 Vice President - Land Development
Marc S. Anderson 50 Vice President - Land Development
Edmund M. Lundgren 60 Vice President and Director
Gerald T. Lundgren 59 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.
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<PAGE>
TERRANCE M. FORBORD served as President - Land Development Division from
August 1996 until February, 1999 and Vice President - Land Development of the
Company since April 1988. In this position, he supervised 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 Vice President of Finance since 1998 and was
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
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<PAGE>
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.
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.
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<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.
ANNUAL
COMPENSATION
<TABLE>
<CAPTION>
NAME AND OTHER ANNUAL(1) ALL OTHER(2)
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) COMPENSATION($)
------------------ ---- --------- -------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Peter Pflaum, 1998 207,692 156,000 4,064 1,588
President 1997 200,000 0 3,968 2,000
1996 200,000 112,500 2,174 1,875
Richard W. Denman, 1998 138,908 46,000 37,787 2,209
Vice President - 1997 185,000 0 3,000 0
Sales and Marketing 1996 289,000 0 3,000 1,619
Terrance M. Forbord, 1998 176,538 20,000 4,800 2,267
President - Land 1997 176,154 0 4,800 2,000
Development Division 1996 158,577 68,000 4,800 1,875
James L. Weaver, 1998 117,692 10,000 987 1,483
Vice President - 1997 110,000 0 718 1,699
Construction 1996 110,000 25,000 629 825
William O. Burgess, 1998 114,231 20,000 23,251 1,283
Vice President - 1997 110,000 0 9,018 0
Purchasing 1996 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.
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<PAGE>
The Company has a Compensation Committee made up of Peter Pflaum, Allan
Lundgren, James Weaver, Laurie Vercnocke and Linda Freiboth, Human Resources
Manager. The Committee establishes guidelines for the managers of the Company in
regard to compensation and makes all final decisions and recommendations
regarding compensation of non-Executive employees.
Directors of the Company are not compensated for their services as
directors.
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<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, 1998 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
Wayzata, MN 55391 Common 1,845 18.4%
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 Voting Common 594 100.0%
group (8 persons)
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,
1998.
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<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, 25 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 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 created 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 were required to make certain minimum purchases per year. In 1998,
option payments totaled just under $200,000. The initial purchase price for the
shares under the Wells Option was $696.30 per share, which was the book value
per share calculated as of December 31, 1996. The purchase price increased 6%
per year. The Wells Option also terminated 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. On February 15, 1999, the Company, Patrick Wells
and Peter Pflaum signed a termination of the Wells Option and Patrick Wells
refunded the $200,000 of option fees to the Company.
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<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 $129,000 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 1998 and 1997, the shareholders did not loan money to
the Company. 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 $1.0 million of undeveloped
land and related research costs to Marsh Pointe, LLC ("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
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<PAGE>
December 31, 1999 with interest payable at 1% above prime rate. The outstanding
balance as of December 31, 1998 was $689,000. Marsh Pointe will develop the land
and the Company has an option agreement with Marsh Pointe that gives the Company
exclusive rights, but no obligation, to purchase the developed lots under terms
similar to other agreements with nonrelated parties.
In September 1997, the Company sold approximately $377,000 of research
costs for a parcel of undeveloped land to Plum Tree 3rd, LLC ("Plum Tree 3rd"),
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, 1998 was $377,000. Plum Tree 3rd will develop the land and
the Company has an option agreement with Plum Tree 3rd that gives the Company
exclusive rights, but no obligation, to purchase the developed lots under terms
similar to other agreements with nonrelated parties.
In May 1998, the Company sold approximately $230,000 of research costs for
a parcel of undeveloped land to Plum Tree 4th, LLC ("Plum Tree 4th"), which is
owned by the shareholders of the Company, in exchange for a $230,000 note
receivable. The note receivable is due on demand and matures on December 31,
2000 with interest payable at 1% above prime rate. The outstanding balance as of
December 31, 1998 was $230,000. Plum Tree 4th will develop the land and the
Company has an option agreement with Plum Tree 4th that gives the Company
exclusive rights, but no obligation, to purchase the developed lots under terms
similar to other agreements with nonrelated parties.
36
<PAGE>
PART IV
ITEM 14. EXHIBITS, 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
Years Ended December 31, 1997 and 1998
Report of Independent Accountants for the Year Ended
December 31, 1996
Consolidated Balance Sheets, December 31, 1997 and 1998
Consolidated Statements of Operations and Retained
Earnings for the Years Ended December 31, 1996, 1997 and
1998
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996, 1997 and 1998
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.
37
<PAGE>
(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 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.
38
<PAGE>
(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 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.
39
<PAGE>
(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.
(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.
40
<PAGE>
(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. 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.
41
<PAGE>
(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 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)10.67 Acquisition and Closing Agreement, dated as of May 16, 1997, by
and between the Company and Marsh Pointe LLC 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)10.68 Form of Option Agreement between the company and Marsh Pointe
LLC 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)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.
42
<PAGE>
(10)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)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)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)10.73 Loan Agreement, dated as of November 13, 1997, by and between
the Company and Norwest Bank Minnesota, National Association.
(10)10.74 Revolving Real Estate Note, dated November 13, 1997, by the
Company in favor of Norwest Bank Minnesota, National
Association.
(10)10.75 Master Sale and Rental Agreement, dated as of December 31,
1997, by and between the Company and National Model Homes, Inc.
(10)10.76 Agreement, dated March 1, 1998, by and between the Company,
Patrick Wells and Peter Pflaum.
(11)10.77 Second Amendment and Extension of Promissory Note, dated March
21, 1998, of the Company and U.S. Bank National Association.
(11)10.78 Second Amendment to Letter Agreement, dated March 21, 1998,
between the Company and U.S. Bank National Association.
(11)10.79 Letter Agreement, dated March 26, 1998, between the Company and
Builders Development & Finance, Inc.
(12)10.80 Partial Assignment of Option, dated May 29, 1998, between the
Company and Plum Tree 4th LLC.
(12)10.81 Form of Option Agreement between the Company and Plum
Tree 4th LLC.
(12)10.82 Third Amendment to Letter Agreement, dated April 29, 1998,
between the Company and U.S. Bank National Association.
(12)10.83 Third Amendment, Extension and Reaffirmation Agreement, dated
as of May 31, 1998, by and between the Company and Norwest Bank
Minnesota, National Association.
(12)10.84 Sixth Amended and Restated Revolving Note, dated as of May 31,
1998, by and between the Company and Norwest Bank Minnesota,
National Association.
43
<PAGE>
(12)10.85 Consent and Reaffirmation of Guaranty, dated as of May 31,
1998, by and between the Company and Norwest Bank Minnesota,
National Association.
(12)10.86 Acquisition and Closing Agreement, dated as of June 9, 1998, by
and between the Company and BF Holding Company.
(12)10.87 Form of Option Agreement between the Company and BF Holding
Company.
(12)10.88 Revolving Construction and Development Loan Agreement, dated as
of July 13, 1998, by and between the Company and U.S. Bank
National Association.
(12)10.89 Development Note, dated as of July 13, 1998, by and between the
Company and U.S. Bank National Association.
(12)10.90 Revolving Note, dated as of July 13, 1998, by and between the
Company and U.S. Bank National Association.
10.91 Amended and Restated Revolving Construction and Development
Loan Agreement dated December 23, 1998 by and between the
Company and U.S. Bank National Association.
10.92 Fourth Amendment and Restatement of Promissory Note, dated as
of December 23, 1998, of the Company and U.S. Bank National
Corporation.
10.93 Fourth Amendment to Letter Agreement, dated December 24, 1998,
between the Company and U.S. Bank National Association.
10.94 Letter dated March 1, 1999, from Patrick C. Wells to the
Company, rescinding his Option Agreement and Option Provisions.
(4)18.1 Letter on accounting change, PricewaterhouseCoopers LLP
(formerly Coopers & Lybrand, LLP), dated May 12, 1995.
27.0 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.
44
<PAGE>
(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.
(10) 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,
1997.
(11) 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,
1998.
(12) 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,
1998.
(b) Reports on Form 8-K.
None.
45
<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: April 15, 1999
---------------------------
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 April 15, 1999
- ----------------------------- (Principal Executive Officer)
Peter Pflaum (Principal Financial Officer)
/s/ Edmund M. Lundgren Vice President and Director April 15, 1999
- -----------------------------
Edmund M. Lundgren
/s/ Allan D. Lundgren Vice President, Secretary/ April 15, 1999
- ----------------------------- Treasurer and Director
Allan D. Lundgren
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.
46
<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
-------
10.91 Amended and Restated Revolving Construction and Development
Loan Agreement dated December 23, 1998, by and between the
Company and U.S. Bank National Association.
10.92 Fourth Amendment and Restatement of Promissory Note, dated as
of December 23, 1998, of the Company and U.S. Bank National
Association.
10.93 Fourth Amendment to Letter Agreement, dated December 24, 1998,
between the Company and U.S. Bank National Association.
10.94 Letter dated March 1, 1999, from Patrick C. Wells to the
Company, rescinding his Option Agreement and Option
Provisions.
27.0 Financial Data Schedule.
47
<PAGE>
LUNDGREN BROS. CONSTRUCTION, INC.
AND SUBSIDIARIES
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PAGE
----
INDEPENDENT AUDITORS' REPORT AS OF DECEMBER 31, 1997
AND 1998 AND FOR THE YEARS THEN ENDED 49
REPORT OF INDEPENDENT ACCOUNTANTS
FOR THE YEAR ENDED DECEMBER 31, 1996 50
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1997 and 1998 51
Consolidated Statements of Operations and Retained Earnings for
the Years Ended December 31, 1996, 1997, and 1998 52
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997, and 1998 53
Notes to Consolidated Financial Statements 54 - 65
48
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Lundgren Bros. Construction, Inc.
We have audited the accompanying consolidated balance sheets of Lundgren Bros.
Construction, Inc. and Subsidiaries (the Company) as of December 31, 1997 and
1998, and the related consolidated statements of operations and retained
earnings and of cash flows for the years 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 audits. The
consolidated financial statements of the Company as of December 31, 1996 and for
the year then ended were audited by other auditors whose report, dated March 7,
1997, expressed an unqualified opinion on those statements.
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 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 1998, and the
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
March 25, 1999
49
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Lundgren Bros. Construction, Inc.:
We have audited the accompanying consolidated statements of income and retained
earnings and cash flows of Lundgren Bros. Construction, Inc. and Subsidiaries
(the "Company") for the year ended December 31, 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 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 consolidated results of operations and
cash flows of Lundgren Bros. Construction, Inc. and Subsidiaries for the year
ended December 31, 1996 in conformity with generally accepted accounting
principles.
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
March 7, 1997
50
<PAGE>
LUNDGREN BROS. CONSTRUCTION, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------------------
1997 1998
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,979 $ 2,257
Restricted cash 1,947 2,662
Receivables, net 1,410 1,660
Notes receivable - affiliates 1,066 1,465
Deposits and prepaid expenses 3,042 2,528
Inventories 35,614 39,601
Income taxes receivable 334 --
Land option and earnest money deposits 1,138 2,166
Property and equipment, net 1,517 1,620
Deferred income taxes 206 513
Other assets 4,531 5,015
-------- --------
$ 52,784 $ 59,487
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Obligations under bank lines of credit $ 7,457 $ 3,499
Debt obligations 27,730 31,905
Obligations under capital leases 447 424
Accounts payable 7,185 8,619
Cost to complete sold homes 469 2,676
Customer deposits 1,060 2,200
Accrued expenses 1,687 1,889
Income taxes payable -- 813
-------- --------
46,035 52,025
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 6,650 7,363
-------- --------
6,749 7,462
-------- --------
$ 52,784 $ 59,487
======== ========
</TABLE>
See notes to consolidated financial statements.
51
<PAGE>
LUNDGREN BROS. CONSTRUCTION, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------------------------
1996 1997 1998
<S> <C> <C> <C>
REVENUES $ 69,798 $ 68,658 $ 91,296
COST OF REVENUES 59,052 60,839 80,323
-------- -------- --------
Gross profit 10,746 7,819 10,973
OPERATING EXPENSES:
Selling 2,728 2,712 3,192
General and administrative 4,510 3,816 4,624
-------- -------- --------
3,508 1,291 3,157
OTHER INCOME (EXPENSES):
Interest (1,811) (2,450) (2,268)
Other, net 168 23 196
-------- -------- --------
Income (loss) from continuing operations before
income taxes 1,865 (1,136) 1,085
INCOME TAX PROVISION (BENEFIT) 709 (489) 372
-------- -------- --------
Income (loss) from continuing operations 1,156 (647) 713
-------- -------- --------
DISCONTINUED OPERATIONS, NET OF INCOME TAXES:
Loss from operations (104) -- --
Estimated loss on disposal (41) -- --
-------- -------- --------
Loss from discontinued operations (145) -- --
-------- -------- --------
NET INCOME (LOSS) 1,011 (647) 713
RETAINED EARNINGS AT BEGINNING OF YEAR 6,286 7,297 6,650
-------- -------- --------
RETAINED EARNINGS AT END OF YEAR $ 7,297 $ 6,650 $ 7,363
======== ======== ========
INCOME (LOSS) PER SHARE - basic and diluted:
Continuing operations $ 109 $ (61) $ 67
Discontinued operations (14) -- --
-------- -------- --------
Net income (loss) $ 95 $ (61) $ 67
======== ======== ========
SHARES USED IN COMPUTING INCOME
PER SHARE - basic and diluted 10,625 10,625 10,625
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
52
<PAGE>
LUNDGREN BROS. CONSTRUCTION, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
(IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------
1996 1997 1998
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,011 $ (647) $ 713
Loss from discontinued operations 145 -- --
-------- -------- --------
Income (loss) from continuing operations 1,156 (647) 713
Adjustments to reconcile income (loss) from continuing operations to
net cash (used in) provided by continuing operating activities:
Depreciation and amortization 386 331 402
Amortization of debt issuance costs 68 120 120
Increase in cash surrender value of life insurance (486) (440) (437)
Deferred income taxes (55) (140) (307)
(Gain) loss on disposal of property and equipment (3) -- 10
Gain on sale of investment (123) -- --
Changes in operating assets and liabilities (2,084) 2,527 1,171
-------- -------- --------
Net cash (used in) provided by continuing
operating activities (1,141) 1,751 1,672
Net cash used in discontinued operations (374) (115) --
-------- -------- --------
Net cash (used in) provided by operating activities (1,515) 1,636 1,672
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment (343) (365) (522)
Proceeds on disposal of property and equipment 4 57 7
Proceeds from sale of investment 159 -- --
Other 14 (8) 5
-------- -------- --------
Net cash used in investing activities (166) (316) (510)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank lines of credit 34,616 32,705 36,548
Payment of principal on bank lines of credit (35,279) (28,235) (40,506)
Proceeds from debt obligations 45,914 40,687 58,784
Payment of principal on debt obligations (44,786) (45,669) (55,687)
Payment of principal on capital lease obligations (6) (52) (23)
Payment of debt issuance costs (509) (30) --
-------- -------- --------
Net cash used in financing activities (50) (594) (884)
-------- -------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,731) 726 278
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,984 1,253 1,979
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,253 $ 1,979 $ 2,257
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
53
<PAGE>
LUNDGREN BROS. CONSTRUCTION, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
(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 99% of these funds
being held in the Company's principal banking institution at December
31, 1997 and 1998. 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 development and construction costs
onto its customers and expects to be able to do so in the
54
<PAGE>
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 - The Company measures any impairments of its inventories
of land held for future development, land under development, developed
land, and homes under construction as the amount by which carrying
value exceeds the fair value of the asset. Fair value is the amount at
which a property could be bought or sold (less transaction costs) in a
current transaction between willing parties. Model home inventories
are homes which are constructed for showcasing and marketing the
Company's product offerings. Model home inventories are measured for
impairment based upon the amount by which carrying value exceeds fair
value less costs to sell. Provisions to reduce land and housing
inventories to the lower of cost or fair value less costs to sell were
not significant for all periods presented. Sold units are expensed on
a specific identification basis as cost of sales. Included in
inventories are related interest and property taxes.
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.
LONG LIVED ASSETS - Impairment of long-lived assets is reviewed
annually or when events and circumstances warrant an earlier review.
In accordance with SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF.
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
55
<PAGE>
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.
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
weighted average outstanding shares of common stock for 1996, 1997,
and 1998 are 10,625 shares. The basic and diluted amounts are the same
because the Company had no dilutive securities outstanding 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.
FINANCIAL INSTRUMENTS - The Company believes that fair value
approximates recorded values for such financial instruments as cash
and cash equivalents, trade receivables and payables, short-term debt
and option deposits because of the typically liquid, short-term
nature, market rate terms, and lack of specific concentration of these
instruments. The fair value of the 1993 and 1996 subordinated
debentures cannot be readily determined as they are not actively
traded on the open market.
NEW ACCOUNTING STANDARDS - In June 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 130, REPORTING COMPREHENSIVE INCOME.
Comprehensive income includes net income and several other items that
current accounting standards require to be recognized outside of net
income. This standard requires enterprises to display comprehensive
income and its components in financial statements, to classify items
of comprehensive income by their nature in financial statements, and
to display the accumulated balances of other comprehensive income in
stockholders' equity separately from retained earnings and additional
paid-in capital. The Company adopted SFAS No. 130 during 1998, and
there were no items of other comprehensive income for all periods
presented.
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION, replacing SFAS No. 14 and
its amendments. This standard requires enterprises to report certain
information about products and services, activities in different
geographic areas, reliance on major customers, and to disclose certain
operating segment information in their financial statements. Operating
segments are components of an enterprise for which financial
information is available and evaluated by the enterprise's chief
operating decision-maker in allocating resources and assessing
performance. The Company adopted SFAS No. 131 during 1998. The Company
has determined that it operates in one segment. In addition, all long
lived assets are located in, and all revenue is derived from,
customers within Minnesota.
56
<PAGE>
During 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which is effective for the Company
in 2000. The Company is currently evaluating the impact, if any, of
this statement.
RECLASSIFICATIONS -- Certain reclassifications were made to the
December 31, 1997 consolidated financial statements in order to
conform to the presentation of the December 31, 1998 consolidated
financial statements. These reclassifications had no impact on
consolidated net income or retained earnings as previously reported.
2. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
December 31
-----------------
1997 1998
<S> <C> <C>
Receivables:
Trade $ 1,014 $ 724
Escrows 336 623
Contracts and notes 6 3
Employees and officers 37 16
Other 72 399
------- -------
1,465 1,765
Less allowance for doubtful accounts 55 105
------- -------
$ 1,410 $ 1,660
======= =======
Approximate amount of receivables due within one year $ 1,410 $ 1,660
======= =======
Inventories:
Homes under construction $13,808 $19,813
Model homes 492 2,138
Developed lots 12,338 10,741
Land under development -- 1,057
Land held for future development 8,976 5,852
------- -------
$35,614 $39,601
======= =======
Property and equipment:
Land $ 193 $ 193
Building and leasehold improvements 1,427 1,452
Furniture and fixtures 1,080 1,449
Equipment 687 742
------- -------
3,387 3,836
Less accumulated depreciation and amortization 1,870 2,216
------- -------
$ 1,517 $ 1,620
======= =======
Other assets:
Cash surrender value of life insurance $ 3,545 $ 3,982
Debt issuance costs, net of accumulated amortization of
$320 and $440 at December 31, 1997 and 1998, respectively 758 638
Other 228 395
------- -------
$ 4,531 $ 5,015
======= =======
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
December 31
------------------------------
1997 1998
<S> <C> <C>
Accrued expenses:
Payroll, bonuses, and payroll taxes $ 609 $ 1,147
Other 1,078 742
------------ ------------
$ 1,687 $ 1,889
============ ============
</TABLE>
<TABLE>
<CAPTION>
December 31
------------------------------------------------
1996 1997 1998
<S> <C> <C> <C>
Interest expense:
Interest $ 3,578 $ 4,104 $ 4,380
Less capitalized interest (1,835) (1,774) (2,232)
Amortization of debt issuance costs 68 120 120
------------ ------------ ------------
$ 1,811 $ 2,450 $ 2,268
============ ============ ============
Other income (expense):
Gain on sale of investment $ 123 $ - $ -
Other, net 45 23 196
------------ ------------ ------------
$ 168 $ 23 $ 196
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
December 31
------------------------------------------------
1996 1997 1998
<S> <C> <C> <C>
Changes in operating assets and liabilities:
Restricted cash $ (256) $ (875) $ (715)
Receivables (229) (144) (209)
Deposits and prepaid expenses (871) (456) (18)
Inventories 420 4,203 (3,099)
Land option and earnest money deposits 126 (343) (746)
Other assets (11) (91) (172)
Accounts payable (1,294) 1,359 1,434
Cost to complete sold homes (256) (486) 2,207
Customer deposits (157) (189) 1,140
Accrued expenses 431 (213) 202
Income taxes 13 (238) 1,147
------------ ------------ ------------
$ (2,084) $ 2,527 $ 1,171
============ ============ ============
Cash paid (received) for:
Interest, net of amount capitalized $ 1,408 $ 2,224 $ 2,299
Income taxes $ 816 $ (112) $ (468)
</TABLE>
The Company acquired land for development under promissory notes with
the sellers aggregating $4,318, $2,242, and $305 for the years ended
December 31, 1996, 1997, and 1998, respectively.
58
<PAGE>
3. DISCONTINUED OPERATIONS
Effective November 30, 1996, the Company adopted a plan to discontinue
operations of its remodeling division. Accordingly, the 1996 statement
of operations reports separately the operating results of the
division.
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 year ended December 31:
1996
Sales $ 3,772
Loss before income taxes (169)
Loss from discontinued operations (104)
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. In May 1998, the Company accepted a note receivable
from another related LLC for land development costs totaling $229. 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 was $1,066 and $1,297 as of December 31, 1997 and 1998,
respectively. The LLCs will develop the land and the Company has
option agreements with the LLCs that gives the Company exclusive
rights, but no obligation, to purchase the developed lots under terms
similar to other agreements with nonrelated parties.
5. EQUITY INVESTMENTS
At December 31, 1997 and 1998, 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
accounted for by the equity method. The Company's aggregate investment
in these partnerships was approximately $136 and $164 at December 31,
1997 and 1998, respectively. The Company's share of the partnerships'
operating results was approximately $11, $13, and $33 for the years
ended December 31, 1996, 1997, and 1998, respectively.
6. LINES OF CREDIT AND DEBT OBLIGATIONS
The Company has a working capital line of credit of $4,750 subject to
renewal May 31, 1999, 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, 1998, borrowings under the line of credit
are limited to $4,482, which is the sum of
59
<PAGE>
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 $3,083 and $658 at December 31, 1997 and 1998, 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 $3,500, expiring June 30, 1999, with interest at 3% over the
prime rate, due on demand. At December 31, 1998, borrowings under the
line of credit are limited to $2,767 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 $3,344
and $1,536 at December 31, 1997 and 1998, respectively.
The Company also has a working capital line of credit of $1,500, due
on demand, subject to renewal May 31, 1999, with interest at 1% over
the prime rate. At December 31, 1998, borrowings under the line of
credit are limited to the lesser of $1,500, or 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
personally guaranteed by the stockholders. The Company had an
outstanding balance on the line of credit of $930 and $1,230 at
December 31, 1997 and 1998, respectively.
A subsidiary of the Company has a working capital line of credit of
$125 subject to renewal April 15, 1999, with interest at 4.5% over the
three-month U.S. treasury bill interest rate (5.5% and 4.5% at
December 31, 1997 and 1998, respectively), due on demand. The Company
had an outstanding balance on the line of credit of $100 and $75 at
December 31, 1997 and 1998, respectively.
The prime rate was 8.50% and 7.75% at December 31, 1997 and 1998,
respectively.
Other debt obligations at December 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
December 31
------------------------------
1997 1998
<S> <C> <C>
Construction loans on single family homes, with interest at 1%
to 3% above the prime rate $ 9,253 $ 15,254
Development loans, with interest at 2% to 5% above the prime rate,
but not to be less than 8% or more than 18% 6,128 7,282
Promissory notes, with interest at 6% to 10.5% 4,658 1,961
1996 subordinated debenture series, with interest at 11% 3,000 3,000
1993 subordinated debenture series, with interest at 10% 2,945 2,945
Street, sewer, and water assessments on land under development
and lots held for sale, with interest at 7% to 11% 1,047 864
Installment loans, with interest from 5.9% to 11% 622 599
Other 77 -
------------ ------------
$ 27,730 $ 31,905
============ ============
</TABLE>
60
<PAGE>
The construction loans, development loans, and promissory notes are
collateralized by substantially all of the Company's inventories, and
in some instances, the personal guarantees of the 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 beginning in 1999. 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.
The weighted average interest rate on short-term borrowings was 10.02%
and 9.82% at December 31, 1997 and 1998, respectively.
The approximate principal payments on obligations, based on the
scheduled maturity dates at December 31, 1998, are set forth by year
below.
1999 $ 17,191
2000 3,463
2001 2,338
2002 2,637
2003 2,945
Thereafter 3,331
-------------
$ 31,905
==============
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 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.
61
<PAGE>
CAPITAL LEASES - Minimum future lease obligations under capital lease
for the Company's primary office building as of December 31, 1998, are
as follows:
<TABLE>
<S> <C>
Year ending December 31:
1999 $ 117
2000 117
2001 117
2002 117
2003 117
2004 to 2009 682
------------
Total minimum lease payments 1,267
Less amount representing interest and consumer price index adjustment 843
------------
Present value of minimum lease payments $ 424
============
</TABLE>
Capital lease and real estate tax payments to the affiliated
partnership were $141, $150, and $153 for the years ended December 31,
1996, 1997, and 1998, respectively.
The cost and accumulated amortization of a building and equipment
under capital leases were $607 and $369 at December 31, 1997, and $607
and $389 at December 31, 1998, respectively.
OPERATING LEASES - The Company leases model homes, agreements under
which the Company is committed to rentals of $83 in 1999. The Company
also leases vehicles, for which rentals are committed of $42 in 1999.
In addition, the Company leases an office and warehouse building with
annual base rentals of approximately $40 through April 1999. Certain
equipment is leased under operating leases with terms of one year or
less. Rental expense was approximately $217, $397, and $764 for the
years ended December 31, 1996, 1997, and 1998, 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
------------------------
1997 1998
Option payments $ 1,138 $ 2,066
Earnest money deposits - 100
--------- ---------
$ 1,138 $ 2,166
========= =========
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 $3,630 at December 31, 1998, related to the earnest
money deposits.
62
<PAGE>
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 $260
and $398 for the years ended December 31, 1996 and 1998, 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 $54, $45, and $61 were made for the years ended
December 31, 1996, 1997, and 1998, 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, 1996, 1997, or 1998.
63
<PAGE>
10. INCOME TAXES
The components of the provision for income taxes for the years ended
December 31, 1996, 1997, and 1998 are as follows:
<TABLE>
<CAPTION>
December 31
-------------------------
1996 1997 1998
<S> <C> <C> <C>
Currently payable (receivable):
Federal $ 579 $(355) $ 605
State 185 6 74
Deferred (55) (140) (307)
----- ----- -----
Income tax provision for continuing operations 709 (489) 372
Income tax provision for:
Discontinued operations (90) -- --
----- ----- -----
$ 619 $(489) $ 372
===== ===== =====
</TABLE>
Net deferred income tax assets include the following:
<TABLE>
<S> <C> <C> <C>
Depreciation $ 95 $ 97 $ 136
Accrued bonus pay 38 -- --
Discontinued operations 25 -- --
Interest expensed on land mortgages (259) (291) (299)
Estimated costs to complete lots sold 90 108 411
Accrued vacation pay 44 48 67
Inventory capitalization 53 86 116
Allowance for doubtful accounts receivable 21 22 46
Accrued warranty 19 19 38
State net operating loss carryforward (expiring 2012) -- 115 --
Other 4 2 (2)
----- ----- -----
$ 130 $ 206 $ 513
===== ===== =====
</TABLE>
The reconciliation of the statutory federal income tax rate with the
effective income tax rate for continuing operation is as follows:
<TABLE>
<CAPTION>
December 31
-------------------------
1996 1997 1998
<S> <C> <C> <C>
Statutory income tax rate 35.0% (35.0)% 35.0%
Increase (reduction) in tax resulting from:
State taxes, net of federal benefits 7.2 (9.8) 5.8
Increase in cash surrender value of life insurance
policies in excess of policy premiums paid (3.6) (4.0) (3.4)
Effect of graduated rate (1.0) 1.0 (1.0)
Other .4 4.8 (2.1)
---- ----- ----
38.0% (43.0)% 34.3%
==== ===== ====
</TABLE>
64
<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 statements of the
Company.
13. SUBSEQUENT EVENT
On February 16, 1999, the company's shareholders entered into a
nonbinding agreement with a third party to sell all of the issued and
outstanding shares of the Company. Among other things, the transaction
is subject to the execution of a definitive agreement and satisfactory
completion of due diligence. There can be no assurance that the
transaction will be completed as contemplated.
* * * * * *
65
EXHIBIT 10.91
AMENDED AND RESTATED
REVOLVING CONSTRUCTION AND DEVELOPMENT LOAN AGREEMENT
THIS AGREEMENT, made and entered into as of the __23__ day of
December, 1998, by and between LUNDGREN BROS. CONSTRUCTION, INC., a Minnesota
corporation (hereinafter referred to as "Borrower"), whose address is 935 East
Wayzata Boulevard, Wayzata, Minnesota 55391; and U.S. BANK NATIONAL ASSOCIATION
(formerly known as First Bank National Association), a national banking
association (hereinafter referred to as "Lender"), whose address is 601 Second
Avenue South, Minneapolis, Minnesota 55402-4302.
PRELIMINARY RECITALS:
A. Borrower and Lender entered into a Revolving and Construction
Loan Agreement dated as of April 18, 1997 (the "Original Loan Agreement"),
pursuant to which Lender agreed to lend to Borrower up to Five Million and
00/100 Dollars ($5,000,000.00) under the terms and conditions of the Loan
Agreement (the "Loan").
B. The Loan was evidenced by the Original Note (as defined below).
C. The Original Note was secured by the Original Mortgage (as
defined below).
D. The Original Note was further secured by a Guaranty (as defined
below) and other collateral security agreements given by Borrower or the
Guarantors to Lender, all dated April 18, 1997.
E. The Borrower has requested an increase in the maximum amount of
the Loan from $5,000,000.00 to $7,500,000.00, and amendments to certain other
provisions of the Loan Agreement, to which Lender is agreeable subject to the
terms of this Agreement.
F. The parties hereto desire to amend and fully restate the terms of
the Original Loan Agreement in its entirety.
NOW, THEREFORE, in consideration of the above recitals and other
good and valuable consideration, the receipt of which is hereby acknowledged,
Borrower and Lender do hereby amend and fully restate the terms of the Original
Loan Agreement as follows:
DEFINITIONS
For the purposes of this Agreement, the following terms shall have
the following meanings:
Acquisition Costs: All costs of acquiring Project Land, including
the purchase price and reasonable and customary closing costs; provided,
however, that Acquisition Costs with respect to any Project Land shall be deemed
never to exceed the lesser of (a) the actual cost of the Project Land, or (b)
the value of the unimproved Project Land in "as-is" condition as shown by
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an Appraisal (to the extent that an Appraisal is required by this Agreement with
respect to such Project Land).
Advance: Any portion of the Loan advanced by Lender to or for the
benefit of Borrower in accordance with the terms hereof.
Advance Date: The date on which an Advance of Loan proceeds
requested by Borrower hereunder is funded.
Affiliate: When used with reference to any Person, (a) each Person
that, directly or indirectly, controls, is controlled by or is under common
control with, the Person referred to, (b) each Person which beneficially owns or
holds, directly or indirectly, five percent (5%) or more of any class of voting
stock of the Person referred to (or if the Person referred to is not a
corporation, five percent (5%) or more of the equity interest therein), (c) each
Person, five percent (5%) or more of the voting stock (or if such Person is not
a corporation, five percent (5%) or more of the equity interest therein) of
which is beneficially owned or held, directly or indirectly, by the Person
referred to, and (d) each of such Person's officers, directors, joint venturers
and partners. The term control (including the terms "controlled by" and "under
common control with") means the possession directly or indirectly, of the power
to direct or cause the direction of the management and policies of the Person in
question.
Agreement: This Amended and Restated Revolving Construction and
Development Loan Agreement including all Project Addenda and any other
amendments hereof and supplements hereto executed by Borrower and Lender.
Amendment of Mortgage: The Amendment of Mortgage to be executed at
the time that an additional Project is approved by Lender for the purpose of
subjecting such Project to the lien of the Mortgage. The form of the Amendment
of Mortgage shall be as set forth in Exhibit "A" attached hereto with the
insertion of the applicable legal description being added for such Project.
Amendment of Mortgage to Increase Loan Amount: The Amendment of
Mortgage to be executed with the execution of this Agreement for the purpose of
increasing the Loan amount and extending the Maturity Date of the Mortgage. The
form of the Amendment of Mortgage to Increase Loan Amount shall be as set forth
in Exhibit "D" attached hereto with the insertion of the applicable legal
description as of the date of the execution of this Agreement.
Applicable Margin: One and one-quarter percent (1.25%).
Application and Certificate For Payment: The Application and
Certificate for Payment in the form of that attached hereto as Exhibit "B" which
shall be used in connection with all Advances for Development Loans.
Appraisal: A third-party appraisal of the value of a Project setting
forth the value of the unimproved Project Land in an "as is" condition and the
value of the improved Project Land based on the retail sales value of the
finished lots in the case of a Development Project and the retail sales value of
the finished lot and the home to be constructed thereon in the case of a
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Construction Project commissioned and/or approved by, and addressed to, Lender,
and prepared at the expense of Borrower by a qualified and licensed MAI
appraiser acceptable to Lender, which complies with all applicable Governmental
Requirements and the requirements of Lender and its chief review appraiser.
Board: The Board of Governors of the Federal Reserve System or any
successor thereto.
Borrowing Base Certificate: The Borrowing Base Certificate in the
form of that attached hereto as Exhibit "C".
Budget: An itemized, certified statement of actual and estimated
Costs, including all Acquisition Costs, Construction Costs and Soft Costs, of a
Project, in Lender's form, signed and sworn to by Borrower, as the same may be
amended or supplemented with approval of Lender from time to time.
Business Day: Any day (other than a Saturday, a Sunday or a legal
holiday in the State of Minnesota) on which national banks are permitted to be
open.
City: The municipality, village, township or other applicable
governmental entity in which the Project is located and from which governmental
approvals or permits are required.
Closing Date: The date of this Agreement.
Code: The Internal Revenue Code of 1986, as amended.
Completion Date: The date on which Completion of a Project occurs,
but in no event later than (a) the date specified therefor on the Project
Addendum relating to a Development Project, and (b) the date specified in Column
I of the Borrowing Base Certificate.
Consolidated Indebtedness: All Indebtedness of Borrower and its
Consolidated Subsidiaries (excluding intercompany items and all Shareholders
Subordinated Debt), after making appropriate deductions for any minority
interests.
Consolidated Net Income: For any period shall mean the amount of
consolidated net income (or loss) of Borrower and its Consolidated Subsidiaries
for such period determined on a consolidated basis in accordance with generally
accepted accounting principles, after eliminating all intercompany items and
portions of earnings properly attributable to minority interests, if any, in the
Consolidated Subsidiaries; provided, however, that there shall not be included
in Consolidated Net Income any net income (or net loss) of a Consolidated
Subsidiary for any period during which it was not a Consolidated Subsidiary, or
any net income (or net loss) of any business, properties or assets acquired (by
way of merger, consolidation, purchase or otherwise) by Borrower or any
Consolidated Subsidiary for any period prior to the acquisition thereof.
Consolidated Subsidiary: A Subsidiary of Borrower whose financial
statements are included in the most recent annual consolidated financial
statements of Borrower and its Subsidiaries.
Consolidated Tangible Net Worth: The dollar amount of:
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(a) the tangible assets of Borrower and its Consolidated
Subsidiaries (excluding intercompany items) after
deducting for minority interests and adequate reserves
in each case where, in accordance with generally
accepted accounting principles, a reserve is proper, in
excess of
(b) the aggregate amount of Consolidated Indebtedness and
Shareholders Subordinated Debt;
provided, however, that (i) inventory shall be taken into account on the basis
of the cost or current market value, whichever is lower, (ii) in no event shall
there be included as such tangible assets (a) any assets typically classified as
intangible assets, including but not limited to patents, trademarks, trade
names, copyrights, licenses, goodwill and debt issuance costs, or (b) treasury
stock or any securities or Indebtedness of Borrower or a Consolidated
Subsidiary, or any other equity, convertible or unsecured debt securities unless
the same are readily marketable in the United States of America or entitled to
be used as a credit against Federal income tax liabilities, and (iii) securities
included as such tangible assets shall be taken into account at their current
market price or cost, whichever is lower, and (iv) any write-up in the book
value of any assets subsequent to December 31, 1995, shall not be taken into
account. The Consolidated Tangible Net Worth as of September 30, 1998 was
$5,586,000.
Construction Costs: All hard costs of constructing Project
Improvements, including site preparation costs and the costs of all materials,
labor and equipment.
Construction Project: The construction of a single-family home or a
two to eight-unit multifamily structure on Construction Project Land, all as
approved by Lender in accordance with Section 2.4 hereof.
Construction Project Completion: All Construction Project
Improvements included within a Construction Project are completed in accordance
with the Plans therefor and paid for in full, free of all mechanics', laborers',
materialmen's and other similar lien claims; a certificate of substantial
completion for the Project Improvements has been signed by Borrower and Borrower
has received a certificate of occupancy from the City and has otherwise complied
with all Governmental Requirements with respect to completion of construction of
the Construction Project.
Construction Project Improvements: New single-family homes or two to
eight-unit multifamily structures and related improvements to be constructed
upon Construction Project Land and owned by Borrower.
Construction Project Land: Land owned in fee simple by Borrower to
be used for a Construction Project and upon which Construction Improvements are
located or are to be constructed.
Construction Project Loan. A Construction Project Loan made pursuant
to Section 2.4.
Consultants: Third party experts retained by Lender to assist it in
connection with approving, closing, advancing or administering the Project
Loans.
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Contingency Reserve: A reserve of Development Project Loan proceeds
to pay Costs which are in excess of the amounts thereof anticipated on the date
of approval of the Development Project, whether as a result of price increases,
changes in the Plans or otherwise, in an amount equal to a percentage of all
Construction Costs of a Development Project as mutually agreed to by Borrower
and Lender.
Contractor: Any Person, party or entity which has a contract or
subcontract under which payment may be required for any work done, material
supplied or services furnished in connection with acquiring, constructing,
financing, equipping and/or developing a Project.
Costs: All Acquisition Costs, Construction Costs and Soft Costs of a
Project.
Debt Restricted Cash: The unborrowed portion of any land development
loans to Borrower held in restricted bank accounts under financing arrangements
substantially similar to such loans made to Borrower in the past.
Default Rate: The Default Rate of interest specified in Section
1.2(b) hereof.
Development Project: The acquisition and development of Development
Project Land into (a) single family housing subdivisions, or (b) two to eight
unit multi-family housing subdivisions, all as approved by Lender in accordance
with Section 2.2 hereof.
Development Project Completion: All Development Project Improvements
included within a Development Project (except for final paving or other similar
items, the completion of which is secured by a Letter of Credit deposited with
the City) are completed in accordance with the Plans therefor, as approved by
Lender, and paid for in full, free of all mechanics', laborers', materialmen's
and other similar lien claims; said completion has been approved and certified
by the General Contractors and by the Inspecting Architect; a certificate of
substantial completion for the Project Improvements has been signed by Borrower
and the General Contractors and delivered to Lender, and no punch-list items
remain to be completed; Lender has received acceptable evidence that all
Governmental Requirements and all private restrictions and covenants relating to
the Project have been complied with or satisfied; Lender has received copies of
all warranties, if any, from suppliers covering materials included within the
Development Project; Lender has received an as-built survey of the Project which
conforms with Lender's requirements.
Development Project Improvements: All improvements, including all
improvements required by the City, which are necessary for the completion of a
Development Project including, but not limited to, the construction of roads,
utilities, curbs, gutters, signage, grading and landscaping, all in accordance
with Plans approved by Lender and Inspecting Architect.
Development Project Land: Land owned or acquired in fee simple by
Borrower to be used for a Development Project and upon which Development Project
Improvements are located or are to be constructed.
Development Project Loan: A Project Loan made pursuant to Sections
2.2 and 2.3.
5
<PAGE>
Draw Request: A written request by Borrower for an Advance of
Construction Project Loan proceeds under this Agreement, in the form Exhibit "E"
attached hereto and with the certifications set forth therein, including the
Borrowing Base Certificate.
Environmental Audit: A written Phase I environmental review, audit,
assessment or report commissioned and/or approved by, and currently addressed
and certified to, Lender, or accompanied by a reliance letter addressed which
complies with ASTM Practice E 1527 and which is otherwise acceptable to Lender,
setting forth the results of an investigation of a Development Project,
including an historical investigation of the uses and ownership of the
Development Project Land included therein, contacts with appropriate
governmental agencies and any Tests which may be requested by Lender, prepared
by a competent, qualified environmental engineer or consultant which is
acceptable to Lender and is licensed, bonded and insured in accordance with all
applicable statutes, and all supplements, updates and recertifications thereof
required by Lender.
Funded Debt: The sum of Senior Indebtedness, the Senior Subordinated
Debentures, Parity Indebtedness and Subordinated Indebtedness (except
Shareholders Subordinated Debt) less Debt Restricted Cash.
GAAP: Generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession, which are applicable to the circumstances as of any date of
determination.
General Contractor: The general contractor or construction manager
(whether one or more) retained by Borrower and approved by Lender, which
approval shall not be unreasonably withheld with respect to any Project, if
different from Borrower. Borrower may act as its own general contractor with
respect to any Construction Project.
Governmental Requirements: All laws, statutes, codes, ordinances and
governmental rules, regulations and requirements applicable to Borrower, Lender,
Guarantors and/or the Projects.
Guarantors: Edmund M. Lundgren, Allan D. Lundgren, Peter Pflaum,
Patrick Wells and Gerald T. Lundgren (each of whom is herein sometimes called a
"Guarantor").
Guaranty: The joint and several Guaranty of full payment and
performance of the obligations of Borrower under all of the other Loan
Documents, dated April 18, 1997, executed by Guarantors, including any
amendments thereof and supplements thereto executed by Guarantors and Lender.
Immediately Available Funds: Funds with good value on the day and in
the city in which payment is received.
6
<PAGE>
Improvements: The buildings and other improvements which are to be
placed or constructed upon the Project Land as a part of any Project, all of
which shall be owned by Borrower.
Indebtedness: With respect to any Person at any date means and
includes all items of indebtedness which, in accordance with generally accepted
accounting principles, would be included in determining total liabilities as
shown on the liabilities side of a balance sheet of such Person at such date,
and in addition shall include (i) all indebtedness guaranteed or endorsed (other
than for purposes of collection in the ordinary course of business), directly or
indirectly, in any manner by such Person, and contingent obligations of such
Person in respect of, or to purchase or otherwise acquire, indebtedness of
others, (ii) all lease obligations of such Person required under generally
accepted accounting principles to be capitalized and reflected as a liability on
the balance sheet of such Person, and (iii) all indebtedness secured by any
mortgage, lien, pledge, charge or encumbrance upon property owned by such
Person, whether or not the indebtedness so secured has been assumed by such
Person.
Indemnification Agreement: Lender's form of joint and several
indemnification agreement relating to environmental matters and executed by
Borrower and Guarantors, dated April 18, 1997, in favor of Lender, including any
amendments thereof and supplements thereto executed by Borrower and Guarantors,
and including the Reaffirmation of Indemnification Agreement executed by the
Borrower of even date herewith which agreement as amended will cover all Project
Land.
Inspecting Architect: The independent architect, engineer or
consultant (whether one or more) selected by Lender to advise Lender with
respect to any Project.
Lender Debt: Any indebtedness of Borrower, of any Guarantor or of
any Affiliate of Borrower or of any Guarantor to the Lender or to any Affiliate
of Lender, whether recourse or nonrecourse, except the Loan.
Letter of Credit: A performance letter of credit required to be
issued by a City or a public utility in connection with a Development Project.
Letter of Instructions: The Letter of Instructions in the form of
that attached hereto as Exhibit "F".
Loan: The aggregate of all Project Loans made by Lender to Borrower
pursuant to the terms of this Agreement in an amount of up to Seven Million Five
Hundred Thousand and 00/100 Dollars ($7,500,000.00) outstanding at any given
time (subject to the limitations set forth in Section 1.1).
Loan Documents: The documents which evidence, secure or otherwise
relate to the Loan including, but not limited to, the Note, this Agreement, the
Mortgage, the Amendment to Mortgage to Increase Loan Amount, all Amendments to
Mortgage, the Indemnification Agreement and the Reaffirmation thereof, and
including any amendments thereof and supplements thereto executed by Lender and
Borrower (and/or any other party thereto).
7
<PAGE>
Loan to Value Ratio: The ratio calculated by dividing the maximum
principal amount of a Project Loan by the market value less special assessments
of the related Project, said market value determined (a) as set forth in the
most recent Appraisal thereof, or (b) as set forth in the purchase agreement
less special assessments in the case of Construction Project Loans of less than
Two Hundred Fifty Thousand and 00/100 Dollars ($250,000.00) which are secured by
Pre-Sold Homes.
Loan Year: A period consisting of twelve (12) consecutive months
commencing on the first calendar month subsequent to the date hereof or on any
anniversary thereof, the first Loan Year being a Loan Year commencing on the
first day of May, 1997.
Management Bonuses: Management Bonuses shall have the meaning set
forth in Section 10.12 of that certain Indenture dated as of October 18, 1996 by
and between Borrower and National City Bank of Minneapolis, National Association
as Trustee.
Maturity Date: May 31, 2001 unless extended as set forth in Section
1.8 herein.
Model Home: A Construction Project which (a) is a single family home
or a unit in a two to eight unit multifamily structure, (b) not a Pre-Sold Home,
and (c) will be used as a model home by Borrower.
Mortgage: The first Mortgage and Security Agreement and Fixture
Financing Statement, dated April 18, 1997, executed and delivered by Borrower in
favor of Lender to secure the Loan, including all amendments thereof and
supplements thereto, which Mortgage shall be a first lien on all Project Land,
and was filed on _____________________________ in the office of the (COUNTY
RECORDER) (REGISTRAR OF TITLES), _____________________________ County,
Minnesota, as Document No. ___________, and which Mortgage has been amended by
the Amendments to Mortgage dated _____________________________, and filed on
__________________ in the office of the (COUNTY RECORDER) (REGISTRAR OF TITLES),
_____________________________, County, Minnesota, as Document Nos.
_______________, and which Mortgage is amended by the Amendment to Mortgage to
Increase Loan Amount (hereinafter the Mortgage and Security Agreement and
Fixture Financing Statement and all amendments thereto shall be referred to as
the "Mortgage")
Note: The Amended and Restated Revolving Credit Note, dated of even
date herewith, executed and delivered by Borrower to Lender in the face
principal amount of Seven Million Five Hundred Thousand and 00/l00 Dollars
($7,500,000.00), to evidence the Loan, as the same may be amended, modified or
replaced from time to time, which Note amends and replaces that certain
Revolving Credit Note dated April 18, 1997, from Borrower to Lender in the
original principal amount of Five Million and 00/100 Dollars ($5,000,000.00)
(the "Original Note")
8
<PAGE>
Parity Indebtedness: Any and all Indebtedness of Borrower created,
incurred, assumed, or guaranteed by Borrower before, at, or after the date of
execution of this Agreement which (a) matures by its terms, or is renewable at
the option of Borrower to a date, more than one year after the date of the
original creation, incurrence, assumption, or guaranty of such Indebtedness by
Borrower, (b) contain covenants, conditions and restrictions on Borrower which
are not inconsistent with nor violate any of the covenants, conditions and
restrictions in this Agreement, and (c) is neither Senior Indebtedness nor
Subordinated Indebtedness. Parity Indebtedness shall include, without
limitation, the Senior Subordinated Debentures.
Permitted Encumbrances: The liens, charges and encumbrances on title
to a Project approved as such by Lender prior to any Advance of proceeds of the
Project Loan therefor.
Person: Any natural person, corporation, limited liability company,
partnership (general or limited), limited liability partnership, joint venture,
firm, association, trust, unincorporated organization, government or
governmental agency or political subdivision or any other entity, whether acting
in an individual, fiduciary or other capacity.
Plans: The final working plans for Project Improvements, including
drawings, specifications, details and manuals (which in the case of Development
Projects shall have been approved by Lender).
Pollutant: Any hazardous or toxic substance, waste or material, or
other pollutant or contaminant (including, but not limited to, radioactive
materials, gasoline, asbestos, dioxin, methane, radon, urea-formaldehyde and
polychlorinated biphenyls), as those terms are defined or used in any
Governmental Requirement.
Pre-Sold Home: A Construction Project that is subject to a
non-cancelable and non-contingent purchase agreement with a bona fide third
party buyer.
Project: The Project Land and the Project Improvements which
collectively make up either a Development Project or a Construction Project.
Project Addendum: An addendum to this Agreement between Borrower and
Lender for each Development Project approved by Lender pursuant to Section 2.2,
identifying and describing the approved Development Project in detail,
supplementing this Agreement as it applies to said Development Project, setting
forth the amount of the Development Project Loan allocated thereto, setting
forth the date by which construction of the Development Project must begin
("Commencement Date") and the outside Completion Date therefor, setting forth
the estimated Costs of the Development Project and adding to this Agreement any
requirements, representations and covenants which are required by Lender as a
condition to its approval of said Development Project.
Project Improvements: All Construction Project Improvements and
Development Project Improvements.
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Project Land: All Development Project Land and Construction Project
Land.
Project Loan: The portion of the Loan set aside to fund an approved
Development Project pursuant to Section 2.2 or an approved Construction Project
pursuant to Section 2.4.
Project Loan Maturity Date: The earlier of (a) the Maturity Date, or
(b) one of the following dates depending upon the type of Project: (i) thirty
(30) months after the date on which the first Advance of the proceeds of a
Development Project Loan is made, (ii) twelve (12) months after the date on
which the first Advance of proceeds of a Construction Project Loan is made if
the Project Improvement is a Pre-Sold Home (or, if earlier, the closing date
stipulated in the Purchase Agreement), (iii) thirty (30) months after the date
on which the first Advance of proceeds of a Construction Project Loan is made if
the Project Improvement is a Model Home, or (iv) fifteen (15) months after the
date on which the first Advance of proceeds of a Construction Project Loan is
made if the Project Improvement is a Speculative Home.
Purchase Agreement: A purchase agreement for the purchase of the
Project Land to be acquired for a Development Project or a Construction Project.
Reference Rate: The rate of interest from time to time publicly
announced by Lender as its "reference rate". Lender may lend to its customers at
rates that are at, above or below the Reference Rate. For purposes of
determining any interest rate hereunder or under any Loan Document which is
based on the Reference Rate, such interest rate shall change as and when the
Reference Rate shall change.
Regulatory Change: Any change after the date hereof in federal,
state or foreign laws or regulations or the adoption or making after such date
of any interpretations, directives or requirements applying to a class of banks
including Lender under any federal, state or foreign laws or regulations
(whether or not having the force of law) by any court or governmental or
monetary authority charged with the interpretation or administration thereof.
Reimbursement Agreement: A reimbursement agreement in form and
content acceptable to Lender which governs the terms upon which a letter of
credit will be issued to a City in connection with a Development Loan.
Release Price: With respect to (a) a lot which is part of a
Development Project and which is being sold to a third party buyer or which
Borrower requests be released, unless such lot is being transferred to, and will
become part of a Construction Project pursuant to Section 3.6 hereof, the
Release Price shall equal one hundred twenty-five percent (125%) of the Transfer
Price for such lot as established by the terms of this Agreement, and (b) a lot
which is a Construction Project but which was originally part of a Development
Project, the Release Price shall equal one hundred eight percent (108%) of the
amount of the maximum approved Construction Project Loan, whether funded or not,
(with the excess proceeds, i.e., the eight percent (8%) being applied as a
prepayment of the Development Loan from which such lot was transferred), and (c)
a lot which is a Construction Project, but which was not originally part of a
Development Project, the Release Price shall equal one hundred percent (100%) of
the amount of the Construction Project Loan.
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Revolving Commitment: The obligation of Lender to make Project Loans
to Borrower in an aggregate principal amount outstanding at any time not to
exceed the Revolving Loan Amount upon the terms and subject to the conditions
and limitations set forth in this Agreement.
Revolving Commitment Ending Date: November 30, 2000 unless extended
pursuant to the terms of Section 1.8 hereof.
Revolving Loan Amount: Seven Million Five Hundred Thousand and
00/100 Dollars ($7,500,000.00).
Senior Indebtedness: The principal of, premium (if any) and interest
on any and all Indebtedness of Borrower (other than the Senior Subordinated
Debentures, Parity Indebtedness and Subordinated Indebtedness) incurred in
connection with (i) the borrowing of money (whether secured or unsecured) from
or guaranteed to banks, trust companies, insurance companies and other financial
institutions, (ii) all Indebtedness to specialized industry lenders to the
extent it is secured by real estate and/or assets of Borrower (including the
cash value of life insurance) evidenced by bonds, debentures, mortgages, notes
or other securities or other instruments, (iii) obligations under capitalized
leases as determined by GAAP, and (iv) other non-recourse obligations to third
parties in connection with the acquisition of land (but excluding option
agreements or contingent purchase agreements which Borrower has the right to
terminate unilaterally) incurred, assumed or guaranteed by Borrower before, at
or after the date of execution of this Agreement, and all renewals, extensions
and refundings thereof, unless in the instrument creating or evidencing any such
Indebtedness or pursuant to which such Indebtedness is outstanding, it is
provided that such Indebtedness, or such renewal, extension or refunding
thereof, is junior or is not superior in right of payment to the Senior
Subordinated Debentures.
Senior Subordinated Debentures: Both (a) the Senior Subordinated
Debentures, Series Ten Percent, in the amount of $3,000,000.00 and due in the
year 2003 as described in and governed by that certain Indenture dated May 14,
1993, by and between Borrower and National City Bank of Minneapolis, National
Association as Trustee, and (b) the Senior Subordinated Debentures, Series
Eleven Percent, in the amount of $3,000,000.00 and due 2004 as described in and
governed by that certain Indenture dated as of October 18, 1996, by and between
Lundgren Brothers Construction, Inc., and National City Bank of Minneapolis,
National Association as Trustee.
Shareholders Subordinated Debt: Any borrowing by Borrower from its
shareholders which is evidenced by a note or other instrument and expressly made
Subordinated Indebtedness as required by Section 10.11 of that certain Indenture
dated as of October 18, 1996 by and between Borrower and National City Bank of
Minneapolis, National Association, as Trustee, and which has a stated maturity
which is later than the stated maturity of the Senior Subordinated Debentures
described in such Indenture.
Soft Costs: Costs of a Project not attributable to Acquisition Costs
or Construction Costs, including interest on the Project Loan, fees payable to
Lender pursuant hereto, fees of Borrower's and Lender's counsel, fees of outside
accountants, costs of feasibility studies, environmental studies, permit fees,
inspection fees, fees of the Inspecting Architect and other Consultants, ad
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valorem taxes, insurance premiums, recording and filing fees and taxes, title
insurance premiums and fees, surveyor's fees and costs of internal and outside
appraisals.
Speculative Home: A Construction Project which is a single family
home, or a unit in a two to eight multifamily structure, not a Pre-Sold Home and
not anticipated to be used as a Model Home.
Subdivision. Any Development Project Land or all of the land,
whether unplatted, platted or replatted, which is being developed by Borrower or
any other Person, for the construction of single-family homes or two to
eight-unit multifamily structures as part of any subdivision authorized under
any applicable sections of Minnesota Statutes or local zoning codes or
ordinances, including any prior plats or replats thereof, shall be considered
one Subdivision (i.e., Lot 1, Block 1, Smith's Third Addition, and Lot 1, Block
1, Smith's Addition, shall be considered one Subdivision if Smith's Third
Addition is a replat of any portion of Smith's Addition or is unplatted land
that was contemplated to be added to Smith's Addition in any development
agreement relating to the development of Smith's Addition).
Subordinated Indebtedness: Any and all Consolidated Indebtedness of
Borrower created, incurred, assumed, or guaranteed by Borrower before, at, or
after the date of execution of this Agreement in which, by the terms of the
instrument (or any supplemental instrument) creating or evidencing such
Consolidated Indebtedness or pursuant to which such Indebtedness is outstanding
(a) it is provided that such Consolidated Indebtedness, or any renewal,
extension, or refunding thereof, is expressly subordinate and junior in right of
payment to the Senior Subordinated Debentures (whether or not subordinated to
any other Indebtedness of Borrower), or (b) it is not, by its terms, Senior
Indebtedness or Parity Indebtedness.
Subsidiary: Any corporation of which at least a majority of the
outstanding voting stock is owned, at the time, directly or indirectly, by
Borrower, or by one or more Subsidiaries of Borrower. For purposes of this
definition, "voting stock" means stock which ordinarily has voting power for the
election of directors, whether at all times or only so long as no senior class
of stock has such voting power by reason of any contingency.
Sworn Construction Cost Statement: An itemized, certified statement
of actual and estimated Construction Costs of a Project, in Lender's form,
signed and sworn to by Borrower and the General Contractor (if any), as the same
may be amended or supplemented with the approval of Lender from time to time.
Termination Date: The earlier of (a) the Maturity Date, or (b) the
date on which the Note is declared to be immediately due and payable pursuant to
the terms hereof or of the Note.
Tests: Such soil tests, water tests, chemical tests, materials tests
and other tests and analyses as are appropriately required to confirm, with
relative certainty, the absence of Pollutants from a Project.
Title Company: Chicago Title Insurance Company, a Missouri
corporation.
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Title Policy: A loan policy of title insurance in favor of Lender
issued by the Title Company together with such endorsements as are necessary to
evidence the addition of Projects, as approved, as additional security for the
Loan and complying with Lender's standard requirements therefor.
Total Revolving Outstandings: As of any date of determination, the
sum of the aggregate unpaid principal balance of Advances on Development Project
Loans outstanding on such date plus any amounts not yet funded for an approved
Development Project Loan.
Transfer Price: The price designated for each lot within a
Development Project which will be used as the Acquisition Cost for such lot when
transferring such lot to a Construction Project. The transfer price for each
such lot shall be established by Borrower and Lender in the Project Addendum
provided that in determining such Transfer Prices the total of all Transfer
Prices for all lots with a Development Project shall equal the amount of the
applicable Development Loan.
Unused Revolving Commitment: As of any date of determination, the
amount by which the Revolving Loan Amount exceeds the Total Revolving
Outstandings.
1. LOAN
1.1 Principal Advances
Upon the terms and subject to the conditions set forth in this
Agreement, Lender agrees to make Project Loans to Borrower on a revolving basis,
in Advances, at any time and from time to time, in accordance with the terms
hereof, from the Closing Date to the Termination Date, during which period
Borrower may borrow, repay and reborrow in accordance with the terms hereof, for
the purpose of acquiring, developing and constructing Projects; provided,
however, that (a) at no time shall Lender be obligated to lend to Borrower more
than the total amount of proceeds of the Loan which Borrower has then qualified
to receive hereunder, (b) the aggregate unpaid principal balance of all Total
Revolving Outstandings plus the aggregate unpaid principal balance of all
Construction Project Loans shall never exceed the Revolving Loan Amount, (c) the
maximum aggregate amount that may be set aside for all Development Project Loans
at any time shall be Four Million Five Hundred Thousand and 00/100 Dollars
($4,500,000.00), and the maximum number of proposed or approved Development
Project Loans at any time shall be three (3), and (d) the maximum aggregate
amount of all Construction Project Loans at any one time shall be the Revolving
Loan Amount less the Total Revolving Outstandings less the total of all Letters
of Credit on Development Projects not yet approved. All Advances shall be
evidenced by the Note. Lender shall enter in its ledgers and records the amount
of each such Advance and of each payment made upon such Advances, and Lender is
authorized by Borrower to enter on a schedule attached to the Note a record of
Advances and payments; provided, however, that the failure by Lender to make any
such entry or any error by Lender in making such entry shall not limit or
otherwise affect the obligations of Borrower hereunder and under the Note.
Notwithstanding the expressed principal amount of the Note, Borrower shall not
at any time be obligated to repay more or less than the total of all Advances
made by Lender pursuant hereto, together with interest thereon at the rates
specified below and in the Note, computed on each Advance from the date it is so
made by Lender, and all other advances made by Lender pursuant
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to the terms of the Loan Documents, with interest thereon as therein provided,
less all payments of principal of and interest on the Note, and of such advances
and interest thereon, made by Borrower. The entire unpaid principal amount of
the Loan shall be due and payable on the Termination Date, and the entire unpaid
principal amount of each Project Loan shall be due and payable on the Project
Loan Maturity Date therefor.
1.2 Interest Rate, Interest Payments and Default Interest
Interest shall accrue and be payable on the Advances from the date
made as follows:
(a) Each Advance shall bear interest on the unpaid principal
amount thereof at a varying rate per annum equal to the sum of
(i) the Reference Rate, plus (ii) the Applicable Margin.
(b) Any Advance not paid when due, whether at the date scheduled
therefor or earlier upon acceleration, shall bear interest
until paid in full at a rate per annum equal to the sum of
(A) the Reference Rate, plus (B) the Applicable Margin, plus
(C) five percent (5%) (herein called the "Default Rate").
(c) Interest shall be payable (i) with respect to each Advance, on
the first Business Day of each calendar month, commencing on
the first Business Day of the next calendar month after the
calendar month in which the first Advance is made and
continuing on the first Business Day of each month thereafter
until the Termination Date; (ii) with respect to any portion
of an Advance which is prepaid in accordance with the terms
hereof, on the date of such prepayment; and (iii) with respect
to interest at the Default Rate, on demand at Lender's option.
Interest on the Loan shall be computed on the basis of actual days elapsed and a
year of three hundred sixty (360) days.
1.3 Prepayments
Borrower may prepay Advances, in whole or in part, at any time after
three (3) Business Days' prior written notice of said prepayment from Borrower
to Lender, without premium or penalty. Any such prepayment must be accompanied
by payment, in full, of all unpaid, accrued interest on the amount prepaid.
Amounts so prepaid shall be applied to such Project Loan or Project Loans as
designated by Borrower unless a default or event of default then exists
hereunder, in which event said amounts shall be applied as Lender may elect. If
no default or event of default exists hereunder, amounts so prepaid may be
reborrowed from time to time as parts of other Project Loans (but not the same
Project Loan) in accordance with the terms of this Agreement.
1.4 Optional Termination of Revolving Commitment
Borrower may, at any time, upon not less than three (3) Business
Days' prior written notice to Lender, terminate the Revolving Commitment in its
entirety. Upon termination of the Revolving Commitment pursuant to this Section,
Borrower shall pay to Lender the full amount
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of all outstanding Advances, all accrued and unpaid interest thereon, and all
other amounts then owing from Borrower to Lender pursuant to the Loan Documents,
and Lender shall have no further obligation to make Advances hereunder.
1.5 Fees
Borrower shall pay to Lender the following fees as and when
hereinafter provided: (a) a commitment fee in the amount of Nineteen Thousand
and 00/100 Dollars ($19,000.00), payable on the Closing Date; (b) a collateral
fee in the amount of one percent (1%) of the amount set aside from the Revolving
Commitment to fund each Development Project Loan, payable with respect to each
Development Project within forty-eight (48) hours after Lender gives Borrower
written notice that Lender has accepted and approved said Development Project
("Collateral Fee"); (c) an annual Letter of Credit fee for each Letter of Credit
issued pursuant to Section 2.2 hereof in an amount equal to two percent (2%) per
annum of the outstanding amount of such Letter of Credit payable quarterly, in
advance, commencing on the date of issuance of the Letter of Credit and (d) an
annual fee in the amount of one-half of one percent (1/2%) per annum of the
Revolving Loan Amount minus (i) the outstanding principal balances of all
Development Project Loans, and (ii) the aggregate amount that Lender remains
obligated to fund with respect to each such Development Project Loan as of the
first day of each Loan Year which fee shall be due and payable on the first day
of each Loan Year beginning May 1, 1998.
1.6 Payments
Payments and prepayments of principal of, and interest on, the Note
and all fees, expenses and other obligations under this Agreement payable to
Lender shall be made without setoff or counterclaim in Immediately Available
Funds not later than 1:00 P.M. (Minneapolis time) on the dates called for under
this Agreement and the Note to the Lender at its main office in Minneapolis,
Minnesota. Funds received after such time shall be deemed to have been received
on the next Business Day. Whenever any payment to be made hereunder or on the
Note shall be stated to be due on a day which is not a Business Day, such
payment shall be made on the next succeeding Business Day and such extension of
time, in the case of a payment of principal, shall be included in the
computation of any interest on such principal payment.
1.7 Capital Adequacy
In the event that any Regulatory Change reduces or shall have the
effect of reducing the rate of return on Lender's capital or the capital of its
parent corporation (by an amount Lender deems material) as a consequence of the
Loan to a level below that which Lender or its parent corporation could have
achieved but for such Regulatory Change (taking into account Lender's policies
and the policies of its parent corporation with respect to capital adequacy),
then Borrower shall, within ten (10) days after written notice and demand from
Lender, pay to Lender additional amounts sufficient to compensate Lender, or its
parent corporation, for such reduction. Any determination by Lender under this
Section and any certificate as to the amount of such reduction given to Borrower
by Lender shall be final, conclusive and binding for all purposes, absent error.
1.8 Extensions
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Not more than ninety (90) days and not less than sixty (60) days
prior to (a) a date two (2) years after the Closing Date, and (b) each
subsequent annual anniversary of the Closing Date (if all previous extension
options available under this Section 1.8 have been exercised by Borrower), and
if no default or event of default then exists hereunder, Borrower may, at its
option, request that Lender extend the Revolving Commitment Ending Date and the
Maturity Date for an additional period of one (1) year. Any such request shall
be accompanied by an extension fee in the amount of Thirty-seven Thousand Five
Hundred and 00/100 Dollars ($37,500.00) ("Extension Fee"). Lender may grant or
deny said request, in its sole and absolute discretion, or may condition its
granting of said request upon such matters as it may, in its sole discretion,
elect. Borrower shall have fifteen (15) days after receipt of a written list of
said conditions from Lender to agree thereto, in writing. If Borrower does not
so agree to the same within said fifteen (15) day period, Borrower's request for
said extension shall be deemed to have been denied. If Lender denies said
request for an extension, or said request is deemed to be denied pursuant to the
terms hereof, Lender shall return the Extension Fee, less any reasonable
out-of-pocket costs incurred by Lender in reviewing and evaluating Borrower's
request therefor including, but not limited to, any appraiser's fees (including
the fees of Lender's own internal review appraiser). Otherwise Lender shall
retain the Extension Fee as consideration for extending the Revolving Commitment
Ending Date and the Maturity Date.
1.9 Term Out
Notwithstanding anything to the contrary herein set forth, if Lender
ever does not extend the Revolving Commitment Ending Date (and the Maturity
Date) pursuant to Section 1.8 hereof, (i) the Revolving Loan Amount shall be
reduced to an amount equal to the amount of the sum of the Total Revolving
Outstandings plus the aggregate unpaid principal balance of all Construction
Project Loans as of the Revolving Commitment Ending Date, and (ii) the Total
Revolving Outstandings plus the aggregate unpaid principal balance of all
Construction Project Loans shall be repaid or reduced by Borrower on the last
day of each month after the Revolving Commitment Ending Date in six (6) equal
installments, so that the Total Revolving Outstandings plus the aggregate unpaid
principal balance of all Construction Project Loans shall be zero (0) on the
Maturity Date.
During the period between the Revolving Commitment Ending Date and
the Maturity Date, (a) no new Project shall be approved by Lender, (b) Lender
will continue to make Advances with respect to existing approved Project
Development Loans subject to the reduced Total Revolving Outstandings set forth
above, and (c) the Revolving Loan Amount shall be reduced simultaneously with
any reduction in the amount of the Total Revolving Outstandings and the
aggregate unpaid principal balance of all Construction Project Loans to an
amount equal to the reduced amount of the Total Revolving Outstandings plus the
aggregate unpaid principal balance of all Construction Project Loans.
2. CONDITIONS OF BORROWING
Lender shall not be required to make any Advances hereunder until
the pre-closing requirements, conditions and other requirements set forth below
have been completed and fulfilled to the satisfaction of Lender, with respect to
said Advance, at Borrower's sole cost and
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expense. It is agreed, however, that Lender may, in its discretion, make such
Advances prior to completion and fulfillment of any or all of such pre-closing
requirements, conditions and other requirements, without waiving its right to
require such completion and fulfillment before any additional Advances are made.
2.1 Prerequisites to Effectiveness of Agreement
The obligations of Lender to make Advances and the effectiveness of
this Agreement are subject to delivery by Lender of the following documents,
certificates and opinions, each in form and substance acceptable to Lender:
(a) This Agreement duly executed by Borrower and Lender; the Note,
Amendment of Mortgage to Increase Loan Amount and
Reaffirmation of Indemnity Agreement duly executed by
Borrower;
(b) A Certificate of Good Standing for Borrower currently
certified by the Secretary of State of Minnesota, a
Certificate by Borrower's corporate secretary that there have
been no amendments to the Articles of Incorporation and the
By-Laws of the Borrower since April 18, 1997, or if there have
been amendments thereto, then a copy of the Articles of
Incorporation of Borrower together with all amendments thereto
currently certified by the Secretary of State of Minnesota; or
Borrower's amended By-Laws, and Resolutions of Borrower's
Board of Directors authorizing the transactions described
herein, and an incumbency certificate for Borrower (including
the names, titles and specimen signatures of officers thereof
authorized to execute Loan Documents), all currently certified
by Borrower's corporate secretary and upon which Lender may
rely until revoked by written notice to Lender;
(c) A Certificate from a duly authorized officer of Borrower
setting forth the names, titles, specimen signatures and
telephone numbers of all Persons authorized to (i) sign Draw
Requests and/or other documents, instruments, certificates and
agreements to be delivered by Borrower to Lender hereunder,
and/or (ii) give instructions to Lender hereunder, which
Certificate shall be deemed to be in full force and effect
until receipt by Lender of an amendment thereof duly executed
by said duly authorized officer of Borrower;
(d) A signed, written opinion from Borrower's counsel, addressed
to Lender and currently dated, as to the due organization,
existence, qualification and good standing of Borrower; as to
the due authorization, validity, legality, binding nature and
enforceability of the Loan Documents listed in Section 2.1(a);
that, to such counsel's knowledge, the execution, delivery and
performance by Borrower of the Loan Documents will not violate
any contracts or agreements of Borrower or any applicable
Governmental Requirements; as to the absence, to such
counsel's knowledge, of litigation or governmental proceedings
which could adversely affect Borrower; and such other matters
as may be required by Lender;
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(e) The most current available annual audited financial statements
for Borrower, as well as financial statements for each of the
three (3) full fiscal years of Borrower immediately preceding
the time period covered by said current financial statements,
and Borrower shall also certify that there has been no
material adverse change in the financial condition of Borrower
since the dates of such financial statements.
(f) Lender shall have issued the Letter of Instructions to the
Title Company which shall include instructions to record the
Amendment to Mortgage to Increase Loan Amount and to issue an
endorsement to the Title Policy, covering all of the
Development Projects and Construction Projects approved as of
the date hereof as part of the insured land under the Title
Policy, increasing the amount of such policy to the Revolving
Loan Amount, and subject only to such Permitted Exceptions as
are acceptable to the Lender, Title shall have given its
agreement to issue such an endorsement in form and content
acceptable to Lender, and Borrower shall have paid all costs
related to this Agreement and the recording of the Amendment
to Mortgage to Increase Loan Amount and the issuance of the
endorsement in regards thereto, all as required by Section 5.5
below.
Lender may advance to itself, pursuant to the provisions of Sections
3.1 and 5.5, proceeds of the Loan sufficient to pay all reasonable costs and
expenses incurred by Lender in connection with preparation, negotiation and
extension of the Loan Documents and the review of the foregoing.
2.2 Conditions Precedent to Approval of a Development Project
If and when Borrower wishes to have Lender approve a Development
Project, so that it will be eligible for a Development Project Loan, Borrower
shall submit to Lender a written request for such approval, which request shall
be accompanied by the following documentation (the "Development Project Approval
Prerequisites"), all of which shall be acceptable in form and content to Lender:
(a) A written description of the Development Project, including
the size, legal description and location of the Development
Project Land and the proposed Development Project Improvements
to be constructed.
(b) A copy of the signed Purchase Agreement covering the
Development Project Land pursuant to which Borrower has
acquired or is acquiring the same.
(c) A Sworn Construction Cost Statement setting forth in detail
all Construction Costs of the Development Project.
(d) A Budget setting forth in detail all Costs of the Development
Project, including all Acquisition Costs, Construction Costs
and Soft Costs associated with the Development Project.
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(e) Lender has obtained an Appraisal of the Development Project at
the cost of Borrower.
(f) A commitment for a Title Policy from the Title Company
covering the Development Project, together with copies of each
document referred to therein and together with searches for
state and federal tax liens, bankruptcies and judgments
against the Borrower and any other Person or entity which may
have an interest in the Development Project.
(g) A current, certified ALTA/ACSM Land Title Survey of the
Development Project Land, which shall also be prepared in
accordance with Lender's standard requirements therefor.
(h) Two (2) complete sets of the Plans for the Development
Project, approved by the City and including a copy of the site
plan with respect to the Development Project.
(i) Soil reports on the Development Project Land, showing that the
soil will adequately support the Development Project
Improvements when constructed in accordance with the Plans.
(j) The construction contract for each General Contractor, a
schedule listing all contracts and subcontracts relating to
the Development Project, and copies of such subcontract as
Lender may require, specifically identifying those which are
with Borrower or Guarantors (or Affiliates thereof). In
addition, Borrower will obtain a conditional assignment of the
construction contract and an agreement from the general
contractor to honor and perform the same for Lender in the
event of default under the Loan Documents.
(k) Lender has obtained an Environmental Audit which indicates
that no Pollutant is present above, on, in or under the
Development Project, together with all reports, data and other
information produced in connection with the Tests at the cost
of Borrower.
(l) Insurance policies and/or certificates of insurance written by
insurers satisfactory to Lender and in amounts satisfactory to
Lender and which comply with the requirements of this
Agreement.
(m) A flood zone certification from Flood Data Services, Inc. (or
another Consultant acceptable to Lender), indicating that the
Development Project is not located in a flood plain or any
other flood prone area, as designated by any governmental
agency; provided, however, that if the Development Project is
so located, Borrower shall provide evidence of flood insurance
acceptable to Lender.
(n) Borrower's estimated time schedules for construction of the
Development Project Improvements and for disbursement of the
Development Project Loan proceeds.
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(o) A current letter, prepared in accordance with Lender's
standard form therefor, addressed to Lender from an
appropriate City officer regarding the zoning status and
classification of the Development Project, certifying that the
Development Project Land may be used for construction and
operation of the Development Project Improvements without
violation of any applicable Governmental Requirements.
(p) Letters addressed to Lender from the utility companies
confirming the availability of water, storm and sanitary
sewer, gas, electric and telephone utilities for the
Development Project, prepared in accordance with Lender's
standard requirements therefor.
(q) UCC chattel lien searches from the appropriate office(s) in
the jurisdictions in which the Development Project is located,
covering the Borrower and of each other owner of the
Development Project Land during the previous five (5) years
(if Lender determines that the same are required).
(r) Information concerning current ad valorem property taxes and
special assessments to which the Development Project is
subject, including copies of tax statements, tax parcel
number(s) and payment dates.
(s) A preliminary plat of the Development Project Land with a copy
of the proposed final plat prepared in accordance with the
Development Agreement, and resulting in the creation of the
individual lots contemplated in the Development Agreement to
be fully executed and in recordable form. The Plats shall be
recorded immediately prior to the recording of the Mortgage or
the Amendment of Mortgage, as the case may be, and certified
copies of the same provided to Lender.
(t) Evidence that construction will commence within sixty (60)
days of the execution of the Project Addendum for the
Development Project.
(u) Any other documents and items which Lender, in its sole
discretion, reasonably requires to evaluate a proposed
Development Project.
Upon receipt of the above-mentioned written request and the Development
Project Approval Prerequisites, Lender may engage an Inspecting Architect to
work on the Development Project, and legal counsel and/or a Consultant to review
the Environmental Audit, title commitment and related documents, all at
Borrower's sole cost and expense. If all of the Development Approval
Prerequisites are acceptable to Lender, in its sole discretion, and if the
proposed Development Project complies with all of the terms, provisions,
requirements and conditions of this Agreement, Lender may, in its sole
discretion, approve the proposed Development Project. In the event Lender
approves the Development Project, an amount equal to the lesser of (a) seventy
percent (70%) of the Costs of the Development Project, or (b) sixty-five percent
(65%) of the market value of the Development Project, as shown by the Appraisal
prepared for the benefit of the Lender, and subject to the limitations set forth
in Section 1.1 hereof, shall be set aside from the Revolving Commitment to fund
the Development Project Loan
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for said Development Project. Once so set aside, said amount may be used only to
fund said Development Project Loan, until said Development Project Loan has been
repaid in full. Development Project Loans are term loans, each of which shall
mature on its respective Project Loan Maturity Date, and are not themselves
revolving loans, i.e., sums prepaid upon a Development Project Loan may not be
reborrowed as a part of the same Development Project Loan, but may be reborrowed
only as part of another Project Loan in accordance with the terms of this
Agreement.
Upon approval of a Development Loan, Borrower and Lender shall enter
into a Project Addendum which shall describe the Development Project, set forth
the amount of the Development Project Loan, set forth the commencement date, the
Completion Date and the Project Loan Maturity Date for the Development Project
Loan, and the Release Price and the Transfer Price for each lot within the
Development Project.
A portion of each Development Project Loan may be used for the issuance
by Lender of Letters of Credit required by the City or any public utility in
connection with a Development Loan provided that no more than Seven Hundred
Fifty Thousand and 00/100 Dollars ($750,000.00) may be reserved for such
purpose, in the aggregate, for each Development Project. The amount of a Letter
of Credit shall be added to and constitute a part of the applicable Development
Project Loan and the Total Revolving Outstandings. Any such Letter of Credit
shall be evidenced by a Reimbursement Agreement, in form and content acceptable
to the Lender, and Borrower shall pay an annual Letter of Credit Fee as forth in
Section 1.5 hereof. Notwithstanding anything to the contrary contained herein,
Borrower may obtain such Letters of Credit for any proposed Development Project
prior to the approval of such Development Project for a Development Project Loan
as specified herein, but otherwise subject to the above requirements, provided
that: (i) no more than Five Hundred Thousand and 00/100 Dollars ($500,000.00),
in the aggregate for each Development Project, may be reserved for Letters of
Credit for Development Projects that have not yet been approved, (ii) Borrower
must have sufficient capacity in its Borrowing Base Certificate for the
Construction Project portion of the Loan to cover the amount of such Letter of
Credit, and (iii) Borrower must submit and obtain Lender's approval of such
proposed Development Project on which a Letter of Credit is issued within three
(3) months after the issuance of such Letter of Credit. A Letter of Credit
issued prior to the approval of a Development Project will be entered on the
Borrowing Base Certificate and count as an outstanding Construction Project Loan
reducing the amount of the Loan available as Construction Project Loans until
such time as the Development Project for which it was issued is approved, at
which time the total of such Letters of Credit will be removed from the
Borrowing Base Certificate and no longer counted as an outstanding Construction
Project Loan, and instead will be counted as a portion of such approved
Development Project Loan. In the event Borrower has not received approval for
the Development Project Loan for which a Letter of Credit was issued within
three (3) months after the issuance of the first Letter of Credit for such
proposed Development Project, Borrower may not request any additional Letters of
Credit for that Development Project or submit any additional Development
Projects for approval until such time as that Development Project Loan is
approved or all the Letters of Credit for that Development Project are
surrendered and terminated. In the event that Borrower does not obtain Lender's
approval for such proposed Development Project or all the Letters of Credit for
that Development Project are not surrendered and terminated within six (6)
months after the issuance
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of the first Letter of Credit for such proposed Development Project, it shall be
an event of default under this Agreement.
2.3 Development Project Loan Pre-Funding Requirements
(a) In order to qualify for the first Advance of proceeds with
respect to an approved Development Project Loan, the following
conditions shall be satisfied:
(i) Borrower shall have delivered to Lender an Amendment
of Mortgage which shall have been fully executed and
notarized.
(ii) Borrower has paid the Collateral Fee as set forth in
Section 1.5 hereof.
(iii) Lender shall have delivered a fully executed copy of
the Amendment to Mortgage to the Title Company.
(iv) Lender shall have issued the Letter of Instructions
to the Title Company which shall include instructions
to record the Amendment to Mortgage and to issue an
endorsement to the Title Policy whereby the
Development Project is added as part of the insured
property under the Title Policy, subject only to such
Permitted Exceptions as are acceptable to the Lender.
(v) Upon recording of the Amendment to Mortgage,
execution of the Letter of Instructions and issuance
to Lender of an acceptable endorsement to the Title
Policy and submission to Lender of all items
referenced in Section 2.2 above, in form and content
acceptable to Lender, and upon receipt and approval
of the items set forth in Section 2.3(b) and 2.3(c)
herein Borrower shall be entitled to obtain Advances
with respect to the Development Project Loan.
(vi) Lender has received evidence that Borrower has paid
in cash at least thirty percent (30%) of all Costs of
the Project.
(b) At least five (5) days prior to the first Advance of funds
from each Development Project Loan or such later date as is
approved by Lender, Borrower shall provide to Lender each of
the following, in form and substance acceptable to Lender, not
previously supplied to and approved by Lender:
(i) An Application and Certificate for Payment.
(ii) Copies of all grading and building permits required
to complete construction of the Development Project
Improvements.
(iii) Copies of all insurance policies and certificates
required under Section 5.10 below.
(iv) If applicable an Assignment of General Contract in
the form attached hereto as Exhibit "G".
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(v) A copy of the Development Agreement duly executed by
Borrower and the City.
(vi) Evidence of access to the Development Project by
publicly dedicated streets.
(vii) A certified copy of the final plat of the Development
Project Land ("Final Plat") showing recording
information or if not yet recorded, a copy of the
Final Plat as approved by the City which plat is to
be recorded immediately after the first Advance of
Funds.
(viii) A certified copy of the resolutions adopted by the
city council of the City indicating the City's
approval of the plats, the Development Agreement, the
plans and the construction of the Development Project
Improvements.
(c) At least ten (10) days prior to any additional Advances with
respect to each Development Loan, Borrower shall provide to
Lender the following, in form and substance acceptable to
Lender:
(i) An Application and Certificate for Payment.
(ii) A certificate signed by Borrower and the General
Contractor, if applicable, certifying as to the
Development Project Improvements completed at the
time; that Borrower or the General Contractor and any
subcontractor specified in the relevant Application
and Certificate for Payment has satisfactorily
completed the work or furnished the materials for
which payment is requested in accordance with the
applicable contracts; that all work for which an
Application and Certificate for Payment is made
conforms to the applicable contracts and any approved
changes and is in place and sufficient Development
Project Loan proceeds remain undisbursed to complete
the Development Project and that all Development Loan
Project proceeds previously disbursed have been
applied as per the previously submitted applications
for payment.
(iii) A certificate by the Inspecting Architect stating
that all work done as specified in the Application
and Certificate for Payment conforms to the contract
documents, the amount requested for the work done and
the materials furnished reasonably approximates the
value of such work or materials and is in place and
that the undisbursed Development Project Loan
proceeds hereunder are then, in its opinion,
sufficient to complete the Development Project.
(iv) Waivers of mechanics' liens and materialmen's liens
executed by Borrower and General Contractor, if
applicable and all subcontractors for all work done
and all materials furnished to the Development
Project and included in the previous Application and
Certificate for Payment.
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(v) Such other supporting evidence, including invoices
and receipts as may be requested by Lender to
substantiate all payments which are to be made out of
the disbursement of Development Loan Project proceeds
or to substantiate all payments then made in respect
to the Development Project.
2.4 Conditions Precedent to Approval of a Construction Project
If and when Borrower wishes to have Lender approve a Construction
Project, so that it will be eligible for a Construction Project Loan, Borrower
shall submit to Lender a written request for such approval, accompanied by the
following documentation (the "Construction Project Approval Prerequisitions"),
all of which shall be acceptable in form and content to Lender:
(a) An Amendment of Mortgage completed with respect to the
Construction Project.
(b) A written description of the Construction Project, including
the size, legal description and location of the Construction
Project Land and the Construction Project Improvements to be
constructed.
(c) In the case of a Pre-Sold Home, a copy of the signed
non-cancelable and non-contingent purchase agreement covering
the Construction Project pursuant to which Borrower is selling
the same.
(d) A commitment for a Title Policy covering the Construction
Project, together with copies of each document referred to
therein.
(e) Insurance policies and/or certificates of insurance written by
insurers satisfactory to Lender and in amounts satisfactory to
Lender and which comply with the requirements of this
Agreement.
(f) A flood zone certification from Flood Data Services, Inc. (or
another Consultant acceptable to Lender), indicating that the
Construction Project is not located in a flood plain or any
other flood prone area, as designated by any governmental
agency; provided, however, that if the Construction Project is
so located, Borrower shall provide evidence of flood insurance
acceptable to Lender.
(g) Lender will obtain at Borrower's cost an Appraisal with
respect to all Construction Projects except those involving a
Pre-Sold Home with a Construction Project Loan of $250,000.00
or less. If a Construction Project Loan of $250,000.00 or less
is secured by a Pre-Sold Home, then no Appraisal will be
required. In this event, Lender will lend an amount equal to
seventy-five percent (75%) of the amount of the purchase
agreement described in subsection 2.4(b) above but not to
exceed $250,000.00. In the event the Pre-Sold Home sale does
not close by the date specified in such purchase agreement,
then Lender will require that the home be appraised and that
the Loan to Value Ratio be reduced by Borrower to seventy
percent (70%) of the appraised value. It is anticipated that
the standard units for each home style built by Borrower will
be appraised. In addition, a value will be
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assigned to pre-approved options and upgrades. It is the
Lender's intent, on a project by project basis, that Borrower
will not have to obtain a separate Appraisal for each single
family home financed as a Construction Project. Rather, it is
anticipated that a single Appraisal will be used for all homes
of the same style in a particular project. Lender may, in its
sole discretion, deny approval for any Construction Project
which is not a Pre-Sold Home, which has an appraised value in
excess of $450,000.00.
(h) A Sworn Construction Cost Statement setting forth in detail
all Construction Costs of the Construction Project.
(i) A Budget setting forth all Costs of the Construction Project,
including all Acquisition Costs, Construction Costs and Soft
Costs associated with the Construction Project, together with
evidence that Borrower has paid, in cash, all Costs of the
Construction Project in excess of the Construction Project
Loan unless the Construction Project Improvement to be
constructed is a Pre-Sold Home. In such event Borrower shall
not be required to pay such costs until the Construction
Project Loan has been fully disbursed.
(j) If so requested by Lender, a copy of the Plans for the
Construction Project.
(k) Any other documents and items which Lender, in its sole
discretion, reasonably requires to evaluate a proposed
Construction Project.
If all of the Construction Project Approval Prerequisites are
acceptable to Lender, in its sole discretion, and if the proposed Construction
Project complies with all of the terms, provisions, requirements and conditions
of this Agreement, Lender may, in its sole discretion, approve the proposed
Construction Project, in writing. In the event Lender approves the Construction
Project, the Borrower may, subject to Borrower's compliance with all of the
requirements of Section 2.5 hereof, and subject to the limitations in Section
1.1 hereof and until the applicable Project Maturity Date, obtain Advances
against such Construction Project up to amount equal to (a) seventy-five percent
(75%) of the appraised value if a Pre-Sold Home (or seventy-five percent (75%)
of the amount of the non-cancelable and non-contingent purchase agreement for
such Pre-Sold Home if the applicable Construction Project Loan is $250,000.00 or
less), or (b) seventy percent (70%) of the appraised value if a Model Home or a
Speculative Home, as shown by the Appraisal, but in no event shall the total of
all Advances on any Construction Project Loan be greater than one hundred
percent (100%) of the cost of the Construction Project as set forth in the
budget. Construction Project Loans are term loans, each of which shall mature on
its respective Project Loan Maturity Date, and are not themselves revolving
loans, i.e., sums prepaid upon a Construction Project Loan may not be reborrowed
as a part of the same Construction Project Loan, but may be reborrowed only as
part of another Project Loan in accordance with the terms of this Agreement.
Approved Construction Projects may be shown on the Borrowing Base Certificate
only until the applicable Project Loan Maturity Date. Approved Construction
Projects for Model Homes will be limited to a maximum of ten (10), with a
maximum of two (2) at each Subdivision, and approved Construction Projects for
Speculative Homes will be limited to a maximum of fifteen (15), with a maximum
of three (3) at each Subdivision.
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2.5 Construction Project Loan Pre-Funding Requirements
(a) In order to qualify for the first Advance of proceeds with
respect to a Construction Project Loan, the following
conditions shall be satisfied:
(i) Lender has received evidence that Borrower has paid,
in cash, all Costs of the Construction Project in
excess of the Construction Project Loan for any Model
Home or Speculative Home. Such equity contribution
shall not be required with respect to Pre-Sold Homes
until the Construction Project Loan is fully
advanced.
(ii) Lender shall deliver the Amendment to Mortgage to the
Title Company which shall have been executed and
notarized by Borrower and Lender.
(iii) Lender shall issue a Letter of Instructions to the
Title Company which shall include instructions to
record the Amendment to Mortgage and to issue an
endorsement to the Title Policy whereby the
Construction Project is added as part of the insured
property under the Title Policy, subject only to such
Permitted Exceptions as are acceptable to the Lender.
(iv) Upon recording of the Amendment to Mortgage,
execution of the Letter of Instructions and issuance
to Lender of an acceptable endorsement to the Title
Policy and submission to Lender of all items
referenced in Section 2.4 above, in form and content
acceptable to Lender, the Construction Project shall
be entered by Borrower on the Borrowing Base
Certificate as an approved Construction Project Loan.
(b) Upon submission to Lender of the revised Borrowing Base
Certificate in which all of the requirements set forth in
subsections 2.5(a)(i), (ii), (iii) and (iv) above have been
complied with, the Borrower shall be entitled to obtain
Advances with respect to such Construction Project Loan in
accordance with the provisions of this Agreement.
3. ADVANCES OF PROJECT LOAN PROCEEDS
3.1 Procedure for Advances
(a) Each Advance shall be made pursuant to (i) a Draw Request with
respect to Construction Project Loans, and (ii) an Application
and Certificate for Payment with respect to Development
Project Loans, which shall be submitted by Borrower to Lender
and to the Inspecting Architect. With respect to each
Development Project, Borrower shall not submit more than one
(1) Application and Certificate for Payment during any thirty
(30) day period. With respect to Construction Projects,
Borrower shall be entitled to make unlimited Draw Requests
during any thirty (30) day period.
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(b) Borrower shall deliver to Lender an updated Borrowing Base
Certificate on the first (1st) day of each month. Borrower
shall also deliver to Lender a revised Borrowing Base
Certificate with each request for an Advance with respect to
each Construction Project Loan.
(c) On each Advance Date, if all the terms and conditions of this
Agreement have been complied with by Borrower to the
satisfaction of Lender, if no default or event of default
exists hereunder, and if Lender has approved (i) each Draw
Request for each Construction Project for which Borrower has
submitted a Draw Request, and (ii) each Application and
Certificate for Payment for each Development Project for which
Borrower has submitted an Application and Certificate for
Payment, Lender shall advance to Borrower the principal amount
of each requested Advance by wire transfer of funds for the
amount set forth in the applicable Draw Request or Application
and Certificate of Payment (less any required retainage, which
retainage shall not be deemed to be advanced hereunder and
shall not bear interest until actually advanced, and less any
amounts so advanced by Lender to itself). All Advances
actually so made shall be deemed to be loans to Borrower,
shall reduce the available amount of the Revolving Loan and of
the Project Loan for the related Project (if any), and shall
bear interest at the rates provided herein from the date so
advanced.
(d) Lender may take such steps as it may deem appropriate, at its
option, to verify the application of Project Loan proceeds to
Costs of the related Project, and to vary the advancement
procedures herein set forth if the same becomes necessary or
desirable to assure the proper application of Project Loan
proceeds and/or to preserve the first lien status of the
Mortgage covering the Project with respect to Advances made
pursuant hereto including, but not limited to, making Advances
directly to the General Contractors and/or subcontractors, and
the amount of Advances to be made to the Borrower hereunder
shall be correspondingly reduced. However, Lender shall not be
obligated to conduct any such verification or to so vary said
procedures.
(e) In the event that Lender shall determine, in its reasonable
judgment, that proper documentation to support a given
Advance, as required by this Agreement, has not been
furnished, it may withhold payment of such Advance, or of such
portion of such Advance as shall not be so supported by proper
documentation, and shall promptly notify Borrower of the
discrepancy in or omission of such documentation. Until such
time as such discrepancy or omission is corrected to the
satisfaction of Lender, it may withhold such funds.
(f) At the time of each Advance, there shall exist no default or
event of default hereunder, and all representations and
warranties made herein shall be true and correct on and as of
each Advance Date with the same effect as if made on that
date.
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3.2 Inspections
Lender, Inspecting Architects, Consultants and their representatives
shall have access to each Project at all reasonable times and shall have the
right to enter each Project and to conduct such inspections thereof as they
shall deem necessary or desirable for the protection of Lender's interests.
However, Lender shall not be obligated to conduct any inspection of any Project.
With respect to Construction Projects, Lender shall retain an
Inspecting Architect at Borrower's expense to make inspections of all existing
Projects prior to the first draw and then every sixty (60) days, commencing on
January 1, 1999, and to review all Draw Requests relating to such Projects for
the purpose of confirming that (a) each Project has been completed to date in a
good and workerlike manner, and (b) that the percentages of completion certified
to by the Borrower in the most recent Draw Request are accurate. The Inspecting
Architect shall issue a written report to Lender with respect to such matters
for approved Construction Projects on a bi-monthly basis.
With respect to Development Projects, Lender shall also retain an
Inspecting Architect and any other Consultants deemed necessary or desirable by
Lender, at Borrower's expense, to inspect the Development Project and review the
Plans, Contracts and Sworn Construction Cost Statements for each Development
Project and to review all change orders relating to said Development Project.
Such inspection and reviews shall be completed prior to approval of each
Application and Certificate for Payment made with respect to a Development
Project Loan.
Neither Borrower nor any third party shall have the right to use or
rely upon the reports of the Inspecting Architect or any other reports generated
by Lender or its Consultants for any purpose whatsoever, whether made prior to
or after commencement of construction. Borrower shall be responsible for making
its own inspections of each Project during the course of construction,
renovation or expansion and shall determine to its own satisfaction that the
work done and materials supplied are in accordance with applicable contracts
with its Contractors. By advancing funds after any inspection of any Project by
Lender or an Inspecting Architect, Lender shall not be deemed to waive any event
of default, waive any right to require construction defects to be corrected, or
acknowledge that all construction conforms with the Plans.
Notwithstanding any provision of this Agreement to the contrary, in the
event that Lender should determine that (a) the actual quality or value of the
work performed or the materials furnished does not correspond with the quality
or value of the work required by the Plans for any Project, or (b) the
percentage of completion certified to in any Draw Request is inaccurate, or (c)
any Project Loan is not in balance, Lender shall notify Borrower of its
objections thereto, and, upon demand, Borrower shall correct the conditions to
which Lender objects.
3.3 Project Loans In Balance
Lender shall not be obligated to make any Advance of any Project Loan
proceeds unless and until Borrower has certified that the Project Loan is in
Balance: i.e., (a) Borrower has paid, in cash, Costs of a Development Project
equal to at least thirty percent (30%) of the total Costs of the Development
Project or all Costs of Construction Project, in excess of the Construction
Project Loan as shown on the most current Budget and Sworn Construction Cost
Statement for
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the Project approved by Lender (provided, however, that Borrower, for the
purposes of this clause, if a Construction Project consists of a Pre-Sold Home,
Borrower shall not be obligated to pay such costs until the Project Loan has
been fully advanced); and (b) all remaining unpaid Costs, as determined by
Lender, including the Contingency Reserve, with respect to a Development Loan,
where applicable, do not exceed the amount of the Loan proceeds not yet advanced
by Lender. The amount of the Contingency Reserve for any Development Project
Loan shall be designated in the Sworn Construction Cost Statement, and shall be
included in the Development Project Addendum, for the Development Project. The
required amount of the Contingency Reserve shall decline as Construction Costs
for which it is maintained are paid therefrom; provided, however, that the
amount of the Contingency Reserve shall never decline below an amount sufficient
to pay all costs and payments for which it is maintained which then remain
unpaid, as determined by Lender, and shall equal a mutually agreed upon
percentage of all Construction Costs of the Development Project. If the
Contingency Reserve becomes depleted, such depletion shall not limit Borrower's
obligation hereunder to pay all sums which otherwise would have been payable
from the Contingency Reserve.
Notwithstanding any provision of this Agreement to the contrary, in the
event that Lender or Borrower determines that the unadvanced balance of any
Project Loan proceeds is insufficient to cover any category of Costs set forth
on the Budget and the Sworn Construction Cost Statement for the Project and/or
to complete the Project, and to pay all costs and expenses of completion and to
pay interest on the Project Loan, through the Project Loan Maturity Date, it
shall notify the other party hereto of such determination, and Borrower shall,
at Lender's option, either (a) be ineligible for further Advances of the
proceeds of said Project Loan until Borrower has directly paid (without any
right to reimbursement therefor hereunder) sufficient Costs, or (b), within
three (3) Business Days, deposit with Lender funds equal to said insufficiency,
in order to bring the Project Loan back into balance. All sums so deposited may
be advanced by Lender to pay Costs in the same manner as, and prior to, Advances
of Project Loan proceeds hereunder.
3.4 General
The Project Loan proceeds shall be advanced by Lender, to or for the
benefit of Borrower, in accordance with the terms and conditions set forth in
this Article 3. All monies advanced by Lender (including amounts payable to
Lender and advanced by Lender to itself pursuant to the terms hereof) shall
constitute loans made to Borrower under this Agreement, evidenced by the Note
and secured by the other Loan Documents, and interest shall be computed thereon
as prescribed by this Agreement and the Note, from the date advanced to or for
the benefit of Borrower.
Borrower may not reallocate Project Loan proceeds to payment of
different items in the Sworn Construction Cost Statement for the Project in
question without the prior written consent of Lender. Lender reserves the right
to make Advances for payment of amounts which are allocated to any of the
designated items in any Sworn Construction Cost Statement for such other
purposes or in such different proportions as Lender may, in its sole discretion,
deem necessary or advisable.
No Advance shall constitute a waiver of any condition precedent to the
obligation of Lender to make any further Advance or preclude Lender from
thereafter requiring Borrower to
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<PAGE>
satisfy any such condition precedent with respect to any prior or further
Advance. No Advance shall constitute a waiver of any default or event of default
hereunder which may exist at the time of said Advance, whether or not the same
is known to Lender. All conditions precedent to the obligation of Lender to make
any Advance are imposed hereby solely for the benefit of Lender, and no other
party may require satisfaction of any such condition precedent or shall be
entitled to assume that Lender will make or refuse to make any Advance in the
absence of strict compliance with such condition precedent. All requirements of
this Agreement may be waived by Lender, in whole or in part, at any time.
Lender may, but shall not be obligated to, advance to itself, when due,
from the proceeds of the Loan, without further order or request from Borrower,
all interest payable to Lender under the terms hereof or of the Note, and may,
at Lender's option, without any obligation to do so, advance to itself all other
sums due or to become due to Lender under this Agreement or under any of the
other Loan Documents including, but not limited to, its reasonable fees,
administration fees, attorneys' fees, appraisal fees, internal appraisal review
fees, engineer's and Inspecting Architect's fees, Consultant's fees and all
out-of-pocket expenses incurred by Lender in connection with this Agreement and
with the Loan, whether or not any Project Loan has yet been approved by Lender
pursuant to Section 2.2 or 2.4. Lender shall also have the right, but not the
obligation, after the occurrence of an event of default, to advance and directly
apply the proceeds of the Loan to the satisfaction of any of Borrower's other
obligations hereunder or under any of the other Loan Documents. Borrower hereby
assigns and pledges the proceeds of each Project Loan and funds deposited by
Borrower pursuant to Section 3.3 hereof (if any) to Lender for such purposes.
Lender may advance such funds and incur such expenses as Lender deems necessary
for the completion of construction of all Project Improvements and to preserve
the Projects and any security for the Project Loans, and such expenses, even
though causing the amount of the Loan to exceed the Revolving Commitment Amount
or the amount of any Project Loan to exceed the amount of the Project Loan
Commitment therefor, shall be secured by any and all documents securing the
Loan, shall be evidenced by the Note and shall be payable to Lender upon demand.
In the event that the total amount of any Project Loan exceeds the
amount needed to fully pay all Costs set forth on the Sworn Construction Cost
Statement for the Project approved by Lender (after subtracting Borrower's
equity contribution required by Section 3.3), Lender shall not be required to
advance, and Borrower shall not be entitled to receive, the excess.
3.5 Releases of Projects
If no event of default exists hereunder, Lender agrees to release the
Mortgage from any lot located within a Project upon payment to the Lender of the
Release Price designated for such lot in either the Project Addendum, with
respect to a Development Project Loan, or the Borrowing Base Certificate, with
respect to a Construction Project Loan.
3.6 Transfers of Projects
If no event of default exists hereunder, Lender agrees that lots
contained within an approved Development Project may be transferred from the
Development Project Loan to a Construction Project Loan at such time as the
Borrower desires to construct Construction Project
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Improvements on such lot. The Borrower shall follow the procedure for approval
of a Construction Project Loan with respect to such lot. At such time as
approval has been obtained in accordance with the terms of Section 2.4 of this
Agreement, the amount of the Development Project Loan shall be reduced by an
amount equal to the Transfer Price designated for such lot in the applicable
Project Addendum.
3.7 Lender Responsibility
It is expressly understood and agreed that Lender assumes no liability
or responsibility for the sufficiency of Project Loan proceeds to complete the
related Project, for protection of any Project, for the satisfactory completion
of any Project, for inspection during construction, for the adequacy of the
Contingency Reserve, for the adequacy or accuracy of any Sworn Construction Cost
Statement, for any representations made by Borrower, or for any acts on the part
of Borrower or its Contractors to be performed in the construction of any
Project.
4. REPRESENTATIONS AND WARRANTIES OF BORROWER
Borrower represents and warrants to Lender that:
4.1 Legal Status of Borrower
Borrower is a corporation duly organized, validly existing and in good
standing under the laws of the State of Minnesota, and has all power, authority,
permits, consents, authorizations and licenses necessary to carry on its
business, to acquire, develop, construct, equip, own and operate each Project
and to execute, deliver and perform this Agreement and the other Loan Documents;
and this Agreement and the other Loan Documents executed to date by Borrower
have been duly authorized, executed and delivered by and on behalf of Borrower
so as to constitute this Agreement and said other Loan Documents the valid and
binding obligations of Borrower, enforceable in accordance with their terms.
4.2 No Breach of Applicable Agreements or Laws
The consummation of the transactions contemplated hereby and the
execution, delivery and/or performance of this Agreement and the other Loan
Documents will not result in any breach of or constitute a default under any
mortgage, deed of trust, lease, bank loan, credit agreement, guaranty or other
instrument or violate any Governmental Requirements, to which Borrower or any
Guarantor is a party, or by which Borrower or any Guarantor may be bound or
affected.
4.3 No Litigation or Defaults
There are no actions, suits or proceedings pending or, to the knowledge
of Borrower, threatened against or affecting Borrower or any Guarantor, in which
an adverse result would have a material adverse impact upon Borrower or any
Guarantor or involving the validity or enforceability of the Loan Documents or
the priority of the lien thereof, at law or in equity; and neither Borrower nor
any Guarantor is in default under any order, writ, injunction, decree or
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demand of any court or any administrative body having jurisdiction over Borrower
or any Guarantor.
4.4 Financial and Other Information
The financial statements of, and other financial and cash flow
information for Borrower previously or hereafter delivered to Lender fairly and
accurately present, or will fairly and accurately present, the financial
condition of Borrower as of the dates of such statements and information, and
the cash flows of Borrower for the periods covered by such information, and
neither this Agreement nor any document, financial statement, financial, cash
flow or credit information, certificate or statement referred to herein or
furnished to Lender by Borrower contains, or will contain, any untrue statement
of a material fact or omits, or will omit, a material fact, or is or will be
misleading in any material respect. There has been no material adverse change in
the financial condition of Borrower since the most recent financial statements
heretofore delivered to Lender.
4.5 No Defaults under Loan Documents or Other Agreements
There is, and, until Lender has been fully repaid the entire
indebtedness evidenced or to be evidenced by the Note, there will be, no default
or event of default on the part of Borrower under the Loan Documents or under
any other document to which Borrower is a party and which relates to the
acquisition, ownership, occupancy, use, development, construction or management
of a Project; and Borrower is not and will not be in default in the payment of
the principal of or interest on any of its indebtedness for borrowed money,
including any Lender Debt, and Borrower is not and will not be in default under
any instrument or agreement under and subject to which any indebtedness for
borrowed money, including any Lender Debt, has been issued or is secured, and no
event has occurred, or will occur, which, with the lapse of time or the giving
of notice or both, would constitute an event of default thereunder.
4.6 Fiscal Years
The fiscal year of Borrower ends on December 31.
4.7 Intentionally Omitted
4.8 Miscellaneous
Borrower is not:
(a) Engaged principally or as one of its important activities in
the business of extending credit for the purpose of purchasing
or carrying margin stock (as defined in Regulation U of the
Board), and the value of all margin stock owned by Borrower
does not constitute more than twenty-five percent (25%) of the
value of the assets of Borrower.
(b) An "investment company" or a company "controlled" by an
investment company within the meaning of the Investment
Company Act of 1940, as amended.
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(c) A "holding company" or a "subsidiary company" of a holding
company or an "affiliate" of a holding company or a subsidiary
company of a holding company within the meaning of the Public
Utility Holding Company Act of 1935, as amended.
THE WARRANTIES AND REPRESENTATIONS IN THIS ARTICLE 4, AND ANY
ADDITIONAL WARRANTIES AND REPRESENTATIONS CONTAINED HEREIN AND IN THE OTHER LOAN
DOCUMENTS, SHALL BE DEEMED TO HAVE BEEN RENEWED AND RESTATED BY BORROWER AT THE
TIME OF EACH REQUEST BY BORROWER FOR AN ADVANCE.
5. COVENANTS OF BORROWER
While this Agreement is in effect, and until Lender has been paid in
full the principal of and interest on all Advances made by Lender hereunder and
under the other Loan Documents:
5.1 Completing Construction
Borrower shall commence construction of each Project on or before the
Commencement Date specified in the Project Addendum with respect to Development
Projects and the Borrowing Base Certificate with respect to Construction
Projects, and shall expeditiously complete and fully pay for the development and
construction of each Project in a good and workmanlike manner and in accordance
with the contracts, subcontracts and Plans (which in the case of Development
Contracts shall be submitted to and approved by Lender), and in compliance with
all applicable Governmental Requirements, and any covenants, conditions,
restrictions and reservations applicable thereto, so that Completion of the
Project Improvements occurs on or before the Completion Date specified for said
Project in the Project Addendum with respect to Development Projects and the
Borrowing Base Certificate with respect to Construction Projects. Borrower
assumes full responsibility for the compliance of the Plans for each Project and
of each Project itself with all applicable Governmental Requirements, and with
sound building and engineering practices, and, notwithstanding any approvals by
Lender, Lender shall have no obligation or responsibility whatsoever for such
Plans or any other matter incident to any Project or the construction of the
Project Improvements. In the case of a Development Contract, Borrower shall
become a party to no General Contractor's contract, for the performance of any
work on any Development Project except upon such terms and with such parties as
shall be approved, in writing, by Lender. No approval by Lender of any contract
relating to any Project or of any change order shall make Lender responsible for
the adequacy, form or content of such contract or change order. Borrower shall
correct or cause to be corrected (a) any defect in the Project Improvements, (b)
any departure in the construction of the Project Improvements from the Plans
therefor or applicable Governmental Requirements, and (c) any encroachment by
any part of the Project Improvements or any other structure located on the
Project Land on or over any building setback line, easement, property line or
restricted area, unless expressly permitted by appropriate easements, licenses
or other instruments. Borrower shall cause all roads necessary for the
utilization of each Project for its intended purposes to be completed and
dedicated, the bearing capacity of the soil on all Project Land to be made
sufficient to support the Project Improvements situated or to be situated
thereon, and sufficient local utilities to be made
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available to each Project and installed at Costs (if any) set out in the Sworn
Construction Cost Statement therefor, on or before the Completion Date therefor.
5.2 Borrowing Base Certificate.
Borrower shall deliver to Lender a completed fully executed Borrowing
Base Certificate on the first day of each month during the term of the Loan.
Borrower shall also deliver to Lender a fully executed Borrowing Base
Certificate at the time of submitting each Draw Request.
5.3 Changing Costs, Scope or Timing of Work
Borrower shall deliver to Lender revised Budgets and/or Sworn
Construction Cost Statements for each Construction Project, showing changes in
or variations from the current Budget and/or Sworn Construction Cost Statement
therefor which involve changes in the costs of five percent (5%) or more for any
single change, or if the aggregate amount of all changes exceeds five percent
(5%) or more, as soon as such changes are known to Borrower. Borrower shall
deliver to Lender a revised construction schedule for any Construction Project,
if and when any target date set forth therein has been delayed by ten (10)
consecutive days or more, or when the aggregate of all such delays equals thirty
(30) days or more.
Borrower shall promptly furnish Lender with two (2) copies of each new
change or modification in the design or style of the Construction Project or
change or modification in the Plans, contracts or subcontracts for any
Construction Project, as approved by Lender, prior to incorporation of any such
change or modification into the Construction Project, whether or not Lender's
consent to such change or modification is required hereby. Borrower shall not
make or consent to any change or modification in the Plans, contracts or
subcontracts, and no work shall be performed with respect to any such change or
modification, without the prior written consent of Lender, if such change or
modification would in any way alter the design or structure of the Construction
Project or increase or decrease Costs of said Construction Project by five
percent (5%) or more for any single change or modification, or if the aggregate
amount of all changes and modifications in Costs of said Construction Project
exceeds five percent (5%) of such Costs.
Borrower shall deliver to Lender revised Budgets and/or Sworn
Construction Cost Statements for each Development Project, showing changes in or
variations from the current Budget and/or Sworn Construction Cost Statement
therefor which involve amounts of $20,000 or more for any single change, or if
the aggregate amount of all changes exceeds $50,000, as soon as such changes are
known to Borrower. Borrower shall deliver to Lender a revised construction
schedule for any Development Project, if and when any target date set forth
therein has been delayed by ten (10) consecutive days or more, or when the
aggregate of all such delays equals thirty (30) days or more.
Borrower shall promptly furnish Lender with two (2) copies of each new
change or modification in the Plans, contracts or subcontracts for any
Development Project, as approved by Lender, prior to incorporation of any such
change or modification into the Development Project, whether or not Lender's
consent to such change or modification is required hereby. Borrower shall not
make or consent to any change or modification in the Plans, contracts or
subcontracts, and no work shall be performed with respect to any such change or
modification, without the
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prior written consent of Lender, if such change or modification would in any way
alter the design or structure of the Development Project or increase or decrease
Costs of said Development Project by $20,000 or more for any single change or
modification, or if the aggregate amount of all changes and modifications in
Costs of said Development Project exceeds $50,000.
5.4 Balancing Project Loans
Borrower shall furnish to Lender, as and when requested by Lender, at
Lender's option (a) satisfactory evidence of Borrower's ability to pay all
unpaid Costs of completing and operating the Project through the Project
Maturity Date, and/or (b) cash equal to any difference between such unpaid Costs
and the proceeds of the Project Loan which have not yet been advanced hereunder,
which shall be held and advanced by Lender pursuant to the terms hereof.
5.5 Paying Costs of Loan, Projects and Project Loans
Borrower shall pay and discharge, as and when required by the Mortgage,
all taxes, assessments and other governmental charges upon a Project, as well as
all claims for labor and materials which, if unpaid, might become a lien or
charge upon said Project; provided, however, that Borrower shall have the right
to bond off, to remove or to contest the amount, validity and/or applicability
of any of the foregoing in strict accordance with the terms of the Mortgage.
Borrower shall also pay all reasonable costs and expenses of Lender and
all costs and expenses of Borrower in connection with the Project, the
preparation and review of the Loan Documents and the evaluation, making,
closing, administration, transfer and/or repayment of the Loan and of each
Project Loan including, but not limited to, the fees of Lender's attorneys, the
Inspecting Architect and Consultants (including preliminary cost review,
construction progress inspection reports, engineers' fees and environmental
Consultants' fees), costs of Environmental Audits, appraisal fees, internal
appraisal review fees, administration fees, title insurance costs, filing and
recording fees, mortgage registration or similar taxes, and all other costs and
expenses payable to third parties incurred by Lender or Borrower in connection
with the Loan. Such costs and expenses shall be so paid by Borrower whether or
not the Loan or any particular Project Loan is fully advanced.
5.6 Using Project Loan Proceeds
Borrower shall use the Project Loan proceeds solely to pay, or to
reimburse Borrower for paying, Costs shown on the Budget and the Sworn
Construction Cost Statement for the relevant Project. Borrower shall take all
steps necessary to assure similar use of Project Loan proceeds by its
Contractors and subcontractors.
5.7 Keeping of Records
Borrower shall set up and maintain accurate and complete books,
accounts and records pertaining to each Project and the development and
construction thereof in a manner reasonably acceptable to Lender. Borrower will
permit representatives of Lender and the Inspecting Architect to have free
access to and to inspect and copy all books, records and contracts of Borrower
relating to each Project and the acquisition, development and construction
thereof, and
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will permit representatives of Lender to have free access to and to inspect and
copy all other books, records and contracts of Borrower. Any such inspection
shall be for the sole benefit and protection of Lender, and Lender shall have no
obligation to disclose the results thereof to Borrower or to any third party.
5.8 Providing Financial Information
Borrower shall furnish to the Lender at the times set forth below the
following financial statements, reports and certificates:
(a) As soon as available, but in any event within ninety (90) days
after each fiscal year end, an audited financial statement of the
Borrower consisting of a balance sheet, profit and loss statement
and sources of cash flow prepared and certified to by an
independent certified public accountant satisfactory to the
Lender together with a copy of Borrower's applicable 10K Report;
(b) As soon as available, but in any event within sixty (60) days
after the last day of each fiscal quarter, a balance sheet and
profit and loss statement of the Borrower dated as of the last
business day of such fiscal quarter in form and detail as
required by the Lender certified by the Chief Financial Officer
of the Borrower together with a copy of Borrower's applicable 10Q
Report;
(c) On the first (1st) Business Day of each month, a copy of the
updated Borrowing Base Certificate, together with a report
regarding sales of all lots located within any Development
Project for which a Development Project Loan has been made; and
(d) Such other information concerning the business, operations and
condition (financial or otherwise) of the Borrower as the Lender
may reasonably request.
All financial statements shall be prepared in reasonable detail, shall
be prepared for partnerships and corporations in accordance with GAAP and for
individuals in accordance with accounting principles consistently applied and
shall be signed and certified by the party to which they apply as true, correct
and complete. In the event the Borrower fails to furnish any of the above
statements or information or upon the occurrence of an event of default
hereunder, the Lender may cause an audit to be made of the books and records of
the Borrower at the sole cost and expense of the Borrower. The Lender also shall
have the right to examine at their place of safekeeping all books, accounts and
records relating to the operation of the Projects and make copies thereof or
extracts therefrom and to discuss the affairs, finances or accounts with the
employees and officers of the Borrower and the Borrower's independent
accountants. Said examinations shall be at the Lender's expense unless the
Borrower's statements are found to contain significant discrepancies, in which
case the examination shall be at the Borrower's expense.
5.9 Providing Evidence of Completion
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Upon Completion of each of the Project Improvements included within
each Project, and, unless the Project Improvement is a Construction Project
Improvement which is a Pre-Sold Home, prior to the final advance of Project Loan
proceeds to pay for Construction Costs thereof including, but not limited to,
any retainage therefor, and as a condition of the same, Borrower shall furnish
Lender with all items required to evidence either Development Project Completion
or Construction Project Completion as set forth herein in the definition of
those terms.
5.10 Maintaining Insurance Coverage; Collection and Application of
Insurance Proceeds
Borrower shall, at all times until Lender has been fully repaid all
indebtedness evidenced by the Note, maintain, or cause to be maintained, in
effect, the following insurance with respect to each Project for the benefit of
Lender:
(a) Builder's risk insurance, written on an "all-risk", completed
value, nonreporting basis, covering one hundred percent (100%) of
the replacement cost of all Project Improvements under
construction at any time upon the Project Land;
(b) Insurance upon all completed Project Improvements against loss or
damage by fire, lightning and other risks customarily covered by
standard "all risk" (or special form cause of loss) and extended
coverage endorsements, together with theft, vandalism, malicious
mischief, collapse, earthquake, replacement cost, agreed amount
(if there is co-insurance), and restoration in conformance with
applicable laws and ordinances endorsements, all in such amounts
as may be from time to time required by Lender, but in no event
less than the full replacement cost of the completed Project
Improvements at any time erected or placed upon the Project Land,
including the cost of debris removal, including the value of all
Project Improvements which cannot be replaced due to changes in
applicable laws, codes, ordinances and/or regulations since the
original construction thereof, and, in any event, in an amount
not less than the unpaid principal balance of the Project Loan;
(c) Comprehensive commercial general public liability insurance
against claims for bodily injury, personal injury, death and/or
property damage occurring in, on or about the Project, with
coverage limits satisfactory to Lender (which shall initially be
at least equal to $1,000,000.00 with respect to any one (1)
Person, accident or occurrence, with at least $10,000,000.00 in
umbrella excess-liability coverage), and including contractual
liability coverage for the tort liability with respect to the
Project assumed by Borrower hereunder and under any other Loan
Document;
(d) Flood insurance upon any Project in such form and amount as may
from time to time be required by Lender, if such Project or any
portion thereof is located in a designated flood zone, flood
plain or other flood hazard or danger area; and
(e) Insurance upon the Project against such other casualties and
contingencies as Lender may from time to time require including,
but not limited to, workers'
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compensation in amounts acceptable to Lender, all in such manner
and form as may be satisfactory to Lender.
Borrower shall, at its sole cost and expense, from time to time and at
any time when Lender shall so request, provide Lender with evidence of the full
replacement cost of a Project in a form acceptable to Lender. Borrower shall
promptly notify Lender and the appropriate insurer in writing of any loss
covered by any of the insurance required hereby.
All insurance provided for in this Section 5.10 shall be in effect
under a valid and enforceable policy or policies of insurance in form and
substance approved by Lender, shall be issued by insurers of recognized
responsibility, which are licensed to do business in the state in which the
Project is located, and which are acceptable to Lender, and shall be
satisfactory to Lender in all other respects.
All hazard and casualty insurance policies maintained by Borrower
pursuant to the foregoing provisions of this Section 5.10 shall (i) provide that
any losses payable thereunder shall (pursuant to a standard first mortgagee
clause in favor of, and acceptable to, Lender, to be attached to each such
policy) be payable to Lender and assigns, (ii) include effective waivers by the
insurer of all claims for insurance premiums against Lender, (iii) provide that
any losses shall be payable notwithstanding (A) any act of negligence by
Borrower or Lender, (B) any foreclosure or other proceedings or notice of sale
relating to the Project, (C) any waiver of subrogation rights by the insured, or
(D) any change in the title to or ownership of the Project or any portion
thereof, and (iv) be written in amounts sufficient to prevent Borrower from
becoming a co-insurer under said policies. All liability insurance policies
maintained by Borrower pursuant to this Section 5.10 shall name Lender as an
additional insured and shall waive contribution from any other insurance carried
by Lender in the event of loss. Borrower shall furnish Lender with evidence that
each Project is insured without interruption as required hereunder and, upon
request, Borrower shall cause the originals or certified copies of the policies
of all such insurance to be deposited with Lender or to be otherwise held as
directed by Lender. At least fifteen (15) days prior to the date on which the
premiums on each such policy shall become due and payable, Borrower shall
furnish Lender with proof reasonably satisfactory to Lender of payment thereof.
Each of such policies shall contain an agreement by the insurer that the same
shall not be amended, modified, canceled, reduced or terminated for any reason
including, but not limited to, a failure to pay premiums and/or expiration by
its terms, without at least thirty (30) days' prior written notice to Lender. If
the Mortgage covering any Project is foreclosed, the purchaser at the
foreclosure sale shall, after the expiration of any statutory period of
redemption become the sole and absolute owner of any and all such policies, with
the sole right to collect and retain all unearned premiums thereon, and, for
this purpose, Borrower hereby assigns and grants a security interest in said
policies and unearned premiums to Lender.
In the event of loss, Borrower shall immediately give written notice
thereof to Lender, and Borrower shall promptly make proof of loss and shall in
good faith and with due diligence file, prosecute, settle, adjust or compromise
any claims for insurance proceeds and cause the same to be paid to Lender;
provided, however, that Borrower agrees not to finally settle, adjust or
compromise any such claims without the prior written consent of Lender. If
Borrower does not itself promptly do so, or if any event of default exists
hereunder, Lender is authorized and
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empowered (but not obligated or required) to make proof of loss, to settle,
adjust or compromise any claims for loss, damage or destruction under, to appear
in, prosecute, settle and compromise any suit or proceeding relating to, and to
collect and receive all proceeds of, any policies of hazard and casualty
insurance maintained pursuant hereto. Borrower shall reimburse Lender, on
demand, for all reasonable costs and expenses including, but not limited to,
court costs and attorneys fees, incurred by Lender in connection therewith, plus
interest thereon from the date incurred at the Default Rate. All proceeds of
such insurance are hereby absolutely and unconditionally assigned, and shall be
paid, to Lender. Such proceeds shall, at Lender's option, be applied first to
the payment of all costs and expenses incurred by Lender in obtaining such
proceeds, and the remainder ("Net Insurance Proceeds") shall be applied, at
Lender's option, either to the reduction of the indebtedness secured by the
Mortgage covering the damaged or destroyed Project in such order as Lender may
elect, whether then due and payable or not, or to the restoration or repair of
said Project, without affecting the lien of said Mortgage or the obligations of
Borrower hereunder or thereunder. Interest upon the entire indebtedness secured
thereby shall continue until any such proceeds are received and applied to such
indebtedness by Lender. Pending a decision as to the proper use and application
of any insurance proceeds, and during any such restoration or repair, Lender
shall not be liable for interest on such proceeds. If Lender elects to apply any
such insurance proceeds to the restoration or repair of a Project, such
disbursement shall proceed in accordance with the procedures set forth in this
Agreement governing disbursement of the proceeds of Project Loans. In such
event, Borrower shall, prior to commencing any such restoration or repair,
deposit with Lender the amount, if any, by which the cost of such restoration or
repair, as determined by Lender, exceeds the amount of the Net Insurance
Proceeds, which amount shall be disbursed to pay costs of such restoration and
repair prior to, and in the same manner as, such Net Insurance Proceeds. Any
surplus which may remain after payment of all costs of restoration or repair
and/or all indebtedness evidenced hereby shall be paid to Borrower, its
successors, transferees or assigns, as their interests may appear.
Notwithstanding any provision contained in this Section to the
contrary, in the event that no event of default then exists hereunder, Lender
shall, at Borrower's written request, permit the Net Insurance Proceeds to be
deposited in an interest bearing escrow account at Lender or at another
financial institution acceptable to Lender, or to be otherwise invested in
liquid, secure investments acceptable and pledged to Lender, with Borrower
bearing all risk of loss thereof, and Lender shall further permit such proceeds
and all interest accrued thereon ("Insurance Interest") to be drawn upon to pay
the costs of restoration, rebuilding or repair of the Project in accordance with
all of the terms of this Agreement applicable to the original construction of
the Project Improvements; provided that (i) the Project Improvements can be
restored, rebuilt or repaired substantially to the condition, and can then
continue to be operated for the purposes, required by this Agreement; (ii) the
restoration, rebuilding or repair of the Project Improvements shall be in strict
accordance with the Plans there for approved by Lender, pursuant to which such
Project Improvements were originally constructed, or Borrower has obtained the
prior written approval by Lender of any other plans and specifications for such
restoration, rebuilding and repair; (iii) the restoration, rebuilding or repair
shall be commenced within sixty (60) days after the date of the loss; (iv) all
restoration, rebuilding and repair shall be performed in a good and workmanlike
manner and in accordance with all applicable Plans, Governmental Requirements
and private restrictions; (v) Borrower has, prior to the commencement of any
restoration, rebuilding or
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repair, deposited with Lender the amount by which the Net Insurance Proceeds and
Insurance Interest will be insufficient to cover the total Costs of the planned
restoration, rebuilding or repair, as evidenced by a Sworn Construction Cost
Statement acceptable to Lender, which shall be submitted by Borrower to Lender
and shall be signed and sworn to by Borrower and by the General Contractor for
the planned restoration, rebuilding or repair, who must both be acceptable to
Lender; (vi) there is sufficient time for Borrower to complete said restoration,
rebuilding or repair and repay the Project Loan prior to the Project Loan
Maturity Date for said Project, and (vii) Borrower proceeds diligently to
complete said restoration, rebuilding or repair prior to said Project Loan
Maturity Date. If at any time during the course of any such restoration,
rebuilding or repair, the amount so deposited is not sufficient, in Lender's
judgment, to pay the cost of said restoration, rebuilding or repair, Borrower
shall deposit additional funds in an amount equal to the amount of such
insufficiency. Borrower hereby grants to Lender a security interest in all Net
Insurance Proceeds, in all Insurance Interest and in all sums deposited pursuant
to this Section 5.10, to secure payment and performance by Borrower of all of
its obligations hereunder and under the other Loan Documents. In the event that
the Net Insurance Proceeds, plus the Insurance Interest, exceed the cost of said
restoration, rebuilding or repair, and if no event of default exists hereunder,
said excess shall be paid to Borrower.
5.11 Transferring Conveying or Encumbering Projects
Borrower shall not voluntarily or involuntarily agree to, cause, suffer
or permit (a) any sale, transfer or conveyance of any interest of Borrower,
legal or equitable, in any Project (as defined on page 8 herein) or any part or
portion thereof; (b) any transfer of stock in Borrower; or (c) any mortgage,
pledge, encumbrance or lien to be imposed or remain outstanding against any
Project, or any security interest to exist therein, except as created by the
Loan Documents, without, in each instance, the prior written consent of Lender.
Borrower shall maintain its existence as a duly organized and qualified
corporation, in good standing under the laws of the State of Minnesota and the
laws of each state in which any Project is located, and shall not be dissolved,
merged, wound up or terminated. Notwithstanding the above restrictions and
provided no default or Event of Default has occurred and is continuing
hereunder, stock in Borrower may be transferred so long as such Transfer is not
a Change in Control as defined in that certain Indenture dated as of October 18,
1996 by and between Borrower and National City Bank of Minneapolis, National
Association as Trustee and so long as Peter Pflaum shall, at all times, own at
least a fifty (50%) voting and controlling interest in Borrower and so long as
Peter Pflaum shall continue to be the President of Borrower and shall continue
to be in control of the day-to-day operations of Borrower.
5.12 Complying with the Loan Documents and Contracts
Borrower shall comply with and perform all of its agreements and
obligations under the Loan Documents, and under all other contracts and
agreements to which Borrower is a party relating to the ownership, occupancy,
use, development or construction of the Projects and shall comply with all
requests by Lender which are consistent with the terms thereof. No contract or
other agreement which has been or is required hereby to be assigned by Borrower
to Lender as security for the Loan, shall be changed, modified, amended, revoked
or terminated without the prior written consent of Lender.
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5.13 Agreements with Affiliates
Any development, management, leasing or other agreement relating to any
Project between Borrower or any Guarantor (or any Affiliate of Borrower or of
any Guarantor), relating to the Project, which requires Borrower to pay any fee,
commission or other compensation of any kind to Borrower, any Guarantor or any
such Affiliate, must be approved by Lender, in writing, and all such agreements
shall be subordinate to the Mortgage covering the Project as to lien and time of
payment.
5.14 Updated Appraisals
Borrower agrees that Lender shall have the right to obtain, once during
the term of each Development Project Loan and each Construction Project Loan, at
Borrower's expense, an updated Appraisal of any Project for which an Appraisal
is required under the terms hereof, acceptable to Lender's internal appraisal
group, in the event that (a) an event of default shall have occurred hereunder,
(b) Lender determines in its reasonable opinion that the security for the
Project Loan for said Project has been physically or financially impaired in any
material respect, or (c) such Appraisal is required by then current Governmental
Requirements applicable to Lender. In the event that Lender shall elect to
obtain such an Appraisal, Lender may immediately commission an appraiser
acceptable to Lender, at Borrower's cost and expense, to prepare the Appraisal,
and Borrower shall fully cooperate with Lender and the appraiser in obtaining
the necessary information to prepare such an Appraisal. In the event that
Borrower fails to cooperate with Lender in obtaining such an Appraisal, or in
the event that Borrower shall fail to pay for the cost of such an Appraisal,
within ten (10) days following demand, such event shall constitute an event of
default hereunder, and Lender shall be entitled to exercise all remedies
therefor available to it hereunder. In the event that any such Appraisal shall
conclude that the Loan to Value Ratio for any Project is greater than that
required hereunder for a particular Project, and Borrower fails to prepay,
within thirty (30) days after written notice from Lender to Borrower, the
outstanding principal balance of the Project Loan, including any amounts which
Lender is obligated to Fund, to the extent necessary to reduce the Loan to Value
Ratio down to that required hereunder, such event shall constitute an event of
default hereunder, and Lender shall be entitled to exercise all remedies
therefor available to it hereunder.
5.15 Limitation on Additional Indebtedness
Borrower shall not, nor shall it permit its Subsidiaries to, create,
incur, assume or issue other Indebtedness if, immediately after the incurrance
thereof, the ratio of Funded Debt to Consolidated Tangible Net Worth, plus
Shareholder Subordinated Debt of the Borrower, would exceed 7 to 1. Compliance
with this covenant shall be measured on the last day of March, June, September
and December of each year, and Borrower shall provide Lender with a detailed
calculation with accompanying Certificate in the form attached hereto as Exhibit
H of the Funded Debt to Consolidated Tangible Net Worth as of each quarter
within forty-five (45) days of each calendar quarter except December 31 for
which Borrower shall have seventy-five (75) days to provide the calculation.
Borrower shall have thirty (30) days to cure any default in this Funded Debt
covenant, and Borrower shall be prohibited from incurring any additional Funded
Debt from the date of measurement until such default is cured. In the event of
any non-compliance
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with this covenant, Borrower shall deliver to Lender a certificate from
Borrower's independent public accountants as to subsequent compliance to cure
any such default.
5.16 Minimum Consolidated Tangible Net Worth
Borrower will maintain, at all times until the maturity of all Project
Loans, a Consolidated Tangible Net Worth, determined as of December 31 of each
year, based upon the annual audited financial statements, of at least Five
Million and 00/100 Dollars ($5,000,000.00) plus fifty percent (50%) of the
Consolidated Net Income earned after December 31, 1995, assuming for purposes of
this Consolidated Tangible Net Worth calculation only that the maximum
Management Bonuses permitted pursuant to Section 10.12 of that certain Indenture
dated as of October 18, 1996 by and between Borrower and National City Bank of
Minneapolis, National Association, as Trustee, are paid as of December 31 of
each year and taxes are then determined based upon the assumed Consolidated Net
Income level. Compliance with this covenant shall be determined quarterly but
the net worth utilized each calendar quarter in March, June and September shall
be the Consolidated Tangible Net Worth amount as determined on the previous
December 31.
Compliance with this covenant shall be measured on the last day of
March, June, September and December of each year, and Borrower shall provide
Lender with a detailed calculation of the Consolidated Tangible Net Worth as of
each quarter within forty-five (45) days of each calendar quarter except
December 31 for which Borrower shall have seventy-five (75) days to provide the
calculation. Borrower shall have thirty (30) days to cure any default in this
Consolidated Tangible Net Worth covenant. In the event of any non-compliance
with this covenant, Borrower shall deliver to Lender a certificate from
Borrower's independent public accountants as to subsequent compliance to cure
any such default.
5.17 Miscellaneous
Borrower shall also:
(a) Maintain its qualification to transact business in its state of
incorporation, in each state in which a Project is located, and
in each jurisdiction where failure so to qualify would
permanently preclude Borrower from enforcing its rights with
respect to any material asset or would expose Borrower to any
material liability.
(b) File all tax returns and reports which are required by law to be
filed by it and pay before they become delinquent all taxes,
assessments and governmental charges and levies imposed upon it
and all claims or demands of any kind which, if unpaid, might
result in the creation of a lien upon its property; provided that
the foregoing items need not be paid if they are being contested
in good faith by appropriate proceedings in accordance with
applicable terms of the Mortgage covering said property, and as
long as the Borrower's title to its property is not materially
adversely affected, its use of such property in the ordinary
course of its business is not materially interfered with, and
adequate reserves with respect thereto have been set aside on the
Borrower's books in accordance with GAAP.
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(c) Give prompt written notice to Lender of the commencement of any
action, suit or proceeding before any court or arbitrator or any
governmental department, board, agency or other instrumentality
affecting Borrower or any property of Borrower or to which
Borrower is a party in which an adverse determination or result
could have a material adverse effect on the business, operations,
property or condition (financial or otherwise) of Borrower or on
the ability of any of them to perform its obligations under this
Agreement and the other Loan Documents, stating the nature and
status of such action, suit or proceeding.
6. DEFAULTS
6.1 Events of Default
Any of the following events shall constitute an event of default under
this Agreement:
(a) Borrower shall default in the payment of principal due according
to the terms hereof or of the Note.
(b) Borrower shall default in the payment of interest on Advances
made by Lender, or in the payment of fees or any other amounts
payable hereunder, under the Note or under any of the other Loan
Documents.
(c) Borrower shall default in the performance or observance of any
other agreement, covenant or condition required to be performed
or observed by Borrower under the terms of this Agreement, which
default, if curable, is not cured within thirty (30) days after
Lender gives Borrower written notice thereof; provided, however,
that if said curable default cannot reasonably be cured within
said thirty (30) day period, but Borrower commences the cure
thereof within said thirty (30) day period and thereafter
prosecutes such cure diligently, continuously and in good faith,
said thirty (30) day period shall be extended by the period of
time reasonably required to cure the same, not to exceed an
additional sixty (60) days.
(d) Any representation or warranty made by Borrower or any Guarantor
in this Agreement or in any of the other Loan Documents, or in
any certificate or document furnished under the terms of this
Agreement or in connection with the Loan, shall be untrue or
incomplete in any material respect.
(e) An event of default shall exist under the terms of any other Loan
Document.
(f) Work on any Project shall be substantially abandoned, or shall,
by reason of Borrower's fault, be delayed or discontinued for an
unreasonably long period or for no valid, good faith business
reason, or such construction shall be delayed for any reason to
the extent that Completion of the Project cannot, in the
reasonable judgment of Lender, be accomplished prior to the
Completion Date for the Project.
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(g) Borrower, or any Affiliate of Borrower, shall become insolvent or
shall commit an act of bankruptcy; or shall apply for, consent to
or permit the appointment of a receiver, custodian, trustee or
liquidator for it or any of its property or assets; or shall fail
to, or admit in writing its inability to, pay its debts as they
mature; or shall make a general assignment for the benefit of
creditors or shall be adjudicated bankrupt or insolvent; or shall
take other similar action for the benefit or protection of its
creditors; or shall give notice to any governmental body of
insolvency or pending insolvency or suspension of operations; or
shall file a voluntary petition in bankruptcy or a petition or an
answer seeking reorganization or an arrangement with creditors,
or to take advantage of any bankruptcy, reorganization,
insolvency, readjustment of debt, rearrangement, dissolution,
liquidation or other similar debtor relief law or statute; or
shall file an answer admitting the material allegations of a
petition filed against it in any proceeding under any such law or
statute; or shall be dissolved, liquidated, terminated or merged
without Lender's prior written consent; or shall effect a plan or
other arrangement with creditors; or a trustee, receiver,
liquidator or custodian shall be appointed for it or for any of
its property or assets and shall not be discharged within sixty
(60) days after the date of his appointment; or a petition in
involuntary bankruptcy or similar proceedings is filed against it
and is not dismissed within sixty (60) days after the date of its
filing.
(h) A judgment or judgments for the payment of money in excess of the
sum of $25,000.00 in the aggregate shall be rendered against
Borrower, and said party shall not (i) discharge the same or
provide for the discharge thereof in accordance with the terms
thereof, or (ii) procure a stay of execution thereof, prior to
any execution on such judgment by the judgment creditor, within
sixty (60) days from the date of entry thereof, and within said
period of sixty (60) days, or such longer period during which
execution of such judgment shall be stayed, appeal therefrom and
cause the execution thereof to be stayed during such appeal.
(i) The maturity of any Lender Debt of Borrower, or any Affiliate of
Borrower (other than indebtedness under this Agreement), shall be
accelerated, or Borrower, or any such Affiliate, shall fail to
pay any such Lender Debt when due (after the lapse of any
applicable grace period) or, in the case of such indebtedness
payable on demand, when demanded (after the lapse of any
applicable grace period), or any event shall occur or condition
shall exist and shall continue for more than the period of grace,
if any, applicable thereto and shall have the effect of causing,
or permitting the holder of any such indebtedness or any trustee
or other Person, party or entity acting on behalf of such holder
to cause, such or Lender Debt to become due prior to its stated
maturity or to realize upon any collateral given as security
therefor.
(j) An Event of Default occurs under the terms of the Senior
Subordinated Debentures.
(k) Borrower shall be terminated, dissolved, liquidated or wound-up.
44
<PAGE>
(l) Peter Pflaum shall die or shall become legally incompetent. The
default described in this Section 6.1(m) may be cured by the
immediate implementation of the Term-Out provisions set forth in
Section 1.9 hereof, with the then Total Revolving Outstandings
plus the aggregate unpaid principal balance of all Construction
Project Loans reduced to zero (0) within six (6) months from the
date of such death or legal incompetence.
(m) Borrower shall fail to comply with the convenants set forth in
Section 5.15 and 5.16 hereof.
6.2 Rights and Remedies
Upon the occurrence of an event of default, unless such event of
default is subsequently waived in writing by Lender, Lender shall be entitled,
at the option of Lender, to exercise any or all of the following rights and
remedies, consecutively or simultaneously, and in any order:
(a) Lender may make one (1) or more further Advances, without
liability to make any subsequent Advances.
(b) Lender may suspend its obligation to make Advances under this
Agreement, without notice to Borrower.
(c) Lender may terminate its obligation to make Advances under this
Agreement, and may declare the entire unpaid principal balance of
the Advances made under this Agreement to be immediately due and
payable, together with accrued and unpaid interest on such
Advances, without notice to or demand on Borrower.
(d) Lender may exercise any or all remedies specified herein and/or
in the other Loan Documents, including (without limiting the
generality of the foregoing) the right to foreclose the Mortgage
or to sell the property covered thereby pursuant to the terms
thereof, and/or any other remedies which it may have therefor at
law, in equity or under statute.
(e) Lender may cure the event of default on behalf of Borrower, and,
in doing so, may enter upon any Project, and may expend such sums
as it may deem desirable, including attorneys' fees, all of which
shall be deemed to be Advances hereunder, even though causing the
Loan to exceed the face amount of the Note, shall bear interest
at the Default Rate and shall be payable by Borrower on demand.
(f) Borrower hereby irrevocably authorizes Lender to set off any sum
due to or incurred by Lender against all deposits and credits of
Borrower with, and any and all claims of Borrower against,
Lender. Such right shall exist whether or not Lender shall have
made any demand hereunder or under any other Loan Document,
whether or not said sums, or any part thereof, or deposits and
credits held for the account of Borrower is or are matured or
unmatured, and regardless of the existence or adequacy of any
collateral, guaranty or any other security, right or remedy
available to Lender. Lender agrees that, as promptly as is
reasonably
45
<PAGE>
possible after the exercise of any such setoff right, it shall
notify Borrower of its exercise of such setoff right; provided,
however, that the failure of Lender to provide such notice shall
not affect the validity of the exercise of such setoff rights.
Nothing in this Agreement shall be deemed a waiver or prohibition
of or restriction on Lender to all rights of banker's lien,
setoff and counterclaim available pursuant to law.
In addition, upon the occurrence of any event described in Section
6.1(g) hereof which will not become an event of default prior to the expiration
of some period of time, Lender may suspend its obligations to fund Advances
hereunder immediately upon the occurrence of said event.
6.3 Completion of a Project by Lender
In addition, in case of the occurrence of an event of default specified
in Section 6.1(f) hereof, or any event of default caused by, or which results
in, Borrower's failure, for any reason, to continue with construction of a
Project as required by this Agreement, then Lender may (but shall not be
obligated to), in addition to, or in concert with, the other remedies referred
to above, take over and complete construction of the Project in accordance with
the Plans, with such changes therein as Lender may, in its discretion, deem
appropriate, all at the risk, cost and expense of Borrower. Lender may assume or
reject any contracts entered into by Borrower in connection with the Project,
may enter into additional or different contracts for work, services, labor and
materials required, in the judgment of Lender, to complete the Project, and may
pay, compromise and settle all claims in connection with the Project. All sums,
including reasonable attorneys' fees, and charges or fees for supervision and
inspection of the construction and for any other necessary or desirable purpose
in the discretion of Lender expended by Lender in completing or attempting to
complete the Project (whether aggregating more, or less, than the face amount of
the Note), shall be deemed Advances made by Lender to Borrower hereunder, and
Borrower shall be liable to Lender, on demand, for the repayment of such sums,
together with interest on such sums from the date of their expenditure at the
Default Rate. Lender may, in its discretion, at any time abandon work on the
Project, after having commenced such work, and may recommence such work at any
time, it being understood that nothing in this Section shall impose any
obligation on Lender either to complete or not to complete the Project. For the
purpose of carrying out the provisions of this Section, Borrower irrevocably
appoints Lender its attorney-in-fact, with full power of substitution, to
execute and deliver all such documents, to pay and receive such funds, and to
take such action as may be necessary, in the judgment of Lender, to complete the
Project. This power of attorney is coupled with an interest and is irrevocable.
Lender, however, shall have no obligation to undertake any of the foregoing,
and, if Lender does undertake any of the same, it shall have no liability for
the adequacy, sufficiency or completion thereof.
7. MISCELLANEOUS
7.1 Binding Effect; Waivers; Cumulative Rights and Remedies
The provisions of this Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective heirs, executors,
administrators, personal representatives, legal
46
<PAGE>
representatives, successors and assigns, subject to the provisions of Section
5.11; provided, however, that neither this Agreement nor the proceeds of the
Loan may be assigned by Borrower voluntarily, by operation of law or otherwise,
without the prior written consent of Lender. No delay on the part of Lender in
exercising any right, remedy, power or privilege hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any right, remedy,
power or privilege hereunder constitute such a waiver or exhaust the same, all
of which shall be continuing. The rights and remedies of Lender specified in
this Agreement shall be in addition to, and not exclusive of, any other rights
and remedies which Lender would otherwise have at law, in equity or by statute,
and all such rights and remedies, together with Lender's rights and remedies
under the other Loan Documents, are cumulative and may be exercised
individually, concurrently, successively and in any order.
7.2 Survival
All agreements, representations and warranties made in this Agreement
shall survive the execution of this Agreement, the making of the Advances by
Lender, and the execution of the other Loan Documents, and shall continue until
Lender receives payment in full of all indebtedness of Borrower incurred under
this Agreement, under the Indemnification Agreements and under the other Loan
Documents and Lender has no obligation to make any further Advances hereunder.
7.3 Governing Law; Waiver of Jury Trial; Venue
THIS AGREEMENT, THE RIGHTS OF THE PARTIES HEREUNDER, AND THE
CONSTRUCTION, INTERPRETATION, VALIDITY AND ENFORCEABILITY HEREOF SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF
MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF, BUT
GIVING EFFECT TO FEDERAL LAWS OF THE UNITED STATES RELATING TO NATIONAL BANKS.
BORROWER AND LENDER HEREBY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR
PROCEEDING RELATING TO THE LOAN, THE LOAN DOCUMENTS AND/OR THE TRANSACTIONS
CONTEMPLATED THEREBY. AT THE OPTION OF LENDER, THIS AGREEMENT MAY BE ENFORCED IN
ANY FEDERAL COURT OR MINNESOTA STATE COURT SITTING IN HENNEPIN OR RAMSEY COUNTY,
MINNESOTA; AND BORROWER CONSENTS TO THE JURISDICTION AND VENUE OF ANY SUCH COURT
AND WAIVES ANY ARGUMENT THAT VENUE IN SUCH FORUMS IS NOT CONVENIENT. IN THE
EVENT BORROWER COMMENCES ANY ACTION IN ANOTHER JURISDICTION OR VENUE UNDER ANY
TORT OR CONTRACT THEORY ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP
CREATED BY THIS AGREEMENT, LENDER, AT ITS OPTION, SHALL BE ENTITLED TO HAVE THE
CASE TRANSFERRED TO ONE OF THE JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF
SUCH TRANSFER CANNOT BE ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE
DISMISSED WITHOUT PREJUDICE.
47
<PAGE>
7.4 Counterparts
This Agreement may be executed in any number of counterparts, all of
which shall constitute a single Agreement.
7.5 Notices
Any notice required or permitted to be given by any party hereto to the
other under the terms of this Agreement, or documents related hereto, shall be
in writing and shall be sent by manual delivery, telegram, facsimile
transmission, overnight courier, or United States registered or certified mail,
return receipt requested (postage prepaid), addressed to such party at the
address specified on the signature page(s) hereof, or at such other address in
the United States of America as such party shall have specified to the other
party hereto in writing, at least ten (10) days prior to the effective date of
said change of address. All periods of notice shall be measured from the date of
delivery thereof if manually delivered, from the date of sending thereof if sent
by telegram or facsimile transmission, from the first Business Day after the
date of sending if sent by overnight courier, or from four (4) days after the
date of mailing if so mailed.
7.6 Lender's Signs
Lender may, if it so desires, at Borrower's cost and expense, place a
sign of reasonable size on any Project Land, indicating that Lender is providing
financing for the Project to be constructed thereon, and/or may otherwise
publicize its involvement with said Project including, but not limited to,
issuing press releases.
7.7 No Third Party Reliance
No third party shall be entitled to rely upon this Agreement or to have
any of the benefits of Lender's interest hereunder, unless such third party is
an express assignee of all or a portion of Lender's interest hereunder.
7.8 Time of the Essence
Time is of the essence hereof with respect to the dates, terms and
conditions of this Agreement.
7.9 Entire Agreement: No Oral Modifications
This Agreement, the Guaranty, the other Loan Documents and the other
documents mentioned herein set forth the entire agreement of the parties with
respect to the Loan and supersede all prior written or oral understandings and
agreements between them with respect thereto. No modification or waiver of any
provision of this Agreement shall be effective unless set forth in writing and
signed by the parties hereto.
48
<PAGE>
7.10 Captions
The headings or captions of the Articles and Sections set forth herein
are for convenience only, are not a part of this Agreement and are not to be
considered in interpreting this Agreement.
7.11 Borrower-Lender Relationship
The relationship between Borrower and Lender created hereby and by the
other Loan Documents shall be that of a borrower and a lender only, and in no
event shall Lender be deemed to be a partner of, or a joint venturer with,
Borrower.
7.12 Release of Guarantors
Upon the execution and delivery of the Loan Documents and compliance
with the requirements of Section 2.1 hereof, Guarantors shall be released from
all liability under the Guaranty and Indemnification Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
Address: LUNDGREN BROS. CONSTRUCTION, INC.,
a Minnesota corporation
935 East Wayzata Boulevard
Wayzata, Minnesota 55391 By:
---------------------------------
Peter Pflaum
Its: President
Address: U.S. BANK NATIONAL ASSOCIATION
U.S. Bank Place - MPFPO8O2
601 Second Avenue South By:
Minneapolis, Minnesota 55402-4302 ---------------------------------
Attention: Real Estate Banking Its:
Division Head ----------------------------
49
<PAGE>
EXHIBIT "A"
AMENDMENT TO MORTGAGE
1
<PAGE>
AMENDMENT OF MORTGAGE AND SECURITY AGREEMENT
AND FIXTURE FINANCING STATEMENT
This Amendment to Mortgage and Security Agreement and Fixture Financing
Statement is made and entered into as of the ______ day of ________________,
19____, by and between U.S. BANK NATIONAL ASSOCIATION (formerly known as First
Bank National Association), a national banking association ("Mortgagee"), ,
whose post office address is 601 Second Avenue South, MPFP0802, Minneapolis,
Minnesota 55402-4302, Attn: Real Estate Banking Group and LUNDGREN BROS.
CONSTRUCTION, INC., a Minnesota corporation (hereinafter referred to as the
"Mortgagor"), whose post office address is 935 East Wayzata Boulevard, Wayzata,
Minnesota 55391.
R E C I T A L S
7.1 Mortgagee has made a revolving construction and development loan
("Loan") to Mortgagor in the sum of Five Million and No/100 Dollars
($7,500,000.00).
7.2 To evidence the Loan, the Mortgagor executed and delivered to
Mortgagee an Amended and Restated Revolving Credit Note dated December ______,
1998, in the original sum of Seven Million Five Hundred Thousand and No/100
Dollars ($7,500,000.00) ("Note") payable to the order of Lender.
7.3 The Note was secured by a Mortgage and Security Agreement and
Fixture Financing Statement dated April _____, 1997, filed in the office of the
Hennepin County Recorder on April ______, 1997, as Document No. ______________
and in the office of the Hennepin County Registrar of Titles on April __, 1997
as Document No. _______ and in the offices of the Dakota County Recorder on
April __, 1997 as Document No. _______ , as amended by the Amendment to Mortgage
dated December __, 1998, recorded on _________________, 19__, in the office of
the Hennepin County Recorder/Registrar of Titles, as Document No.
____________________, and on ____________________, 19__, in the office of the
Carver County Recorder/Registrar of Titles (collectively as amended the
"Mortgage"), on certain property located in Hennepin, Dakota, Carver and
______________________ Counties, Minnesota, and legally described therein.
2
<PAGE>
7.4 Mortgagor has requested that the Mortgagee agree to amend and
modify the Note. Mortgagee has agreed to such amendment and modification upon
the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the above recitals and other
good and valuable consideration, the receipt of which is hereby acknowledged,
Mortgagor and Mortgagee do hereby amend the terms of the Mortgage as follows:
(a) Exhibit "A" attached to the Mortgage and the real property
conveyed therein, is hereby amended and supplemented and the
real property described in Exhibit "A" attached hereto shall
become a part thereof. All references in the Mortgage to
Exhibit "A" and/or the Premises shall refer to Exhibit "A" and
the Premises as amended hereby.
(b) All references in the Mortgage to the county wherein the
Premises shall is located shall be amended to include the
County of _________________.
(c) Except as amended hereby, all provisions of the Mortgage shall
remain in full force and effect and are not further modified,
and the liens securing the Note are continued and carried
forward in full force and effect in accordance with their
terms.
IN WITNESS WHEREOF, the parties hereto have executed the foregoing
instrument as of the date first above written.
U.S. BANK NATIONAL
ASSOCIATION, a national banking
association
By:
------------------------------
Its:
------------------------------
LUNDGREN BROS. CONSTRUCTION,
INC., a Minnesota corporation
By:
------------------------------
Its:
------------------------------
3
<PAGE>
STATE OF MINNESOTA )
) ss.
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this _______ day of
__________, 199___, by ________________________________, the
_______________________ of U.S. Bank National Association, a national banking
association, on behalf of said association.
-------------------------------------
Notary Public
STATE OF MINNESOTA )
) ss.
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this _______ day of
__________, 199 , by ________________________________, the
_______________________ of Lundgren Bros. Construction, Inc., a Minnesota
corporation, on behalf of said corporation.
-------------------------------------
Notary Public
THIS DOCUMENT DRAFTED BY
Oppenheimer Wolff & Donnelly (DRS)
3400 Plaza VII
45 South Seventh Street
Minneapolis, Minnesota 55402
Telephone: (612) 607-7000
4
<PAGE>
EXHIBIT "A"
LEGAL DESCRIPTION
<PAGE>
EXHIBIT "B"
APPLICATION AND CERTIFICATE FOR PAYMENT
<PAGE>
EXHIBIT "C"
BORROWING BASE CERTIFICATE
<PAGE>
LUNDGREN BROS. CONSTRUCTION, INC. -- U.S. BANK NATIONAL ASSOCIATION
BORROWING BASE CERTIFICATE _____________, 199___
The undersigned hereby certifies to U.S. Bank National Association ("Bank") that
(a) all information set forth on this Borrowing Base Certificate and the
attached Borrowing Base Certificate Exhibit A is true, correct, complete and
accurate on the date set forth below; (b) no uncured Event of Default (as that
term is defined in the Amended and Restated Revolving Construction and
Development Loan Agreement ("Loan Agreement"), dated ________, 1998, between the
Bank and Lundgren Bros. Construction, Inc.) exists on the date set forth below,
except as set forth below or in previous notices sent, or certificates delivered
to the Bank as set forth below; and (c) this Certificate complies with all of
the terms and provisions of the Loan Agreement.
Unit Summary
<TABLE>
<CAPTION>
Number of Units Amount of
Construction
Project Loans
--------------- -------------
<S> <C> <C>
Total Housing Units Under Construction
--------------- -------------
Presold Units
--------------- -------------
Models
--------------- -------------
Spec Units
--------------- -------------
Models and Specs Maximum = (10 Models and
15 Specs)
--------------- -------------
</TABLE>
Notices The following notices have been provided to U.S. Bank
- ------- National Association and remain effective as of the date
hereof:
None.
Certified: Lundgren Bros. Construction, Inc.
By: Date:
------------------------------ ---------------------
Its:
------------------------------
<PAGE>
EXHIBIT "D"
AMENDMENT TO MORTGAGE
1
<PAGE>
AMENDMENT OF MORTGAGE AND SECURITY AGREEMENT
AND FIXTURE FINANCING STATEMENT
This Amendment to Mortgage and Security Agreement and Fixture Financing
Statement is made and entered into as of the ______ day of ________________,
1998 by and between U.S. BANK NATIONAL ASSOCIATION (formerly known as First Bank
National Association), a national banking association ("Mortgagee"), whose post
office address is 601 Second Avenue South, MPFP0802, Minneapolis, Minnesota
55402-4302, Attn: Real Estate Banking Group and LUNDGREN BROS. CONSTRUCTION,
INC., a Minnesota corporation (hereinafter referred to as the "Mortgagor"),
whose post office address is 935 East Wayzata Boulevard, Wayzata, Minnesota
55391.
R E C I T A L S
7.1 Mortgagee has made a revolving construction and development loan
("Loan") to Mortgagor in the sum of Five Million and No/100 Dollars
($5,000,000.00).
7.2 To evidence the Loan, the Mortgagor executed and delivered to
Mortgagee a Revolving Credit Note dated April 18, 1997, in the original sum of
Five Million and No/100 Dollars ($5,000,000.00) ("Original Note") payable to the
order of Lender.
7.3 The Original Note was secured by a Mortgage and Security Agreement
and Fixture Financing Statement dated April 18, 1997, executed and delivered by
Mortgagor in favor of Mortgagee to secure the Original Note, including all
amendments thereof and supplements thereto, which Mortgage was filed on
_________________ in the office of the (COUNTY RECORDER) (REGISTRAR OF TITLES),
______________________ County, Minnesota, as Document No. ____________________,
and which Mortgage has been amended by the Amendments to Mortgage dated
______________________, and filed on _____________________ in the office of the
(COUNTY RECORDER) (REGISTRAR OF TITLES), ______________________, County,
Minnesota, as Document Nos. _____________________ (collectively the "Mortgage"),
on certain property located in Hennepin and Dakota and ______________________
Counties, Minnesota, and legally described therein, and upon which Mortgage
Registry tax in the amount of $ _____ was paid as evidenced by receipt no.
______________________.
2
<PAGE>
7.4 Mortgagor has requested that the Mortgagee agree to amend and
modify the Note to increase the amount of the loan to Seven Million Five Hundred
Thousand and 00/100 Dollars ($7,500,000.00). Mortgagee has agreed to such
amendment and modification upon the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the above recitals and other good
and valuable consideration, the receipt of which is hereby acknowledged,
Mortgagor and Mortgagee do hereby amend the terms of the Mortgage as follows:
(a) The Original Note has been replaced by the Amended and Restated
Revolving Credit Note of even dated herewith from Mortgagor to
Mortgagee in the principal amount of Seven Million Five Hundred
Thousand and 00/100 Dollars ($7,500,000.00) (hereinafter referred
to as the "Note"). The maximum principal amount secured by the
Mortgage is hereby increased to Seven Million Five Hundred
Thousand and 00/100 Dollars ($7,500,000.00), and Mortgagee shall
pay such additional Mortgage Registry tax as required for the
recording of this Amendment.
(b) All references in the Mortgage to the Original Note shall
hereafter mean the Note as defined herein.
(c) Section 10.9 of the Mortgage is deleted in its entirety and
replaced with the following:
10.9 REVOLVING LINE OF CREDIT MORTGAGE. THIS MORTGAGE
SECURES A REVOLVING LINE OF CREDIT UNDER WHICH ADVANCES,
PAYMENTS AND READVANCES MAY BE MADE FROM TIME TO TIME. THE
MAXIMUM AMOUNT OF THE LINE OF CREDIT WHICH MAY BE SECURED
AT ANY ONE TIME UNDER THIS MORTGAGE IS SEVEN MILLION FIVE
HUNDRED THOUSAND AND 00/100 DOLLARS ($7,500,000.00). THE
PROVISIONS OF MINN. STATS. SECTION 507.325 SHALL
ACCORDINGLY APPLY TO THIS MORTGAGE.
(d) Notwithstanding anything to the contrary contained in the
Mortgage, the unpaid balance of the principal together with
interest thereon payable under the Note or any amounts payable
under the Mortgage shall be due and payable in any event on May
31, 2001.
(e) Except as amended hereby, all provisions of the Mortgage shall
remain in full force and effect and are not further modified, and
the liens securing the Note are continued and carried forward in
full force and effect in accordance with their terms.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed the foregoing
instrument as of the date first above written.
U.S. BANK NATIONAL
ASSOCIATION, a national banking
association
By:
--------------------------
Its:
--------------------------
LUNDGREN BROS. CONSTRUCTION,
INC., a Minnesota corporation
By:
--------------------------
Its:
--------------------------
STATE OF MINNESOTA )
) ss.
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this _______ day of
__________, 1998, by ________________________________, the ____________________
of U.S. Bank National Association, a national banking association, on behalf of
said association.
------------------------------
Notary Public
STATE OF MINNESOTA )
) ss.
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this _______ day of
__________, 1998, by ________________________________, the ____________________
of Lundgren Bros. Construction, Inc., a Minnesota corporation, on behalf of said
corporation.
------------------------------
Notary Public
THIS DOCUMENT DRAFTED BY
Oppenheimer Wolff & Donnelly (DRS)
3400 Plaza VII
45 South Seventh Street
Minneapolis, Minnesota 55402
Telephone: (612) 607-7000
4
<PAGE>
EXHIBIT "A"
LEGAL DESCRIPTION
Parcel I:
Lot 7, Block 2, The Woods at Longacres 3rd Addition, according to the recorded
plat thereof, Carver County, Minnesota.
Parcel II:
Lot 12, Block 1, Highlands on Lake St. Joe, according to the recorded plat
thereof, Carver County, Minnesota.
Parcel III:
Lot 11, Block 1, March Pointe, according to the recorded plat thereof, Hennepin
County, Minnesota.
Parcel IV
Lot 4, Block 3, Plum Tree 3rd Addition, according to the recorded plat thereof,
Hennepin County, Minnesota.
1
<PAGE>
EXHIBIT "E"
DRAW REQUEST CERTIFICATION
1
<PAGE>
DRAW REQUEST
In accordance with the attached Collateral Certificate and Borrowing Base
Certificate, Borrower has requested a draw in the amount of $_______________ as
of ________________, 199__.
BORROWER
LUNDGREN BROS. CONSTRUCTION, INC.,
a Minnesota corporation
By:
---------------------------------------
Its:
---------------------------------------
2
<PAGE>
EXHIBIT "F"
LETTER OF INSTRUCTIONS
1
<PAGE>
__________________, 1998
BY OVERNIGHT COURIER
Chicago Title Insurance Company
2740 West 80th Street, Suite 120
Bloomington, Minnesota 55431
Attention: _________________
Re: $7,500,000.00 Revolving Single Family Residential
Development Loan from U.S. Bank National Association
("Bank") to Lundgren Bros. Construction, Inc., (Borrower")
Mortgage and Security Agreement and Fixture Financing
Statement by and between Bank and Borrower dated April 18,
1997, as amended _________________________ ("Mortgage")
Your Mortgagee's Policy of Title Insurance No. _____ ("Policy)
Dear _______________:
Enclosed please find a fully completed, dated, executed and acknowledged
Amendment of Mortgage and Security Agreement and Fixture Financing Statement
("Amendment of Mortgage"), covering real property located in ____________
County, Minnesota ("Subject Property").
Please record the Amendment of Mortgage in the office of the County Recorder
(Registrar of Titles) in and for said County, at the sole cost and expense of
the Borrower named therein at such time as you are prepared to issue to the Bank
an Endorsement under the Policy in the same form and amount as, including the
same endorsements as are attached to, and with the same deletions from the
Standard Printed Exceptions and Standard Exclusions from Coverage as are made
in, the Policy, covering the Subject Property and insuring that the Mortgage, as
amended and supplemented by the Amendment of Mortgage, is a first lien on the
Subject Property, free and clear of all mortgages, liens, exceptions,
encumbrances or objections to title except (a) the liens of unpaid taxes which
are not yet delinquent and (b) the items numbered _____, ______, and _______ of
Schedule B of your Commitment to Insure covering the Order Number _____________;
Effective Date: _____________, 1997, a copy of which is attached hereto and is
hereby made a part hereof. Please have an appropriate, authorized officer of
Chicago Title Insurance Company date, sign and return to the undersigned by
facsimile transmission (at 612/973-0830) and by overnight air courier, the
enclosed copy of this letter. Notwithstanding
2
<PAGE>
our failure to receive a copy of this letter executed by an authorized agent of
Chicago Title Insurance Company, your recordation of the Mortgage and issuance
of the Endorsement shall constitute evidence of your agreement with these
instructions.
All premiums and other costs associated with the issuance of the Endorsement and
compliance with these instructions must be paid by the Borrower.
If you have any questions concerning any of these instructions, please contact
the undersigned before acting thereon.
Sincerely,
Karen Olson
Senior Loan Administrator
KO:
Attachment
cc: Michael Raarup
ACKNOWLEDGMENT AND ACCEPTANCE
The undersigned hereby acknowledges receipt of the foregoing letter of
instructions, agrees to comply therewith and agrees to issue the Endorsement in
accordance with the terms thereof.
CHICAGO TITLE INSURANCE COMPANY
By:
--------------------------------
Its:
-------------------------------
3
<PAGE>
EXHIBIT "G"
ASSIGNMENT OF GENERAL CONTRACT
-1-
<PAGE>
ASSIGNMENT OF GENERAL CONTRACT
THIS ASSIGNMENT is made this _____ day of ____________, 199_, by
LUNDGREN BROS. CONSTRUCTION, INC., a Minnesota corporation (hereinafter
collectively referred to as the "Borrower"), whose address is c/o Peter Pflaum,
935 East Wayzata Boulevard, Wayzata, Minnesota 55391, to U.S. BANK NATIONAL
ASSOCIATION, a national banking association (hereinafter referred to as the
"Lender"), whose address is U.S. Bank Place, 601 Second Avenue South,
Minneapolis, Minnesota 55402-4302.
RECITALS
A. The Borrower is the owner of certain real property and the
improvements thereon located in the City of ______________,
County of ____________, State of Minnesota (hereinafter
referred to as the "Premises").
B. The Borrower has executed and delivered to and with
______________ ______________________, a _____________________
(hereinafter referred to as the "Contractor") a certain
agreement dated as of _____________, 19 ____ (hereinafter
referred to as the "Contract") providing that Contractor will
act as general contractor in connection with the construction
of certain improvements upon the Premises (hereinafter
referred to as the "Improvements").
C. The Lender has made to the Borrower a $7,500,000.00 revolving
and development construction loan (hereinafter referred to as
the "Loan") pursuant to a certain Revolving Construction and
Development Loan Agreement of even date herewith (hereinafter
referred to as the "Loan Agreement") for the purpose of
financing a portion of the costs of the construction of the
Improvements, and as a condition of making certain advances
under the Loan, the Lender requires the assignment to it of
the Contract and certain subcontracts and the consent of the
Contractor and certain subcontractors thereto as herein set
forth.
D. The Loan is evidenced by an Amended and Restated Revolving
Credit Note dated as of _________________, 1998 (hereinafter
referred to as the "Note") and secured by a Mortgage and
Security Agreement and Fixture Financing Statement
(hereinafter referred to as the "Mortgage"), dated April 18,
1997, as amended by the Amendments to Mortgage dated
______________________ and _________________ (the Note, the
Mortgage and all other documents securing the Loan are
hereinafter collectively referred to as the "Loan Documents").
NOW, THEREFORE, to secure the Loan and all advances to and obligations
of the Borrower under the Loan Agreement and the Loan Documents for the
Improvements, the Borrower hereby sells, assigns and transfers and sets over
unto the Lender and its successors and assigns, and grants a security interest
in all of the right, title and interest of the Borrower in and to the Contract
and in and to any and all subcontracts (hereinafter referred to as the
-1-
<PAGE>
"Subcontracts") now or hereafter entered into by Contractor in connection with
the construction of the Improvements, and the Borrower hereby represents,
warrants and agrees as follows:
1. The copy of the Contract attached hereto as Exhibit "A" is a
true, correct and complete copy of the Contract; there have
been no prior assignments of the Contract; the Contract is
valid, enforceable and in full force and effect and has not
been amended or modified in any manner; neither party to the
Contract is in default under the terms of the Contract; and
all covenants, conditions and agreements contained in the
Contract have been performed as required therein, except those
not due to be performed until after the date hereof.
2. The Borrower agrees not to further assign, sell, pledge,
mortgage or otherwise transfer or encumber its interest in the
Contract so long as this Assignment is in effect. The Borrower
agrees that it shall not amend or modify the terms of the
Contract without the prior written approval of the Lender.
3. This Assignment shall constitute a perfected, absolute and
present assignment provided that the Lender shall have no
right under this Assignment to enforce the provisions of the
Contract until an Event of Default shall have occurred under
the terms of the Construction Loan Agreement. Upon the
occurrence of such an Event of Default, the Lender may,
without affecting any of its rights or remedies against the
Borrower under any other instrument, document or agreement,
exercise its rights under this Assignment as the Borrower's
attorney-in-fact in any manner permitted by law, and in
addition, the Lender shall have the right to exercise and
enforce any or all rights and remedies available to a secured
party under the Uniform Commercial Code.
4. The Borrower hereby irrevocably constitutes and appoints the
Lender as its attorney-in-fact upon the occurrence of an Event
of Default under the Construction Loan Agreement to demand,
receive and enforce the Borrower's rights with respect to the
Contract, to make payments under the Contract and to give
appropriate receipts, releases and satisfactions for and on
behalf of and in the name of the Borrower or, at the option of
the Lender, in the name of the Lender, with the same force and
effect as if the Lender had originally executed the Contract.
5. The Lender does not assume any of the obligations or duties of
the Borrower under or with respect to the Contract unless and
until the Lender shall have given the Contractor written
notice that it is exercising its right to complete or cause
the completion of the construction of the Improvements
following the occurrence of an Event of Default under the
Construction Loan Agreement. If the Lender does not undertake
to complete or cause the completion of the construction of the
Improvements, the Lender shall have no liability whatsoever
for the performance of any of the obligations or duties under
the Contract. The Lender may reassign, in its sole discretion,
and for the purpose of completing the Improvements, its
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<PAGE>
right, title and interest in the Contract and Subcontracts
upon notice to the Contractor and Subcontractors, but without
any requirement for the consent of the Borrower.
6. The Borrower agrees to pay all costs and expenses, including
attorney's fees, which the Lender may incur by exercising any
of its rights under this Assignment.
7. Neither this Assignment nor any provision hereof may be
changed, waived, discharged or terminated, except by an
instrument in writing signed by the Borrower and the Lender.
IN WITNESS WHEREOF, the Borrower has executed this Assignment as of the
day and year first written above.
LUNDGREN BROS. CONSTRUCTION,
INC., a Minnesota corporation
By:
--------------------------------
Peter Pflaum
Its: President
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<PAGE>
CONTRACTOR'S CONSENT
The undersigned, ___________________________, a __________________
(hereinafter referred to as the "Contractor"), does hereby consent to the above
Assignment and acknowledges and agrees with U.S. BANK NATIONAL ASSOCIATION, a
national banking association (hereinafter referred to as the "Lender") as
follows:
1. The Contractor acknowledges that it has entered into a certain
construction and development contract with the Borrower
(hereinafter referred to as the "Contract") dated
_____________, 19 ____, a true and correct copy of which is
attached hereto as Exhibit "A", and that it is the Contractor
under the Contract referred to in the foregoing Assignment.
The Contract is valid, enforceable and in full force and
effect and has not been amended or modified in any respect.
2. The Contractor acknowledges that the rights of the Borrower
under the Contract have been collaterally assigned by the
Borrower to the Lender.
3. Upon the occurrence of an Event of Default under the terms of
the Loan Agreement, the Contractor shall, at the Lender's
written request, continue performance on the Lender's behalf
under the Contract in accordance with the terms thereof,
conditioned only upon receipt by the Contractor of payment on
account of its compensation in accordance with the terms and
provisions of the Contract.
4. The disbursement provisions contained in the Loan Agreement
shall control the disbursement of Loan proceeds to the
Borrower notwithstanding any conflicting provisions contained
in the Contract.
5. The Lender may enforce the obligations of the Contractor under
the Contract with the same force and effect as if enforced by
the Borrower and may perform the obligations of the Borrower.
The Contractor will accept such performance in lieu of
performance by the Borrower in satisfaction of the Borrower's
obligations thereunder.
6. The Contractor will give the Lender prompt written notice of
any default by the Borrower under the Contract. The Contractor
will not terminate the Contract on account of any default of
the Borrower thereunder without written notice of such default
to the Lender and will give the Lender thirty (30) days to
cure the default. In the event the Lender elects to cure the
default and does, in fact, cure such default within the time
period set forth herein, the Contractor agrees not to
terminate the Contract. If, however, the Lender elects not to
enforce the Contract against the Contractor, the Lender shall
have no obligation to cure any default of the Borrower under
the Contract.
<PAGE>
7. The Contractor has full authority under all state and local
laws and regulations to perform all of its obligations under
the Contract in accordance with the terms thereof and the
Contractor will comply with all applicable local, state and
federal laws and regulations. Upon completion of the
Improvements, the Contractor will certify to the Lender or its
successors or assigns that the Improvements have been
completed in substantial accordance with the Plans and
Specifications as prepared by _________________________, a
______________________ and all applicable building, fire,
health, zoning, environmental and energy legislation,
ordinances, rules and regulations.
8. The Contractor hereby collectively assigns to the Lender as
collateral security for the Loan all of Contractor's right,
title and interest under the Subcontracts under the same terms
and conditions as contained herein with reference to the
Contract which assignment shall become operative upon the
occurrence of an event of default by the Contractor under the
terms of the Contract or the Subcontracts and the written
assumption by Lender of the Contractor's obligations under the
Subcontracts.
9. The Contractor agrees not to modify or amend the Contract or
any Subcontracts or give effect to any change order without
the Lender's specific written consent.
10. All terms defined in the foregoing Assignment shall have the
same meanings when used in this Consent.
Dated: _______, 199_
CONTRACTOR:
-------------------------------,
a
--------------------------------
By:
--------------------------------
Its:
--------------------------------
-5-
<PAGE>
EXHIBIT "A"
CONTRACT
-1-
<PAGE>
EXHIBIT "H"
CERTIFICATE REGARDING CONSOLIDATED
NET WORTH AND LEVERAGE RATIO
The undersigned, being the Borrower or an authorized representative of the
Borrower, delivers this certificate pursuant to the terms of Sections 5.15 and
5.16 of the Amended and Restated Revolving Construction and Development Loan
Agreement dated as of ___________, 1998, and hereby certifies that for the
quarter immediately preceding the date of this Certificate:
(1) Consolidated Tangible Net Worth $______________ *
(2) Leverage Ratio _________ *
BORROWER
LUNDGREN BROS. CONSTRUCTION,
INC., a Minnesota corporation
By:
-------------------------------------
Its:
------------------------------------
Date:
-----------------------------------
*Calculations attached
-1-
EXHIBIT 10.92
FOURTH AMENDMENT AND RESTATEMENT
OF PROMISSORY NOTE
THIS FOURTH AMENDMENT AND RESTATEMENT OF PROMISSORY NOTE, effective
as of the 23rd day of December, 1998, between LUNDGREN BROS. CONSTRUCTION, INC.,
a Minnesota corporation (the "Borrower"), whose post office address is 935 East
Wayzata Boulevard, Wayzata, Minnesota 55391, and U.S. BANK NATIONAL ASSOCIATION,
a national banking association, formerly known as First Bank National
Association (the "Bank"), whose post office address is 601 Second Avenue South,
Minneapolis, Minnesota 55402-4302.
PRELIMINARY RECITALS:
A. The Borrower has executed and delivered a Promissory Note dated
March 21, 1996 in the original principal amount of One Million and 00/100
Dollars ($1,000,000.00), made payable to the order of the Bank, which Promissory
Note was modified by Amendment and Restatement of Promissory Note dated March
21, 1997, by Second Amendment and Extension of Promissory Note dated March 21,
1998, and by Third Amendment and Restatement of Promissory Note dated April 29,
1998 (the Promissory Note, as so amended, being hereinafter referred to as the
"Note").
B. The parties hereto desire to further amend and fully restate the
terms of the Note in its entirety.
NOW, THEREFORE, in consideration of the above recitals and other
good and valuable consideration, the receipt of which is hereby acknowledged,
the Borrower and the Bank do hereby amend and fully restate the terms of the
Note in its entirety as follows:
PROMISSORY NOTE
$1,500,000.00 Minneapolis, Minnesota
December 23, 1998
FOR VALUE RECEIVED, LUNDGREN BROS. CONSTRUCTION, INC. (the
"Borrower"), promises to pay to the order of U.S. BANK NATIONAL ASSOCIATION,
formerly known as First Bank National Association (the "Bank"), at its office at
601 Second Avenue South, Minneapolis, Minnesota 55402-4302, or at such other
place as any present or future holder of this Note may designate from time to
time, the principal sum of One Million Five Hundred Thousand and 00/100 Dollars
($1,500,000.00) or so much thereof as may be advanced hereunder from time to
time pursuant to the terms of that certain Letter Agreement dated March 21,
1996, as amended by Amendment to Letter Agreement dated March 21, 1997, by
Second Amendment to Letter Agreement dated March 21, 1998, by Third Amendment to
Letter Agreement dated April 29, 1998, and by Fourth Amendment to Letter
Agreement dated December 23, 1998 (the Letter Agreement, as so amended, being
hereinafter referred to as the
<PAGE>
"Letter Agreement"), plus interest thereon from the date of each advance in
whole or in part included in such amount until this Note is fully paid, computed
on the basis of the actual number of days elapsed and a 360-day year, at an
annual rate that shall always be 1.00% per annum in excess of the Reference Rate
and that shall change when and as the Reference Rate shall change. The term
"Reference Rate" means the rate established by the Bank from time to time in its
sole discretion as its Reference Rate; the Bank may lend to its customers at
rates that are at, above or below the Reference Rate. Notwithstanding the
foregoing, after an Event of Default this Note shall bear interest until paid at
2% per annum in excess of the rate otherwise then in effect, which rate shall
continue to vary based on further changes in the Reference Rate.
This Note shall be payable in the following manner:
1. Accrued interest at the variable interest rate set forth above
shall be due and payable on the last day of each calendar
month, commencing on December 31, 1998, until all indebtedness
evidenced hereby is paid in full.
2. On May 31, 2000, all outstanding principal and accrued and
unpaid interest shall be due and payable in full.
This Note is the Note evidencing the Line of Credit as described in
the Letter Agreement, and this Note and the holder hereof are entitled to all of
the benefits provided for in the Letter Agreement, or are referred to therein.
Reference is made to the Letter Agreement for a statement of further terms and
conditions under which this indebtedness was incurred and is to be repaid. The
provisions of the Letter Agreement are hereby incorporated by reference with the
same force and effect as if fully set forth herein.
All or any part of the unpaid balance of this Note may be prepaid at
any time without penalty. At the option of the then holder of this Note, any
payment under this Note may be applied first to the payment of other charges,
fees and expenses under this Note and any other agreement or writing in
connection with this Note, second to the payment of interest accrued through the
date of payment, and third to the payment of principal. Amounts may be advanced
and readvanced under this Note, provided the principal balance outstanding shall
not exceed the amount first above written.
This Note is secured by (i) a Pledge Agreement (the "Pledge
Agreement") dated March 21, 1996 between the Borrower and the Bank, and (ii) a
Control Agreement (the "Control Agreement") dated March 21, 1996 between the
Borrower, the Bank and FBS Investment Services, Inc. The terms of the Pledge
Agreement and the Control Agreement are incorporated herein by reference and
made a part hereof.
The occurrence of any of the following events shall constitute an
Event of Default under this Note: (i) any breach or default in the payment of
this Note, and such breach or default continues for a period of 5 days; or (ii)
any breach or default under the terms of any other note, debenture, indenture,
obligation, mortgage, guaranty, other agreement, or other writing heretofore,
herewith or hereafter existing to which any maker, endorser, guarantor or surety
of this Note or any other person providing security for this Note or for any
guaranty of this Note is a
2
<PAGE>
party including, but not limited to, the Pledge Agreement, the Control Agreement
and the Letter Agreement; or (iii) the insolvency, death, dissolution,
liquidation, merger or consolidation of any such maker, endorser, guarantor,
surety or other person; or (iv) any appointment of a receiver, trustee or
similar officer of any property of any such maker, endorser, guarantor, surety
or other person; or (v) any assignment for the benefit of creditors of any such
maker, endorser, guarantor, surety or other person; or (vi) any commencement of
any proceeding under any bankruptcy, insolvency, receivership, dissolution,
liquidation or similar law by or against any such maker, endorser, guarantor,
surety or other person; or (vii) the sale, lease or other disposition (whether
in one transaction or in a series of transactions) to one or more persons of all
or a substantial part of the assets of any such maker, endorser, guarantor,
surety or other person; or (viii) any such maker, endorser, guarantor, surety or
other person takes any action to revoke or terminate any agreement, liability or
security in favor of the Bank; or (ix) the entry of any final judgment or other
final order for the payment of money in the amount of $25,000.00 or more against
any such maker, endorser, guarantor, surety or other person, which judgment or
order is not or is no longer subject to a stay pending appeal; or (x) the
issuance or levy of any writ, warrant, attachment, garnishment, execution or
other process against any property of any such maker, endorser, guarantor,
surety or other person; or (xi) the attachment of any tax lien to any property
of any such maker, endorser, guarantor, surety or other person; or (xii) any
statement, representation or warranty made by any such maker, endorser,
guarantor, surety or other person (or any representative of any such maker,
endorser, guarantor, surety or other person) to any present or future holder of
this Note at any time shall be incorrect or misleading in any material respect
when made; or (xiii) there is a material adverse change in the condition
(financial or otherwise), business or property of any such maker, endorser,
guarantor, surety or other person; or (xiv) any present or future holder of this
Note shall in good faith believe that the prospect of due and punctual payment
or performance of this Note or the due and punctual payment or performance of
any other note, obligation, mortgage, guaranty, or other agreement heretofore,
herewith or hereafter given to or acquired by any present or future holder of
this Note in connection with this Note is impaired.
Upon the commencement of any proceeding under any bankruptcy law by
or against any such maker, endorser, guarantor, surety or other person, this
Note automatically shall become immediately due and payable for the entire
unpaid principal balance of this Note plus accrued interest and other charges,
fees and expenses under this Note without any declaration, presentment, demand,
protest, or other notice of any kind. Upon the occurrence of any other Event of
Default and at any time thereafter, the then holder of this Note may, at its
option, declare this Note to be immediately due and payable and thereupon this
Note shall become due and payable for the entire unpaid principal balance of
this Note plus accrued interest and other charges, fees and expenses under this
Note without any presentment, demand, protest or other notice of any kind.
The Borrower (i) waives demand, presentment, protest, notice of
protest, notice of dishonor and notice of nonpayment of this Note; (ii) agrees
to promptly provide all present and future holders of this Note from time to
time with financial statements of the Borrower and such other information
respecting the financial condition, business and property of the Borrower as any
such holder of this Note may request, in form and substance acceptable to such
holder of this
3
<PAGE>
Note; (iii) agrees that when or at any time after this Note becomes due the then
holder of this Note may offset or charge the full amount owing on this Note
against any account then maintained by the Borrower with such holder of this
Note without notice; (iv) agrees to pay on demand all fees, costs and expenses
of all present and future holders of this Note in connection with this Note and
any security and guaranties for this Note, and any transactions and matters
relating to this Note and to any security and guaranties for this Note,
including but not limited to audit fees and expenses and reasonable attorneys'
fees and legal expenses, plus interest on such amounts at the rate set forth in
this Note; and (v) consents to the personal jurisdiction of the state and
federal courts located in the State of Minnesota in connection with any
controversy related in any way to this Note or any security or guaranty for this
Note, or any transaction or matter relating to this Note or to any security or
guaranty for this Note, waives any argument that venue in such forums is not
convenient, and agrees that any litigation initiated by the Borrower against the
Bank or any other present or future holder of this Note relating in any way to
this Note or any security or guaranty for this Note, or any transaction or
matter relating to this Note or to any security or guaranty for this Note, shall
be venued in either the District Court of Hennepin County, Minnesota, or the
United States District Court, District of Minnesota, Fourth Division. Interest
on any amount under this Note shall continue to accrue, at the option of any
present or future holder of this Note, until such holder receives final payment
of such amount in collected funds in form and substance acceptable to such
holder.
No waiver of any right or remedy under this Note shall be valid
unless in writing executed by the holder of this Note, and any such waiver shall
be effective only in the specific instance and for the specific purpose given.
All rights and remedies of all present and future holders of this Note shall be
cumulative and may be exercised singly, concurrently or successively. This Note
shall bind the Borrower and the successors and assigns of the Borrower. This
Note shall be governed by and construed in accordance with the laws of the State
of Minnesota.
THE BORROWER REPRESENTS, CERTIFIES, WARRANTS AND AGREES THAT THE
BORROWER HAS READ ALL OF THIS NOTE AND UNDERSTANDS ALL OF THE PROVISIONS OF THIS
NOTE. THE BORROWER ALSO AGREES THAT COMPLIANCE BY ANY PRESENT OR FUTURE HOLDER
OF THIS NOTE WITH THE EXPRESS PROVISIONS OF THIS NOTE SHALL CONSTITUTE GOOD
FAITH AND SHALL BE CONSIDERED REASONABLE FOR ALL PURPOSES.
4
<PAGE>
IN WITNESS WHEREOF, the Borrower and the Bank have executed this
Third Amendment and Restatement of Promissory Note effective as of the day and
year first above written.
BORROWER: LUNDGREN BROS. CONSTRUCTION, INC.,
a Minnesota corporation
By:_______________________________________
Its:_______________________________________
BANK: U.S. BANK NATIONAL ASSOCIATION,
a national banking association,
formerly known as First Bank National Association
By:_______________________________________
Its:_______________________________________
5
EXHIBIT 10.93
December 24,1998
To: Lundgren Bros. Construction, Inc.
935 East Wayzata Boulevard
Wayzata, Minnesota 55391
FOURTH AMENDMENT
TO LETTER AGREEMENT
Ladies and Gentlemen:
This fourth amendment to letter agreement (the "Amendment") is being
executed in order to amend certain of the terms and conditions contained in that
certain letter agreement dated March 21, 1996, as previously amended by
Amendment to Letter Agreement dated March 21, 1997, by Second Amendment to
Letter Agreement dated March 21, 1998, and by Third Amendment to Letter
Agreement dated April 29, 1998 (hereinafter collectively referred to as the
"Letter Agreement") between Lundgren Bros. Construction, Inc., a Minnesota
corporation (the "Borrower"), and U.S. Bank National Association, a national
banking association, formerly known as First Bank National Association (the
"Bank"). In consideration of the mutual agreements set forth herein, and for
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged by the parties, the Borrower and the Bank agree to further
amend the Letter Agreement as follows:
(a) Paragraph 1 of the Letter Agreement, as previously amended, is
hereby deleted in its entirety and the following paragraph
inserted in lieu thereof effective as of December 24, 1998:
"1. Subject to the provisions of this letter
agreement, at the Borrower's request, the Bank shall
make loans to the Borrower during the period from the
date of this letter agreement to May 31, 2000 in an
aggregate amount not exceeding $1,500,000.00 at any time
outstanding (the "Line of Credit"). The Line of Credit
is a revolving line of credit, and the Borrower may
borrow, prepay and reborrow under the Line of Credit.
The Borrower's obligation to repay such loans and to pay
interest and other charges, fees and expenses thereon is
evidenced by the Borrower's Fourth Amendment and
Restatement of Promissory Note dated as of December 23,
1998, payable to the order of the Bank in the principal
amount of $1,500,000.00 (together with any additional
amendments, extensions, renewals and replacements
thereof, called the "Revolving Note"). The Bank shall
have no obligation to make any such loan after the
<PAGE>
occurrence of any default or event of default under the
Revolving Note or any other agreement of the Borrower
with the Bank, or any other event that would accelerate
or allow the Bank to accelerate payment of the Revolving
Note. The Borrower shall use all proceeds of such loans
solely for working capital of the Borrower."
(b) Paragraph 4(a) of the letter agreement is hereby deleted in
its entirety and the following paragraph inserted in lieu
thereof effective as of December 24, 1998:
"Borrowing Base" shall mean:
(a) during the period from the date of this letter
agreement through May 31, 2000, the sum of (i)
$300,000.00, plus (ii) the aggregate fair market
value of the Borrower's investments which the
Bank, in its sole discretion, shall deem
acceptable, and in which the Bank shall have a
perfected security interest constituting a first
lien in form and substance acceptable to the
Bank."
(c) Exhibit A attached to the Letter Agreement is hereby deleted
in its entirety and replaced with Exhibit A attached hereto
and made a part hereof.
(d) Upon the execution and delivery by Borrower to Lender of this
Amendment and the Fourth Amendment and Restatement of
Promissory Note dated December 23, 1998, Lender agrees to
release Edmund Lundgren, Allan Lundgren, Peter Pflaum and
Gerald Lundgren (the "Guarantors" or individually "Guarantor")
from all of their obligations under that certain Guaranty
given by each Guarantor in favor of First Bank National
Association, each such Guaranty dated March 21, 1996.
(e) Except as herein expressly modified, all of the terms and
conditions of the Letter Agreement shall remain in full force
and effect.
Sincerely,
U.S. BANK NATIONAL ASSOCIATION,
a national banking association, formerly known as
First Bank National Association
By:_______________________________________
Its:_______________________________________
<PAGE>
Lundgren Bros. Construction, Inc. agrees to this Fourth Amendment to
Letter Agreement.
Executed as of December __, 1998.
LUNDGREN BROS. CONSTRUCTION, INC.,
a Minnesota corporation
By:____________________________________
Its:____________________________________
<PAGE>
EXHIBIT A
LUNDGREN BROS. CONSTRUCTION, INC.
BORROWER'S CERTIFICATE
I, _______________________, the chief financial officer of Lundgren
Bros. Construction, Inc., a Minnesota corporation (the "Borrower"), pursuant to
the letter agreement dated March 21, 1996, as modified by amendments to letter
agreement dated March 21, 1997, March 21, 1998, April 29, 1998 and December 23,
1998, respectively (collectively, the "Agreement"), hereby certify to U.S. Bank
National Association, formerly known as First Bank National Association (the
"Bank"):
1. As of the close of business on ____________, 199___ (the most
recent Determination Date), the aggregate fair market value of
the Borrower's investments in account number 000303451 at FBS
Investment Services, Inc. was $_______________.
2. As of the date of this Certificate, no event has occurred
which constitutes a default or an event of default under the
Revolving Note (as defined in the Agreement), or an event that
would accelerate or allow the Bank to accelerate payment of
the Revolving Note, or would constitute any default or event
of default under the Revolving Note with notice or the passage
of time or both.
Date of Certificate: __________________, 19_____
------------------------------------
Signature
EXHIBIT 10.94
PATRICK C. WELLS
11217 OLD ROCKFORD ROAD
PLYMOUTH, MINNESOTA 55441
March 1, 1999
Mr. Peter Pflaum, President
Lundgren Bros. Construction, Inc.
935 East Wayzata Boulevard
Wayzata, Minnesota 55391
Dear Peter:
I refer to your letter to me dated February 15, 1999 ("February 15
Letter") relating to the option agreement dated March 1, 1998 covering my 1,845
non-voting common shares of Lundgren Bros. Construction, Inc. ("Option
Agreement").
In the February 15 Letter, you, I and Lundgren Bros. Construction,
Inc. ("Lundgren") each agreed that the option provisions (sections 2.1 through
2.4) ("Option Provisions") of the Option Agreement were no longer in the best
interest of Lundgren and its shareholders, and therefore, by mutual agreement of
the parties thereto, those provisions were terminated.
You and I have had further discussions on this matter. Based on
those discussions, you and I have concluded that it is in the best interests of
the shareholders of Lundgren that the original Option Provisions be rescinded.
The purpose of this letter, therefore, is to confirm that the Option Provisions
of the Option Agreement are hereby rescinded. Enclosed herewith is my check for
$201,900, representing all option payments made to me to date under the Option
Agreement. Please treat this amount as a refund of all option payments made to
me. I will be doing the same for purposes of my personal taxes.
Please counter-sign this letter to confirm your agreement with the
rescission of the Option Provisions.
Regards,
Patrick C. Wells
The undersigned hereby agree and consent to the rescission of
sections 2.1 through 2.4 ("Option Provisions") of the Option Agreement dated
March 1, 1998. Lundgren hereby
<PAGE>
Mr. Peter Pflaum, President
March 1, 1999
Page 2
acknowledges receipt of $201,900 as repayment by Patrick C. Wells of the option
payments previously made.
LUNDGREN BROS. CONSTRUCTION, INC.
By
--------------------------------------
Peter Pflaum, President
- --------------------------------------
Peter Pflaum
Date: March _____, 1999
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