-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WD05OLBwdrmYVxrqu/yoM836qy+tqcKppMT60nXmSgm6rC6hbwP2r/dbjNz/TSp9 hKTYBNL9Afo8uOPsgQ8H6Q== 0001047469-98-027229.txt : 19980720 0001047469-98-027229.hdr.sgml : 19980720 ACCESSION NUMBER: 0001047469-98-027229 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980714 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROTTLUND CO INC CENTRAL INDEX KEY: 0000891329 STANDARD INDUSTRIAL CLASSIFICATION: OPERATIVE BUILDERS [1531] IRS NUMBER: 411228259 STATE OF INCORPORATION: MN FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-13841 FILM NUMBER: 98665726 BUSINESS ADDRESS: STREET 1: 2681 LONG LAKE RD CITY: ROSEVILLE STATE: MN ZIP: 55113 BUSINESS PHONE: 6126380500 MAIL ADDRESS: STREET 1: 2681 LONG LAKE RD STREET 2: STE 301 CITY: ROSEVILLE STATE: MN ZIP: 55113 10-K405 1 10-K - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 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 March 31, 1998 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission File No. 0-20614 THE ROTTLUND COMPANY, INC. (Exact name of registrant as specified in its charter) MINNESOTA 41-1228259 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 2681 LONG LAKE ROAD MINNEAPOLIS, MINNESOTA 55113 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (651) 638-0500 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.10 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ The aggregate market value of voting stock held by nonaffiliates of the registrant as of June 30, 1998 was approximately $5,900,000. As of June 30, 1998, there were 5,772,913 shares of Common Stock of the registrant issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the documents listed below have been incorporated by reference into the indicated part of this Form 10-K. DOCUMENT INCORPORATED PART OF FORM 10-K --------------------- ----------------- Proxy Statement for 1998 Annual Meeting of Shareholders Part III - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ FORM 10-K INDEX
PAGE ---- PART I.........................................................................................................1 Item 1. BUSINESS.........................................................................................1 Item 2. PROPERTIES.......................................................................................7 Item 3. LEGAL PROCEEDINGS................................................................................7 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS DURING FOURTH QUARTER OF FISCAL YEAR.........7 PART II........................................................................................................8 Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.............................8 Item 6. SELECTED FINANCIAL DATA AND STATISTICAL COMPARISON...............................................9 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION...........10 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................................13 Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................................................14 Item 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES............14 PART III......................................................................................................29 Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................................29 Item 11. EXECUTIVE COMPENSATION.........................................................................29 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................29 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................30 PART IV.......................................................................................................31 Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K...............................31
PART I ITEM 1. BUSINESS GENERAL The Rottlund Company, Inc. ("Rottlund" or the "Company"), through its subsidiaries, designs, builds, and markets detached single family homes and attached townhomes and villas in the Minneapolis-St. Paul, Minnesota, Des Moines, Iowa, Indianapolis, Indiana, Southern New Jersey and Naples-Ft. Myers, Orlando and Tampa, Florida metropolitan areas. The Company began operations in 1973 and, through February 1993, had built all of its developments in the Minneapolis-St. Paul metropolitan area. Rottlund is currently ranked among the top 100 builders in the nation by two leading trade publications. Since 1973, the Company has built and sold over 8,900 homes. During the year ended March 31, 1994 ("fiscal 1994") the Company began home building operations in Naples-Ft. Myers, Florida and Des Moines, Iowa and, during the first quarter of the year ended March 31, 1995 ("fiscal 1995"), began home building operations in Indianapolis, Indiana and Orlando and Tampa, Florida and during the year ended March 31, 1996 ("fiscal 1996") the Company acquired certain assets and assumed certain liabilities of Kevin Scarborough, Inc., a residential homebuilder operating in Southern New Jersey. All references to the Company contained herein, unless the context indicates otherwise, include its wholly owned subsidiaries Rottlund Homes of Iowa, Inc., Rottlund Homes of Florida, Inc., Rottlund Homes of Indiana, Inc., Rottlund Homes of New Jersey, Inc., and Rottlund Homes of Indiana Limited Partnership. As of March 31, 1998, the Company owned or controlled through options over 2,100 home sites in communities under development and land for the development of over 2,000 additional planned home sites in proposed communities. The Company's homes are sold primarily through its own staff of sales personnel. The Company markets its homes to a wide range of buyers, emphasizing high quality construction and customer satisfaction. Its promotional efforts include advertisements in newspapers and other printed media, radio and television, illustrated brochures, billboards, on-site displays and model homes. Purchasers of the Company's homes are given the opportunity to select, at additional cost, various optional amenities such as upgraded carpet, fireplaces, varied interior and exterior color schemes, lighting and upgraded appliances. The Company offers a diverse product line ranging from townhomes to single-family homes at prices generally ranging from $70,000 to $300,000. The average price of the Company's homes delivered in fiscal 1998 was approximately $146,000. The Company believes that its success has been due to its strategy of (i) marketing the Company's homes to many segments of the home-buying public, which enables the Company to respond rapidly to changing market conditions and the cyclical nature of the home-building industry, (ii) controlling costs by closely monitoring the construction process through the use of an advanced, industry-specific, management information system, (iii) controlling the Company's inventory of home sites and unsold homes, and (iv) emphasizing the Company's design capabilities that enable it to offer quality homes at all price levels in the markets in which the Company competes. Further, the Company generally attempts to reduce the effect of certain risks in the home-building industry by purchasing land through options whenever possible, beginning construction of multi-family buildings only after contracts for sales of approximately 75% of units have been executed and of single family homes only after an agreement of sale has been executed by a purchaser, and by using subcontractors to perform all site improvement and construction work on a fixed-price basis. OPERATING STRATEGY Set forth below are the major elements of the Company's operating strategy: MARKETS. The Minneapolis-St. Paul metropolitan area has been the Company's primary market and has accounted for the majority of revenues since the Company's inception. The Company has built and delivered more homes in this market over the last five years than has any other home builder. The Company's marketing strategy in the Minneapolis-St. Paul market has been to establish itself as a name brand builder. Management believes this 1 strategy has helped Rottlund to build and deliver more homes in this market than any other builder during the last five years. The Company presently accounts for approximately 4.0% of all homes sold in this market. The Company does not presently intend to increase its share of the Minneapolis-St. Paul market, but rather to expand its operations in the Des Moines, Iowa, Indianapolis, Indiana, Southern New Jersey and Naples-Ft. Myers, Tampa, and Orlando, Florida markets. Rottlund is implementing its name brand builder strategy in these markets. PRODUCTS. The Company markets its homes to a wide range of buyers, including entry level, move-up and retirees. Accordingly, the Company offers a number of home styles and price ranges at various locations. The Company's product offerings include villas, townhomes and detached single family homes. Sales prices presently range from approximately $70,000 to $300,000, and the average sales price of homes being delivered during fiscal 1998 was approximately $146,000. Management believes the Company's ability and willingness to build homes in accordance with home buyers' needs will enable the Company to continue to grow. Management believes that the Company's long-standing strategy of product diversification enables it to respond rapidly to changing market conditions and the cyclical nature of the home-building industry. COST CONTROL. The Company controls the cost of construction through the efficient design of its homes and favorable pricing from subcontractors due to the high volume of work performed for the Company. Rottlund uses an advanced, industry-specific management information system to control construction costs. This system allows the Company to monitor subcontractor performance and expenditures for each home built. All subcontracted work is authorized through the generation of purchase orders which are approved for payment by the Company's on-site construction supervisors upon completion of work. Any additional costs require authorization through the issuance of variance purchase orders which require reporting of the reason for the variance and measures taken to eliminate further variances. This strategy permits the Company to monitor gross margins on each individual home from the time a purchase agreement is signed through the building process to closing. The Company requires all subcontractors to perform all home construction and site improvement work on a fixed price basis. In addition, management continually monitors selling, general and administrative expenses in an effort to control overhead and improve efficiency. INVENTORY MANAGEMENT. Two of the major risks in the home-building industry are excessive home site inventory and inventory of completed homes. The Company attempts to reduce its vulnerability to these risks by (i) acquiring control of improved home sites through option contracts which allow the Company to build homes with relatively minimal capital expenditures and limited risks, (ii) acquiring land for development with seller financing, (iii) acquiring land through purchase agreements on a nonrecourse basis which enables the Company to obtain necessary governmental approvals before the acquisition of the land (generally, the down payment on a land purchase or option agreement will be returned to the Company if all approvals are not obtained, although pre-development costs may not be recoverable), (iv) beginning construction of a single family home only after execution of a sales contract, receipt of satisfactory earnest money and, where applicable, a tentative mortgage approval, (v) minimizing inventory homes by requiring contracts for at least 75% of the units in attached buildings to be executed prior to construction, and (vi) controlling the number of finished homes held in inventory. LAND ACQUISITION AND DEVELOPMENT The Company generally follows a policy of acquiring options to purchase land for future community developments. The Company attempts to acquire land with a minimum cash investment and the maximum degree of purchase money financing that the Company is able to obtain from sellers. The purchase money financing and purchase agreements are generally on a nonrecourse basis, thereby limiting the Company's financial exposure to the amounts invested in property and predevelopment costs. This policy may raise the cost of land the Company acquires somewhat, but significantly reduces risk to the Company. In addition, this policy allows the Company to obtain necessary development approvals prior to acquisition of land. The Company's purchase agreements are typically subject to numerous conditions including, but not limited to, the Company's ability to obtain necessary zoning and other governmental approvals for the proposed development. The Company believes it has been successful in obtaining local governmental approvals through proactive interaction with neighborhood and citizen groups. The Company maintains a policy of holding 2 neighborhood meetings to gain support for its development activities. During the initial municipal approval process, the Company confirms the availability of utilities, conducts environmental reviews, arranges acquisition development and financing, and completes its marketing construction feasibility studies. As a result, the Company is generally able to begin marketing immediately after closing the land purchase. This results in reduced carrying costs and increased liquidity for future development opportunities. The Company has been able to acquire control of improved single family detached home sites through option contracts which enables the Company to build in an area if it purchases a specified number of home sites each month. Contracts of this nature enable the Company to begin offering homes for sale in a new community with relatively minimal capital expenditures and limited risk. Accordingly, the Company has adopted a strategy of acquiring control of single family detached home sites through option contracts when appropriate opportunities exist which meet the Company's marketing strategy. The Company expects the availability of such contracts to satisfy the majority of the Company's requirements for detached single family home sites. Due to the product-specific nature of the Company's attached home sites, the Company expects limited opportunities for option contracts for this portion of its developed home site requirements. Accordingly, the continuation of the Company's development activities to satisfy its land inventory requirements will depend upon its continued ability to locate, enter into contracts to acquire, obtain governmental approvals for, obtain acquisition and development financing for, consummate the acquisition of, and improve, suitable parcels of land. AVAILABLE HOME SITE INVENTORY (ALL CITIES) The following table sets forth information with respect to the Company's available lot inventory by state as of March 31, 1998.
Homes Under Construction Total ---------------------------------------------------------- Unsold Sites Available Market Available Sold (1) Models Inventory (2) for Future Construction - ------ --------- -------- ------ ------------- ----------------------- Minnesota..................... 1,339 350 26 52 911 Florida....................... 662 117 21 10 514 Iowa.......................... 240 50 8 12 170 Indiana....................... 140 35 6 9 90 New Jersey.................... 545 79 9 0 457 --- -- - - --- Total......................... 2,926 631 70 83 2,142 ----- --- -- -- ----- ----- --- -- -- -----
- ---------------------- (1) Under contract and under construction but not yet closed. (2) Inventory are homes which are unsold that are completed or in various stages of construction. Although the Company does not purchase land for speculation, the Company has and will purchase land with the intent of selling home sites within developments to other builders. Additionally, the Company has attempted to manage the risk of home building in particular areas through cooperation with other builders, such as Centex Homes Corporation, by building in the same subdivision. This arrangement provides for a diversity of types of homes in the Company's communities and the advantages of joint marketing. Rottlund strives to maintain a supply of developed home sites to meet anticipated homebuilding requirements for not more than 24 months. As of March 31, 1998 the Company had an aggregate of 2,142 home sites available for future construction which represents approximately a 16-month supply based on actual deliveries anticipated in fiscal 1999. The Company believes there is an adequate supply of undeveloped land in all metropolitan areas where it conducts business to maintain adequate home site inventories. Detached single family homes sold by the Company are marketed to move-up and entry-level buyers. Move-up homes are sold in the $170,000 to $300,000 price range while entry level homes are sold in the $110,000 to $160,000 price range. Detached single family homes are offered by the Company in a variety of floor plans and exterior styles with two, three and four bedrooms, two or more bathrooms and a two-car attached garage. 3 The Company also offers attached product lines which offer a variety of floor plans and provide for certain options. Entry-level townhomes are sold in the $70,000 to $105,000 price range, and the balance of townhome sales are sold in the $100,000 to $200,000 price range. The Company believes that the fastest growing segments of the home buying market are singles and couples without children. The Company has adopted a strategy to capture these segments by developing expertise in the design, marketing, financing and construction of alternative or attached housing types which appeal to these segments. Contracts for the sale of homes are at fixed retail prices. The prices at which homes are offered have generally increased from time to time during the sellout period for each community and in response to cost increases, however, there can be no assurance that sales prices will increase in the future. All of the attached home communities are governed by a homeowner's association (the "Association"). The Company, acting as declarant, is responsible for the management of the Association until 75% of the homes within the Association are closed. The Company's line of homes is designed to promote efficient use of space and materials to minimize construction costs and time, thereby maximizing the value of the homes in the marketplace. The Company is continually developing new home designs to replace or augment existing home designs in an effort to assure that the Company's homes are responsive to current consumer preferences and are unique in the marketplace. In order to respond to consumer preferences the Company relies primarily upon its internal marketing department to analyze information gathered from buyer profiles, focus groups, exit interviews at model sites, telephone surveys and demographic data bases. For new designs, the Company has engaged a number of unaffiliated architectural firms in addition to its in-house architectural staff. All home designs are copyrighted by the Company. The Company does not license its home designs to other builders and vigorously pursues infringers. The Company expends considerable effort in developing a design and marketing concept for each of its communities. This includes determination of product line, layout of streets, layout of individual home sites or structures and overall community design. The communities have attractive entrances with distinctive signage and landscaping. The Company recognizes the importance of the sense of "neighborhood" and strives to create this feeling within its communities to preserve and enhance the investment of its home buyers. CONSTRUCTION Rottlund acts as the general contractor for the construction of its residential communities. The Company's construction supervisors monitor the construction of each home, participate in design and building decisions, coordinate the activities of subcontractors and suppliers, maintain quality and cost controls and monitor compliance with zoning and building codes. The Company maintains a strategy of subcontracting all home construction at a fixed cost basis. The Company believes this strategy limits its financial exposure during downturns in the housing market. All subcontracted work is authorized by purchase orders which require approval for payment by the construction supervisor upon completion. Any additional costs require authorization through the issuance of variance purchase orders. All variances require reporting of the reason therefor, and measures taken to eliminate further variances. Subcontractors typically are retained by the Company for a specific time period or project pursuant to a contract which obligates the subcontractor to complete its duties at a fixed price. Contracts with the Company's subcontractors and material suppliers are entered into after competitive bidding during predetermined time periods or on a project by project basis. The construction of detached single family homes is generally tied to home buyer sales contracts to minimize the costs and risks of completed but unsold inventory. Similarly, the Company's policy is to require 75% of the units on attached home buildings having executed sales contracts prior to construction. 4 Construction time for each home is tied to a construction schedule established for each of the Company's home types. Variances from the schedule are infrequent but may occur due to weather conditions or availability of labor, materials and supplies. The Company's line of homes is designed to promote efficient use of space and materials to minimize construction costs and time. The Company's construction schedules are typically from three to four months. The personnel of the Company's corporate headquarters are responsible for sales processing, estimating, architectural design, centralized purchasing through the generation of purchase orders, contract management, home site planning, obtaining governmental approvals, closing, accounting and warranty service, among other responsibilities. The Company's management information system is designed to monitor the progress of each home built by the Company, from acceptance of a sales contract to delivery of a completed home to the buyer. At any time after contract acceptance the Company can provide the home buyer with the construction status of its home and the anticipated delivery date. The Company historically has maintained its construction schedule throughout the entire year, despite seasonal climate changes in the Minneapolis-St. Paul and Des Moines metropolitan areas. However, additional winter construction charges are incurred due to propane heating costs, frost ripping charges, utility construction charges and special footing designs. The Company is also required to put into escrow at closing amounts to cover items which cannot be installed in the winter which may include driveways, sidewalks and air conditioning. MARKETING AND SALES In Minnesota, Indiana, New Jersey and Florida, the Company sells its homes through commissioned employees who work from sales offices in model homes located in each Rottlund community. In addition, the Company cooperates with outside independent brokers on approximately 33% of all of its sales. The Company utilizes independent realtors for home sales in Iowa. In all instances, Company sales employees assist prospective buyers through the home buying process by providing information on the Company's line of homes, pricing, options and upgrades, mortgage financing, warranties, construction, and information regarding the Company itself. The Company provides a home buyer's guide to all prospective customers. The home buyer's guide highlights the steps and process of buying a new home in an effort to accurately set the expectations of the Company's customers. Sales personnel are trained by the Company and attend periodic meetings where they are updated on current financing, construction schedules, marketing and advertising plans. Rottlund has adopted a strategy of becoming a "name brand" builder in the Minneapolis-St. Paul market. This strategy has been implemented through its visible support of public television, the Children's Minneapolis Hospital, and other community organizations. Rottlund also advertises through newspaper, radio, TV and a billboard campaign. In its expansion to new markets, the Company over time will attempt to utilize this same strategy of advertising to increase customer awareness of the Company's products. In order to respond to consumer preferences, the Company relies upon its internal marketing department to analyze information which is gathered from buyer profiles, focus groups, exit interviews at model sites, telephone surveys, and demographic data bases. The Company's comprehensive marketing program also includes direct mail, participation in home tour events and use of fully merchandised model homes. Management believes model homes play an important role in demonstrating the functional use of space in the Company's homes and in allowing prospective buyers to experience the emotional aspects of the home buying process. The Company attempts to create attractive model homes and chooses interior merchandising for each type of home based upon the lifestyles of targeted customers. The Company builds most of its homes under the guidelines and specifications of the Federal Housing Administration (FHA) and the Veterans Administration (VA), thereby providing eligible prospective buyers the added benefit of the availability of FHA/VA-insured mortgages. The Company may also from time to time help its customers secure below market interest rates by contributing points to buy-down the existing mortgage rates. 5 CUSTOMER SERVICE AND QUALITY CONTROL Rottlund is committed to providing a high level of customer service as an important component of its competitive strategy. The Company, through its on-site team of a sales representative and a construction supervisor maintains personalized contact with its customers. The Company's construction supervisors follow a 14-step inspection process on each home the Company builds. This process is followed to ensure each home meets or exceeds the Company's performance standards for its homes. Upon completion of construction of each home and prior to closing, an employee of the Company's Customer Care Department conducts a quality control inspection of the completed home. From this inspection, a list is created which sets forth those areas which do not meet the Company's performance standards and require correction by the contract builder. Also prior to closing, the Customer Care Department accompanies the buyer on a customer orientation of their home to demonstrate the proper use and care of the home including the mechanical equipment and other components of the home. At this time, additional items which do not meet the Company's performance standards may be added to the quality control inspection list. All such items are repaired or replaced within 15 days of being added to the quality control inspection list. At the customer orientation, the buyer is also familiarized with the service warranty process following closing on its home. The Company's Customer Care Department handles all service and warranty requests following the closing of each home. Management believes the participation of Customer Care personnel prior to and after closing reduces post-closing service costs, fosters the Company's reputation for service, and ultimately leads to the building of a referral base of business. The Company provides all home owners with a one-year comprehensive warranty and a two-year warranty on all mechanical systems and provides, from an unaffiliated insurance company, a five-year warranty on appliances (single-family product) and a ten-to fifteen-year structural warranty. The five-year appliance warranty and fifteen-year structural warranty are unique in the Minneapolis-St. Paul market and help to distinguish the Company from its competitors. COMPETITION AND MARKET FACTORS The development and sale of residential properties is highly competitive and fragmented. The Company competes on the basis of a number of interrelated factors, including location, product design, perceived value, price and reputation in the marketplace with a number of national home builders and numerous local builders. The Company's homes must also compete with resale of existing homes and available rental housing. Management believes Rottlund's primary competitive advantages are based upon the following strengths: (i) product innovation, (ii) offering homes with the highest perceived value, (iii) product diversification which enables the Company to offer homes to all segments of the population, (iv) marketing programs and community involvement programs which have established Rottlund as a "name brand" builder in the Minneapolis-St. Paul market, (v) the location of its communities, and (vi) its reputation for superior customer service and quality. Rottlund maintains a strong position in its markets due in part to product innovation. The Company's ability to respond to the changing needs of home buyers has allowed it to continue to grow despite declining demand for previously popular products. The Company continuously examines its markets to determine if certain housing needs are not being met and attempts to design and build homes to meet such needs. Management believes this is one of the primary reasons for its long-term success. The Company's years of experience provide it with expertise in the area of design, construction and financing of attached housing. The Company believes that this experience is especially important in the attached home market which is subject to stricter regulation than the detached home market. The housing industry is cyclical and affected by consumer confidence levels, prevailing economic conditions and interest rate levels. Other factors affecting the industry include increases in construction costs, 6 increases in costs associated with home ownership such as property taxes, changes in consumer preferences and demographic trends. The Company believes its experience provides a sound understanding of the nature of the industry which enables it to base its strategic planning on such cyclical conditions. EMPLOYEES As of March 31, 1998, the Company employed 248 persons, 56 as on-site sales personnel, 70 involved in construction, 17 as customer care personnel, 18 as estimating, drafting and architectural design personnel and 87 as executive, administrative and clerical personnel. The Company's employees are not covered by a collective bargaining agreement and the Company believes its relationships with its employees are good. GOVERNMENTAL REGULATION The Company's business is subject to regulation by a variety of state and federal laws and regulations relating to, among other things, advertising, charging, collection of state sales and use taxes, zoning and product safety. While the Company believes it is presently in material compliance with such regulations, in the event that it should be determined that the Company is not in compliance with all such laws and regulations, the Company could become subject to cease and desist orders, injunctive proceedings, civil fines and other penalties. ITEM 2. PROPERTIES The Company's principal offices are located at 2681 Long Lake Road, Minneapolis, Minnesota 55113. The offices total 10,000 square feet, and are leased from an unrelated party through March 31, 1999, at a base annual rent of $94,000. Various computer equipment and office furniture are also leased by the Company. ITEM 3. LEGAL PROCEEDINGS The Company is not currently a party to any material pending legal proceedings. From time to time the Company may become involved in routine litigation incidental to its business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS DURING FOURTH QUARTER OF FISCAL YEAR There were no matters submitted to a vote of the Company's shareholders during the three-month period ended March 31, 1998. 7 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS On February 19, 1998, the Company's Common Stock was listed on the American Stock Exchange ("AMEX") under the symbol "RH". Also on that date, the Company's Common Stock ceased trading on the NASDAQ National Market System. The following table sets forth the range of high and low sale prices for the Company's Common Stock for each of the fiscal quarters of the two years ended March 31, 1997 and 1998. STOCK QUOTATIONS
HIGH LOW ---- --- Fiscal 1998 First Quarter........................................... 5 1/4 4 1/4 Second Quarter.......................................... 5 1/4 4 1/2 Third Quarter........................................... 4 3/4 3 1/8 Fourth Quarter.......................................... 4 3/4 3 Fiscal 1997 First Quarter........................................... 8 1/2 6 1/2 Second Quarter.......................................... 8 5 Third Quarter........................................... 7 1/4 4 1/2 Fourth Quarter.......................................... 6 4 5/8
As of June 30, 1998, the Company had approximately 150 holders of record of its Common Stock. The transfer agent for the Company's Common Stock is Norwest Bank Minnesota, N.A.. 161 North Concord Exchange. South St. Paul, Minnesota, 55075-0738, telephone: (651) 450-4064. The Company has not paid any dividends on its Common Stock since its initial public offering in October 1992 and expects that for the foreseeable future it will follow a policy of retaining earnings in order to finance the continued development of its business. Payment of dividends is within the discretion of the Company's Board of Directors and will depend upon the earnings, capital requirements and operating and financial condition of the Company, among other factors. In addition, the terms of the Company's 9.42% Senior Notes Due December 1, 2004 and the 12.11% Senior Notes Due December 1, 2004 contain restrictions on the ability of the Company to pay dividends. The Company has not made any sales of restricted stock during the previous three fiscal years. 8 ITEM 6. SELECTED FINANCIAL DATA AND STATISTICAL COMPARISON The following table sets forth selected financial data with respect to the Company for the periods indicated. This information should be read in conjunction with the Financial Statements and related notes appearing elsewhere herein and "Management's Discussion and Analysis of Results of Operations and Financial Conditions." The Company's Statement of Operations and balance data for each of the years set forth below have been derived from financial statements which have been audited by Arthur Andersen LLP, independent public accountants.
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND UNIT DATA) STATEMENT OF OPERATIONS DATA: Net sales...................................... $160,830 $180,457 $131,583 $116,520 $ 94,076 Cost of sales.................................. 139,284 156,332 110,589 96,344 78,292 ------------ ------------ ------------ ------------- ------------- Gross profit................................... 21,546 24,125 20,994 20,176 15,784 Selling, general and administrative expenses... 20,541 19,569 13,671 13,307 9,469 Write-down of land(1) - 1,500 - - - ------------ ------------ ------------ ------------- ------------- Operating income............................... 1,005 3,056 7,323 6,869 6,315 Interest expense............................... 2,018 958 153 295 198 Income (loss) before provision for income taxes......................................... (1,013) 2,098 7,170 6,574 6,117 Provision for income taxes..................... (415) 862 2,928 2,695 2,500 ------------ ------------ ------------ ------------- ------------- Net income (loss)........................... (598) $ 1,236 $ 4,242 $ 3,879 $ 3,617 ------------ ------------ ------------ ------------- ------------- ------------ ------------ ------------ ------------- ------------- Basic earnings (loss) per Share................ $ (0.10) $ 0.22 $ 0.75 $ 0.69 $ 0.64 ------------ ------------ ------------ ------------- ------------- ------------ ------------ ------------ ------------- ------------- Diluted earnings (loss) per Share.............. $ (0.10) $ 0.22 $ 0.74 $ 0.68 $ 0.63 ------------ ------------ ------------ ------------- ------------- ------------ ------------ ------------ ------------- ------------- Weighted average shares outstanding............ 5,745 5,735 5,749 5,661 5,645 ------------ ------------ ------------ ------------- ------------- ------------ ------------ ------------ ------------- ------------- OPERATING DATA: Number of home sales closed.................... 1,092 1,346 1,187 1,003 867 Average sales price............................ $ 146 $ 134 $ 111 $ 116 $ 108 ------------ ------------ ------------ ------------- ------------- ------------ ------------ ------------ ------------- ------------- BALANCE SHEET DATA: Inventories and properties held for development or sale............................ $ 74,379 $ 81,825 $ 74,650 $ 60,450 $ 42,604 Total assets................................... 88,281 96,234 83,756 68,549 50,330 Notes and mortgage notes payable............... 47,907 54,137 40,584 33,746 18,673 Shareholders' equity........................... $ 26,315 $ 26,819 $ 25,396 $ 21,033 $ 17,030
- ------------------------ (1) The Company recorded a noncash write-down of land development costs and finished lots at development sites in Florida and Indiana in fiscal 1997. See Note 1 of the Notes to Consolidated Financial Statements. 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION GENERAL The following table sets forth, for the periods indicated, unit activity, average sales price and revenue from home sales:
YEARS ENDED MARCH 31 1998 1997 1996 ------------ ------------ ------------ Homes closed: Single family.............. 431 397 181 Multi-family............... 661 949 1,006 Average sales price: Single family.............. $ 186,000 $ 199,000 $ 154,000 Multi-family............... 122,000 107,000 103,000 Net sales: Single family.............. $ 80,370,000 $ 79,083,000 $ 27,916,000 Multi-family............... 80,460,000 101,374,000 103,667,000 ------------ ------------ ------------ Total net sales $160,830,000 $180,457,000 $131,583,000 ------------ ------------ ------------ ------------ ------------ ------------
- ------------------------------- The following table sets forth the Company's backlog (homes under contract but not closed):
MARCH 31 NUMBER OF HOMES SALES VALUE - -------- --------------- ----------- 1998.............................................. 631 $98,380,000 1997.............................................. 409 $60,908,000 1996.............................................. 533 $69,319,000
The Company estimates that the period between receipt of sales contracts and delivery of completed homes to the purchasers is generally four to six months. The Company's backlog historically tends to increase between January and April. Trends in the Company's backlog are subject to change from period to period based upon economic conditions including consumer confidence levels, interest rates and the availability of mortgages. RESULTS OF OPERATIONS YEAR ENDED MARCH 31, 1998 COMPARED TO YEAR ENDED MARCH 31, 1997 The Company's home sales decreased $19.6 million or 11% during fiscal 1998 as compared to fiscal 1997 as a result of a 18.9% decrease in the number of homes closed which was partially offset by a 9% increase in the average sales price of homes closed. The decrease in the number of homes closed was principally due to delays in opening new communities for sales in New Jersey, Minneapolis and Iowa which resulted in those projected closings being pushed to fiscal 1999. This also accounts for a portion of the increase in backlog at March 31, 1998. Gross profit decreased by $2.6 million or 11% during fiscal 1998 as compared to fiscal 1997. Gross profit margins remained constant at 13% during both years. The decrease in gross profit was primarily due to the decrease in home sales during fiscal 1998. Selling, general and administrative expenses increased by $972,000 to $20.5 million in fiscal 1998 from $19.6 million in fiscal 1997. As a percentage of net sales, selling, general and administrative expenses increased to 10 12.8% in fiscal 1998 from 10.8% in fiscal 1997. This increase was primarily due to the decrease in home sales during fiscal 1998. Interest expense was $2.0 million in fiscal 1998 as compared to $958,000 in fiscal 1997. The increase in interest expense is primarily due to the Company terminating capitalizing interest on a piece of commercial land that it has held for approximately ten years. This land is currently for sale and has a book value of about $9.0 million. The Company capitalizes certain interest costs for land development and includes such capitalized interest in cost of sales when the related homes are delivered to purchasers. Accordingly, total interest incurred by the Company was approximately $5.1 million for fiscal 1998 and $5.2 million for fiscal 1997. The Company's tax rate was approximately 41% in fiscal 1998 and 1997 which reflects the federal statutory rate plus the effect of state taxes, net of federal benefit. Net income decreased from $1.2 million in fiscal 1997 to a net loss of $598,000 in fiscal 1998. This decrease was primarily due to the decrease in home sales, increased interest expense and a slight increase in selling, general and administrative expenses for which the Company invested in increased advertising and overhead to fund an expected increase in home sales in fiscal 1999 as witnessed by the large increase in backlog at March 31, 1998. YEAR ENDED MARCH 31, 1997 COMPARED TO YEAR ENDED MARCH 31, 1996 The Company's home sales increased $48.9 million or 37% during fiscal 1997 as compared to fiscal 1996 as a result of a 13.4% increase in the number of homes closed combined with an 29% increase in the average sales price of single family homes closed and a 4% increase in the average sales price of multifamily homes closed. The increase in the average sales price of single family homes was principally due to a greater number of homes closed in Tampa, Orlando and New Jersey where the products are larger and sold at higher price levels than those achieved historically in single family developments. Gross profit increased by $3.1 million or 15% during fiscal 1997 as compared to fiscal 1996. Gross profit margins decreased to 13% in fiscal 1997 from 16% in fiscal 1996. This decrease was primarily due to rising material and labor costs caused by the strength in the homebuilding industry as well as tight labor markets in many of the Company's markets, and slower sales than anticipated in some of the Company's newer markets. Selling, general and administrative expenses increased by 43.0% to $19.6 million in fiscal 1997 from $13.7 million in fiscal 1996. As a percentage of net sales, selling, general and administrative expenses increased to 10.8% in fiscal 1997 from 10.4% in fiscal 1996. Interest expense was $958,000 in fiscal 1997 as compared to $153,000 in fiscal 1996 due to an increased percentage of borrowings under the Company's credit facility. The Company capitalizes certain interest costs for land development and includes such capitalized interest in cost of sales when the related homes are delivered to purchasers. Accordingly, total interest incurred by the Company was approximately $5.2 million for fiscal 1997 and $3.9 million for fiscal 1996. This increase was primarily due to increased borrowings to fund the Company's increased business level. The Company's tax rate was approximately 41% in fiscal 1997 and 1996 which reflects the federal statutory rate plus the effect of state income taxes, net of federal benefit. Net income decreased from $4.2 million in fiscal 1996 to $1.2 million in fiscal 1997. This decrease was primarily due to a noncash write-down of $1.5 million, representing an inventory valuation adjustment of certain land for approximately 250 unsold lots located in Orlando and Indianapolis, and an overall decline in the gross profit margin partially offset by an increase in home sales. 11 LIQUIDITY AND CAPITAL RESOURCES Cash flows provided by operating activities increased $14.2 million from ($9.8) million in fiscal 1997 to $4.4 million in fiscal 1998. This increase was primarily due to decreased investments in residential housing completed and under construction resulting from the decrease in sales activity, combined with the lower level of inventory homes at March 31, 1998. Cash flows used for investing activities were not significant. Cash flows provided by (used for) financing activities decreased by $19.9 from $13.7 in fiscal 1997 to ($6.1) in fiscal 1998. This decrease was primarily due to reduced borrowings under the company's revolving credit facility to finance the lower levels of land inventory and residential housing completed and under construction. Cash flows used for operating activities increased $7.5 million from ($2.3) million in fiscal 1996 to ($9.8) million for fiscal 1997. This increase was primarily due to increased investments in residential housing completed and under construction resulting from the Company's expansion to additional geographic regions, combined with an increase in sales activity. Cash flows used for investing activities were not significant. Cash flows provided by financing activities increased by $13.4 million from $336,000 in fiscal 1996 to $13.7 million in fiscal 1997. This increase was primarily due to increased borrowings under the Company's revolving credit facility to finance the increased level of business over the previous year, and the resulting higher levels of land inventory and residential housing completed and under construction. The Company's financing needs depend primarily upon sales volume, asset turnover, land acquisition and inventory balances. In December 1994, the Company issued $25 million of 12.11% Senior Notes payable and in February 1996, the Company issued an additional $10 million of 9.42% Senior Notes payable (collectively referred to as the "Senior Notes"). Proceeds were used to retire certain mortgage notes payable and for working capital purposes. Principal and interest payments of approximately $552,000 are due monthly through December 2004. At March 31, 1998, the Company also had a $23.0 million unsecured revolving credit facility from a commercial lender. Borrowings under this facility totaled $15.0 million at March 31, 1998. The Company believes that amounts available under its existing borrowing arrangements (assuming extensions and renewals of debt in the ordinary course of business) and amounts generated from operations will provide funds adequate for its home-building activities and debt service. The Company has no significant commitments as of March 31, 1998 requiring the use of funds. Due to the lower than expected financial results for the fiscal year ended March 31, 1998, the Company was not in compliance with certain financial covenants under both its Senior Note agreements and its revolving credit facility. All of the Company's lenders have agreed to waive the violations and in addition the agreements have been amended. Certain financial covenants have been reset over the next fiscal year in order to give the Company time to reach original covenant levels. The Company will pay an additional $100,000 principal per month amortization on the Senior Notes for the remaining life of the notes. The Company has generally been able to secure financing for its acquisition, development and construction activities, and management believes that such arrangements will continue to be available on terms satisfactory to the Company. There can be no assurance, however, that continued financing for land acquisitions will be available or, if available, will be on terms satisfactory to the Company. INFLATION AND EFFECTS OF CHANGING PRICES Real estate and residential housing prices are affected by inflation, which can cause increases in the price of land, raw materials and subcontracted labor. Unless such costs are recovered through higher sales prices, gross profit margins will decrease. As interest rates increase, construction and financing costs, as well as the cost of borrowing funds, also increase which can result in lower gross profits. High mortgage interest rates would make it more difficult for the Company's customers to qualify for home mortgage loans. These factors have a much more significant effect on the Company's operations than does seasonality, in part because homes can be constructed year-round. 12 YEAR 2000 CONSIDERATIONS The Company has reviewed the implications of year 2000 compliance and has taken steps designed to ensure that the Company's computer systems and applications will manage dates beyond 1999. The Company believes that it has allocated adequate resources for this purpose and that planned software upgrades, which are underway and in the normal course of business, will address the Company's internal year 2000 needs. While the Company expects that efforts on the part of current employees of the company will be required to monitor year 2000 issues, no assurances can be given that these efforts will be successful. The Company does not expect the cost of addressing any year 2000 issue to be a material event or uncertainty that would have a material adverse effect on future operating results or financial condition. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 13 ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements of the company as of March 31, 1998 and 1997 together with the Report of Independent Public Accountants are included in this Form 10-K on the pages indicated below. THE ROTTLUND COMPANY, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Report of Independent Public Accountants................................................................. 14 Consolidated Balance Sheets as of March 31, 1998 and 1997................................................ 15 Consolidated Statements of Operations for the Years Ended March 31,1998, 1997 and 1996................... 16 Consolidated Statements of Shareholders' Equity for the Years Ended March 31,1998, 1997 and 1996......... 17 Consolidated Statements of Cash Flows for the Years Ended March 31, 1998, 1997 and 1996.................. 18 Notes to Consolidated Financial Statements............................................................... 19
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. 14 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Rottlund Company, Inc.: We have audited the accompanying consolidated balance sheets of The Rottlund Company, Inc. (a Minnesota corporation) and Subsidiaries as of March 31, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended March 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Rottlund Company, Inc. and Subsidiaries as of March 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Minneapolis, Minnesota, May 15, 1998 (except for Note 3 which date is July 10, 1998) 15 THE ROTTLUND COMPANY, INC. AND SUBSIDIARIES Consolidated Balance Sheets As of March 31 (In Thousands, Except Per Share Data)
1998 1997 ------- ------- ASSETS CASH AND CASH EQUIVALENTS $ 4,247 $ 7,016 ESCROW AND OTHER RECEIVABLES 2,520 1,512 LAND, DEVELOPMENT COSTS AND FINISHED LOTS 47,247 49,236 RESIDENTIAL HOUSING COMPLETED AND UNDER CONSTRUCTION 27,132 32,589 PROPERTY AND EQUIPMENT, net 1,251 710 DEFERRED INCOME TAXES 1,164 1,350 INTANGIBLE AND OTHER ASSETS, net 4,720 3,821 $88,281 $96,234 ------- ------- ------- ------- LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES: Revolving credit facility $15,010 $15,185 Senior notes payable 30,925 33,868 Mortgage notes payable 1,972 5,084 Accounts payable 11,553 9,289 Accrued liabilities 2,506 4,079 Income taxes payable - 1,910 Total liabilities 61,966 69,415 ------- ------- COMMITMENTS AND CONTINGENCIES (Note 7) SHAREHOLDERS' EQUITY: Preferred stock, $.10 par value, 10,000 shares authorized; none issued - - Common stock, $.10 par value, 40,000 shares authorized; 5,745 and 5,716 shares issued and outstanding 141 138 Paid-in capital 11,747 11,656 Retained earnings 14,427 15,025 Total shareholders' equity 26,315 6,819 $88,281 $96,234 ------- ------- ------- -------
The accompanying notes are an integral part of these consolidated balance sheets. 16 THE ROTTLUND COMPANY, INC. AND SUBSIDIARIES Consolidated Statements of Operations For the Years Ended March 31 (In Thousands, Except Per Share Data)
1998 1997 1996 NET SALES $160,830 $180,457 $131,583 COST OF SALES 139,284 156,332 110,589 GROSS PROFIT 21,546 24,125 20,994 SELLING, GENERAL AND ADMINISTRATIVE EXPENSE 20,541 19,569 13,671 WRITE-DOWN OF LAND - 1,500 - Operating income 1,005 3,056 7,323 INTEREST EXPENSE 2,018 958 153 Income (loss) before provision (benefit) for income taxes (1,013) 2,098 7,170 PROVISION (BENEFIT) FOR INCOME TAXES (415) 862 2,928 Net income (loss) $(598) $1,236 $4,242 BASIC EARNINGS (LOSS) PER SHARE $(0.10) $0.22 $0.75 DILUTED EARNINGS (LOSS) PER SHARE $(0.10) $0.22 $0.74
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED BALANCE SHEETS. 17 THE ROTTLUND COMPANY, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity For the Years Ended March 31 (In Thousands)
Common Stock Paid-In Retained Shares Amount Capital Earnings Total BALANCE, March 31, 1995 5,661 $132 $11,354 $ 9,547 $21,033 Net income - - - 4,242 4,242 Stock issued under employee stock purchase plan 22 2 119 - 121 BALANCE, March 31, 1996 5,683 134 11,473 13,789 25,396 Net income - - - 1,236 1,236 Stock issued under employee stock purchase plan 22 3 125 - 128 Stock options exercised 11 1 58 - 59 BALANCE, March 31, 1997 5,716 138 11,656 15,025 26,819 Net loss - - - (598) (598) Stock issued under employee stock purchase plan 29 3 91 - 94 BALANCE, March 31, 1998 5,745 $141 $11,747 $14,427 $26,315
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 18 THE ROTTLUND COMPANY, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Years Ended March 31 (In Thousands)
1998 1997 1996 OPERATING ACTIVITIES: Net income (loss) $ (598) $ 1,236 $ 4,242 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities- Depreciation and amortization 626 479 233 Write-down of land - 1,500 - Deferred income taxes 186 (833) (186) Change in operating items: Escrow and other receivables (1,008) 483 (848) Land, development costs and finished lots 1,989 (1,797) (2,193) Residential housing completed and under construction 5,457 (6,878) (3,137) Intangible and other assets (1,012) (1,457) (1,199) Accounts payable 2,264 (1,475) (2,196) Accrued liabilities (1,573) 158 789 Income taxes payable (1,910) (1,181) 2,218 Net cash provided by (used for) operating activities 4,421 (9,765) (2,277) INVESTING ACTIVITIES: Purchase of property and equipment, net (1,054) (383) (307) Net cash received from acquisition (Note 2) - - 109 Other - (13) (19) Net cash used for investing activities (1,054) (396) (217) FINANCING ACTIVITIES: Proceeds from (repayments of) revolving credit facility, net (175) 14,685 500 Proceeds from issuance of senior notes payable - - 10,000 Proceeds from issuance of mortgage notes payable 174 5,205 1,117 Repayments of senior notes payable (2,943) (1,132) - Repayments of mortgage notes payable (3,286) (5,205) (11,402) Proceeds from stock options exercised - 59 - Proceeds from stock issued under employee stock purchase plan 94 128 121 Net cash provided by (used for) financing activities (6,136) 13,740 336 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,769) 3,579 (2,158) CASH AND CASH EQUIVALENTS: Beginning of year 7,016 3,437 5,595 End of year $ 4,247 $ 7,016 $ 3,437 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest, net of amounts capitalized $ 2,025 $ 906 $ 153 Cash paid for income taxes $ 2,022 $ 2,948 $ 1,010
The accompanying notes are an integral part of these consolidated financial statements. 19 THE ROTTLUND COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 1998 and 1997 1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: NATURE OF BUSINESS The Rottlund Company, Inc. (a Minnesota corporation) and its subsidiaries, collectively referred to as the Company, are engaged in the design, construction, marketing and sale of residential real estate. The Company's primary developments are in Minnesota, with additional development sites in Iowa, Florida, Indiana and New Jersey; accordingly, the Company's operations can be impacted significantly by the residential real estate market conditions in each of these geographic areas. During fiscal 1998, the Company disposed of a wholly owned subsidiary which was engaged in the business of originating residential mortgage loans as a correspondent for various mortgage banking companies. Through the date of disposal, such mortgage activity was not significant. The reserves the Company established in fiscal 1997 were adequate to cover the costs the Company incurred to dispose of this subsidiary. The Company has generally been able to secure financing for its acquisition, development and construction activities, and management believes that such arrangements will continue to be available on terms satisfactory to the Company. However, there can be no assurance that continued financing for land acquisitions will be available or, if available, will be on terms satisfactory to the Company. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of The Rottlund Company, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Ultimate results could differ from those estimates. REVENUE RECOGNITION Revenue from sales of properties is recognized upon a formal closing and conveyance of title to the buyer. Escrow receivables represent funds held in escrow because the Company is obligated to perform minor activities subsequent to formal closing. Customer earnest money deposits received under binding purchase agreements are reflected as accrued liabilities until formal closing. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. As of March 31, 1998 and 1997, approximately $811,000 and $597,000, respectively, of cash and cash equivalents was restricted for customer earnest money deposits. 20 LAND, DEVELOPMENT COSTS AND FINISHED LOTS Direct costs related to land development, including land acquisition costs; improvement and construction costs for clearing and grading, roads and utility systems; architectural, surveying, engineering and legal fees; and real estate taxes, are capitalized as costs of land. The Company also capitalizes interest incurred in connection with land held for development up to the point it is deemed fully realizable upon sale. Interest of approximately $2,942,000, $4,196,000 and $3,698,000 was capitalized in fiscal 1998, 1997 and 1996, respectively. Aggregate development costs are allocated to finished lots and charged to cost of sales upon a formal closing and conveyance of title to the buyer. During fiscal 1997, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable and that impairment losses be recorded on long-lived assets when indications of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Prior to the adoption of SFAS No. 121, inventories were recorded at the lower of cost or net realizable value for each parcel or subdivision. Under SFAS No. 121, inventories to be held and used are stated at cost unless a subdivision is determined to be impaired, in which case the impaired inventories are written down following the provisions of SFAS No. 121. Write-downs of impaired inventories are recorded as adjustments to the cost basis of the respective inventory. The Company recorded a noncash write-down of land, development costs and finished lots at development sites in Florida and Indiana of $1,500,000 in fiscal 1997. The impairment was determined by the Company's management based on decreases in the market value of the sites as well as development costs which were in excess of management's original estimates. Management determined the fair value of these development sites based on various methods, including discounted cash flow projections and evaluations of comparable market prices of land, as appropriate. The write-down for impairment of long-lived assets was calculated in accordance with the requirements of SFAS No. 121 but was not necessitated by the implementation of SFAS No. 121. Had the Company not adopted SFAS No. 121, a similar write-down would have been required. The estimation process involved in determining if assets have been impaired and in determining fair value is inherently uncertain since it requires estimates of current market yields, as well as future events and conditions. Such future events and conditions include economic and market conditions, as well as the availability of suitable financing to fund development and construction activities. The realization of the estimates applied to the Company's real estate projects is dependent upon future uncertain events and conditions and, accordingly, the actual timing and amounts realized by the Company may differ materially from the estimated fair values, as described herein. RESIDENTIAL HOUSING COMPLETED AND UNDER CONSTRUCTION Residential housing completed and under construction represents the direct costs of construction of single-family and multifamily home projects, excluding land costs. Residential housing is valued at the lower of cost or estimated fair value. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Additions and major renewals are capitalized, while maintenance and repairs are charged to expense as incurred. Depreciation is provided using accelerated methods, principally over three to five years for model home furnishings and five to seven years for furniture and equipment. Accumulated depreciation totaled $780,000 and $725,000 as of March 31, 1998 and 1997, respectively. INTANGIBLE AND OTHER ASSETS Intangible and other assets consist primarily of the excess of the purchase price paid for business acquisitions over the net assets acquired, deferred financing costs and deposits for the option to acquire land. The excess of the purchase price paid for business acquisitions over the net assets acquired is being amortized over 20 years, with accumulated amortization of $147,000 and $73,000 as of March 31, 1998 and 1997, respectively. Deferred financing costs are amortized over the lives of the respective financing agreements, with accumulated amortization of $125,000 and $87,000 as of March 31, 1998 and 1997, respectively. Deposits for the option to acquire land are capitalized as land, development costs and finished lots at the time of exercise or are charged to expense upon expiration. 21 INCOME TAXES The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using currently enacted tax rates. PRODUCT WARRANTY The Company warrants its residential housing for periods of 10 and 15 years. The Company purchases insurance coverage for periods after two years. Warranty costs are estimated at the time of sale and adjusted annually to reflect ultimate experience. Product warranty costs are included in cost of sales in the accompanying consolidated statements of operations. ADVERTISING The Company's advertising expense amounted to $2,316,000, $1,795,000 and $1,352,000 in fiscal 1998, 1997 and 1996, respectively. NET EARNINGS (LOSS) PER SHARE The Company adopted SFAS No. 128, "Earnings per Share," effective December 31, 1997. As a result, all prior periods presented have been restated to conform to the provisions of SFAS No. 128, which requires presentation of basic and diluted earnings per share. Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the year. Diluted earnings per share is computed under the treasury stock method and is calculated to reflect the dilutive effect of the Company's stock option plans. A reconciliation of these amounts is as follows (in thousands, except for per share data):
1998 1997 1996 Net income $ (598) $1,236 $4,242 Weighted average number of common shares outstanding: Basic 5,745 5,712 5,684 Dilutive effect of stock options - 23 69 Common and potential common shares outstanding: Diluted 5,745 5,735 5,753 Basic earnings (loss) per share $(0.10) $ 0.22 $ 0.75 Diluted earnings (loss) per share $(0.10) $ 0.22 $ 0.74
22 As a result of the adoption of SFAS No. 128, the Company's reported earnings per share (EPS) for fiscal 1997 and 1996 have been restated as follows:
1977 1996 Primary EPS as reported $ 0.22 $ 0.74 Effect of SFAS No. 128 - 0.01 Diluted EPS as reported $ 0.22 $ 0.74 Effect of SFAS No. 128 - - Diluted EPS as restated $ 0.22 $ 0.74
NEW ACCOUNTING PRONOUNCEMENTS SFAS NO. 130 On March 31, 1998 the Company adopted SFAS No. 130, "Reporting Comprehensive Income," which requires companies to report all changes in equity during a period, except those resulting from investment by owners and distribution to owners, in a financial statement for the period in which they are recognized. The Company has no other elements of comprehensive income outside its reported net loss; thus, net loss is equivalent to comprehensive income for all periods presented. SFAS NO. 131 The Financial Accounting Standards Board issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," in June, 1997. SFAS No. 131 requires that public business enterprises report information about operating segments in annual financial statements and requires selected information in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers, and is effective for fiscal years beginning after December 15, 1997. The Company believes adoption will not have a significant impact on the consolidated financial statements. 2. ACQUISITION: On February 20, 1996, the Company acquired certain assets, including land, work in process and contractual rights, and assumed certain liabilities of Kevin Scarborough, Inc. (Scarborough), a residential home builder operating in New Jersey. The purchase price, which included liabilities assumed by the Company, was approximately $9,800,000. The acquisition was accounted for using the purchase method of accounting, which resulted in an excess of the purchase price over the net assets acquired of approximately $1,000,000. In connection with the acquisition, the Company entered into employment agreements with certain key employees who were former shareholders of Scarborough. These agreements have five-year terms and provide for compensation based in part on earnings of the acquired Scarborough operations. Results of operations of Scarborough have been included in the accompanying consolidated financial statements from the date of acquisition. The following unaudited pro forma financial data gives effect to the Scarborough acquisition as if it had occurred on the first day of each period presented. This pro forma information has been prepared utilizing the historical consolidated financial statements of the Company and Scarborough. The pro forma financial data is provided for comparative purposes only and does not purport to be indicative of the results which would have been obtained if the acquisition had been effected during the periods presented. The pro forma financial information reflects adjustments to record the excess purchase price over the fair value of net assets acquired and adjusts income taxes for the pro forma adjustments (in thousands, except per share data):
March 31,1996 Net sales $147,467
23 Net income 3,405 Basic earnings per share 0.60 Diluted earnings per share 0.59
3. DEBT: REVOLVING CREDIT FACILITY In October 1996, the Company entered into an unsecured revolving credit agreement (the Credit Facility) with a group of banks that provides borrowings of up to $23 million, of which $5 million may be used for letters of credit. Borrowings under the Credit Facility are subject to a borrowing base calculation based on a defined percentage of land, development costs, finished lots, residential housing completed and under construction, and the working capital of the Company less amounts outstanding under the Senior Notes, as defined herein. Borrowings under the Credit Facility bear interest at the greater of the agent bank's base rate or the federal funds rate plus 1.0% (9.5% as of March 31, 1998). As of March 31, 1998, borrowings outstanding under the Credit Facility's line of credit totaled $15,010,000, outstanding letters of credit totaled $646,000 and $7,344,000 was available for borrowing under the calculation described above. The Credit Facility expires in October 1999. During fiscal 1998, 1997 and 1996, the maximum balance outstanding under current and former revolving credit facilities was $20,860,000, $16,585,000 and $6,500,000, and the average balance was $12,359,000, $9,507,000 and $1,464,000, respectively. The weighted average interest rate during such years was 9.5%, 8.9% and 9.6%, respectively. The carrying amount of borrowings outstanding under the Credit Facility as of March 31, 1998 and 1997 approximates their fair value due to their current maturities and/or variable interest rates. SENIOR NOTES PAYABLE In December 1994, the Company issued $25 million of 12.1% senior notes payable, and in February 1996, the Company issued an additional $10 million of 9.4% senior notes payable (collectively, the Senior Notes). Proceeds were used to retire certain mortgage notes payable and for working capital purposes. Interest on the Senior Notes was due monthly through November 1996, with monthly principal and interest payments of approximately $552,000 due from December 1996 through December 2004. As of March 31, 1998 and 1997, the fair value of the Senior Notes was approximately $32,800,000 and $35,690,000, respectively. MORTGAGE NOTES PAYABLE Mortgage notes payable are primarily for the acquisition and development of land, with fixed interest rates ranging from 8.0% to 9.0% and variable interest rates at prime plus 1.0%. These nonrecourse notes are collateralized by land, with a carrying cost of approximately $2,379,000 as of March 31, 1998, and mature at various dates through December 2001. The carrying amounts of mortgage notes payable approximate their fair value due to their current maturities and/or variable interest rates. Scheduled annual maturities of the Senior Notes and mortgage notes payable as of March 31, 1998 are as follows (in thousands):
Fiscal Year 1999 $ 3,996 2000 4,695 2001 4,256 2002 4,748 2003 5,171 Thereafter 10,031 $32,897
The Senior Notes and the Credit Facility contain various restrictive covenants including, among others, certain financial covenants relating to minimum consolidated tangible net worth and earnings levels, as well as funding, 24 borrowing base requirements, payment of dividends and maximum land and construction limitations. The Company was in compliance with, or had obtained waivers for, all covenants as of March 31, 1998. 4. INCOME TAXES: The following summarizes the provision (benefit) for income taxes (in thousands):
Years Ended March 31 1998 1997 1996 Current: Federal $(606) $1,346 $2,424 State 5 349 690 Deferred 186 (833) (186) Provision (benefit) for income taxes $(415) $ 862 $2,928
The components of deferred income taxes consist of the following as of March 31 (in thousands):
1998 1997 Inventory $ 606 $ 493 State--net operating loss carryforward 191 - Warranty reserves 144 554 Other accrued liabilities 93 217 Other 130 86 Deferred income tax asset $1,164 $1,350
A reconciliation of the Company's statutory federal income tax rate to the effective tax rate is as follows:
Years Ended March 31 1998 1997 1996 Statutory federal rate 34.0% 34.0% 34.0% State income taxes, net of federal benefit 6.0 5.8 6.3 Other 1.0 1.3 0.5 Effective tax rate 41.0% 41.1% 40.8%
5. EMPLOYEE STOCK PLANS: STOCK OPTION PLANS The Company has a stock option plan (the Plan) which provides for the granting of options to designated employees, nonemployees and consultants of the Company to purchase up to an aggregate of one million shares of common stock at an exercise price not less than the fair market value of the common stock on the dates the options are granted. The options become exercisable in equal amounts over a five-year period from the date of grant and expire ten years from the date of grant. The Company also has a director stock option plan (DSOP), pursuant to which 100,000 shares of common stock have been reserved for the granting of stock options to the Company's outside directors. Under the DSOP, the Company granted an initial option for the purchase of 1,000 shares to each of the two outside directors and thereafter will grant stock options for the purchase of 1,000 additional shares of common stock annually for each year of continued service on the board. Each option is granted at fair market value on the date of grant and is exercisable for a period of four years, commencing one year after the date of grant. 25 The following table summarizes activity in the stock option plans:
Weighted Average Number of Shares Exercise The Plan DSOP Price Balance, March 31, 1995 299,872 3,000 $5.91 Granted 128,468 2,000 8.12 Balance, March 31, 1996 428,340 5,000 6.59 Granted 166,196 2,000 5.38 Exercised (10,420) - 5.62 Canceled (8,480) (3,000) 5.87 Balance, March 31, 1997 575,636 4,000 6.26 Canceled (40,534) - 6.37 Balance, March 31, 1998 535,102 4,000 $5.55 Options exercisable as of March 31, 1998 329,073 4,000 $6.08 Shares available for future grants 445,998 92,000
Shares outstanding under the stock option plans as of March 31, 1998 have exercise prices ranging from $5.13 to $8.87 and a weighted average remaining contractual life of 6.8 years. The Company follows the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." As permitted by SFAS No. 123, the Company has elected to continue to account for its stock option plans under the provisions of APB Opinion No. 25, under which no compensation costs have been recognized. Because the measurement provisions of SFAS No. 123 have not been applied to options granted prior to April 1, 1995, the resulting pro forma compensation costs may not be representative of those to be expected in future years. Had compensation costs for these plans been recorded at fair value consistent with the provisions of SFAS No. 123, the Company's net income (loss) and earnings (loss) per share would have been as follows:
1998 1997 Net income (loss) (in thousands): As reported $(598) $1,236 Pro forma (713) 1,168 Basic and diluted earnings (loss) per share: As reported $(.10) $ 0.22 Pro forma $(.12) $ 0.20
The weighted average fair value of stock options granted in fiscal 1997 was $2.64.The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model. The following assumptions were used to estimate the fair value of options granted in fiscal 1997:
Risk-free interest rate 5.97%-6.11% Expected life 5-10 Years Expected volatility 34%-36% Expected dividend yield None
EMPLOYEE STOCK PURCHASE PLAN The Company sponsors an employee stock purchase plan (the Purchase Plan). A total of 125,000 shares of common stock are reserved for issuance under the Purchase Plan. The Purchase Plan permits eligible employees to purchase 26 common stock at 85% of the lower fair market value of the common stock at certain dates. During the years ended March 31, 1998, 1997 and 1996, employee contributions of approximately $94,000, $128,000 and $121,000, respectively, were used to purchase common stock under the terms of the Purchase Plan. 6. RETIREMENT SAVINGS PLAN: The Company sponsors a 401(k) profit-sharing plan which covers all employees over the age of 20 1/2 who elect to participate. The Company may, at its discretion, make contributions to the 401(k) plan. All plan contributions vest in equal installments over a five-year period. The Company contributed $80,000, $83,000 and $53,000 to the 401(k) plan in fiscal 1998, 1997 and 1996, respectively. 7. COMMITMENTS AND CONTINGENCIES: LETTERS OF CREDIT AND BONDS Letters of credit are issued by banks, and bonds are issued by insurance companies on behalf of the Company during the ordinary course of business, as required by certain development agreements with municipalities. As of March 31, 1998, the Company had outstanding letters of credit totaling $2,200,000 and outstanding bonds totaling $944,000. LITIGATION The Company is party to certain claims arising in the ordinary course of business. In the opinion of management, based upon the advice of legal counsel, the outcomes of such claims are not expected to be material to the Company's financial position or results of operation. LEASES The Company is obligated under various noncancelable operating leases for office facilities and certain equipment. Rental expense under these agreements, excluding leaseback of model homes, was approximately $714,000, $866,000 and $600,000 in fiscal 1998, 1997 and 1996, respectively. Future minimum lease payments required under noncancelable operating lease agreements are as follows (in thousands):
Fiscal Year Amount ------------------- ------------ 1999 $575 2000 271 2001 57 2002 16 $919
On March 29, 1998, the Company entered into an agreement for the sale and leaseback of ten of its model homes in Minnesota and New Jersey for approximately $1,400,000. The lease term on individual model homes is 11 months. Total lease payments are based on LIBOR plus 5.0%, and no rental expense was incurred in fiscal 1998. Additional future rental commitments approximate $155,000 in fiscal 1999. 8. QUARTERLY FINANCIAL INFORMATION (UNAUDITED): The following is a condensed summary of quarterly results of operations for fiscal 1998 and 1997 (in thousands, except per share data): Basic and Diluted Net Earnings Gross Income (Loss) Per Net Sales Profit (Loss) Share ----------- -------- -------- ------------ ----------- -------- -------- ------------ 27 Fiscal 1998: First quarter $ 42,704 $ 6,076 $ 454 $ 0.08 Second quarter 41,674 5,642 94 0.02 Third quarter 32,008 4,082 (732) (0.13) Fourth quarter 44,444 5,746 (414) (0.07) $160,830 $21,546 $ (598) $(0.10) Fiscal 1997: First quarter $ 38,074 $ 5,572 $ 652 $ 0.11 Second quarter 46,669 5,971 429 0.08 Third quarter 49,614 6,412 823 0.14 Fourth quarter* 46,100 6,170 (668) (0.11) $180,457 $24,125 $1,236 $ 0.22
*Fourth quarter of fiscal 1997 reflects adjustments relating to land impairment that reduced income before provision (benefit) for income taxes by $1,500,000. 28 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding the directors of the Company is incorporated herein by reference to the descriptions set forth under the caption "Election of Directors" in the Proxy Statement for Annual Meeting of Shareholders to be held September 10, 1998 (the "1998 Proxy Statement"). Set forth below are the names, ages and positions of the executive officers of the Company. David H. Rotter 51 President, Secretary and Director Bernard J. Rotter 55 Vice President, Treasurer and Director Todd M. Stutz 40 Executive Vice President and Director John J. Dierbeck, III 52 Executive Vice President and Director Lawrence B. Shapiro 42 Chief Financial Officer and Director
The officers of the Company are elected annually and serve at the discretion of the Board of Directors. None of the Company's officers is employed pursuant to a written employment contract. BACKGROUND OF EXECUTIVE OFFICERS DAVID H. ROTTER is a founder of the Company and has been a member of its Board of Directors since its inception. He served as the Company's Vice President for 1973 through March 1990 and has served as its President from April 1990 through the present. He has also served as the Company's secretary since its inception. He is the brother of Bernard J. Rotter. BERNARD J ROTTER has served as a Director, Vice President and Treasurer of the Company since July 1984. He is the brother of David H. Rotter. TODD M. STUTZ was elected a Director of the Company in August 1992 and has served as Executive Vice President since June 1991. He joined the Company in April 1989 and served as its Land Development Manager until June 1991. Between April 1980 and March 1989 he was employed by the Housing and Redevelopment Authority of the City of Columbia Heights, Minnesota as Executive Director. JOHN J. DIERBECK, III was elected Executive Vice President in May 1996. He was elected a Director of the Company in August 1992. He served as the Company's sales manager for more than five years prior to becoming an Executive Vice President. LAWRENCE B. SHAPIRO was elected Chief Financial Officer and a Director of the Company in August 1992. Prior to that time, he served as the Company's Controller. ITEM 11. EXECUTIVE COMPENSATION Information regarding executive compensation is incorporated herein by reference to the information set forth under the caption "Executive Compensation" in the 1998 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding security ownership of certain beneficial owners and management of the Company is incorporated herein by reference to the information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in the 1998 Proxy Statement. 29 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions with the Company is incorporated herein by reference to the information set forth under the caption "Certain Transactions" in the 1998 Proxy Statement. 30 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) DOCUMENTS FILED WITH THIS REPORT. (1) See index to consolidated financial statements on page 14 of this report. (2) All supplemental schedules are omitted because of the absence of conditions under which they are required or because the information is shown in the Consolidated Financial Statements or notes thereto. (b) REPORTS ON FORM 8-K. During the quarter ended March 31, 1998, the Company filed no reports on Form 8-K with the Securities and Exchange Commission. (c) EXHIBITS
Exhibit Number Description - ------ ----------- 3.1 The Company's Restated Articles of Incorporation.(1) 3.2 The Company's Bylaws.(1) 10.1 The Rottlund Company, Inc. 1992 Stock Option Plan.(1) 10.2 The Rottlund Company, Inc. 1992 Director Stock Option Plan.(1) 10.3 The Rottlund Company, Inc. Employee Stock Purchase Plan.(1) 10.4 Form of Shareholders Agreement.(1) 10.5 Note Agreement, dated as of December 2, 1994, by and among the Company and the purchasers listed therein.(2) 10.6 Note Agreement, dated as of February 15, 1996, by and among the Company and the purchasers listed therein.(3) 10.7 Letter Amendment, dated December 30, 1996, by and among the Company and the note purchasers listed therein. 10.8 Waiver and Amendment, dated March 31, 1997, by and among the Company and the note purchasers listed therein. 10.9 Waiver and Amendment, dated December 31, 1997, by and among the Company and the note purchasers listed therein. 10.10 Waiver and Amendment, dated as of March 31, 1998, by and among the Company and the note purchasers listed therein. 10.11 Credit Facility, dated October 23, 1996 with First National Bank of Boston.(4) 10.12 First Modification of Credit Agreement, dated November 19, 1996. 10.13 Second Modification of Credit Agreement, dated December 24, 1996. 10.14 Third Modification of Credit Agreement, dated January 18, 1997. 10.15 Fourth Modification of Credit Agreement, dated June 25, 1997. 10.16 Fifth Modification of Credit Agreement, dated January 15, 1998. 10.17 Sixth Modification of Credit Agreement, dated July 10, 1998. 11 Computation of Per Share Earnings. 22 Subsidiaries of the Company. 23 Consent of Arthur Andersen LLP. 27.1 Financial Data Schedule.
- ------------------------ (1) Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-51726 (the "Form S-1"). (2) Incorporated by reference to the Company's filing on Form 10-K for the year ended March 31, 1995. (3) Incorporated by reference to the Company's filing on Form 10-K for the year ended March 31, 1996. 31 (4) Incorporated by reference to the Company's filing on Form 10-Q for the three month period ending December 31, 1996. 32 SIGNATURES Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE ROTTLUND COMPANY. INC. Dated: July 13, 1998 By /s/ DAVID H. ROTTER ------------------------------------ David H. Rotter PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE /s/ DAVID H. ROTTER President, Chief Executive Officer July 13, 1998 - ------------------------------ and Director David H. Rotter /s/ BERNARD J. ROTTER Vice President, Treasurer and Chairman July 13, 1998 - ------------------------------ of the Board Bernard J. Rotter /s/ JOHN J. DIERBECK, III Executive Vice President and Director July 13, 1998 - ------------------------------ John J. Dierbeck, III /s/ LAWRENCE B. SHAPIRO Chief Financial Officer and Director July 13, 1998 - ------------------------------ (Principal Financial and Accounting Officer) Lawrence B. Shapiro /s/ TODD M. STUTZ Executive Vice President and Director July 13, 1998 - ------------------------------ Todd M. Stutz Director Dennis Doyle - ------------------------------ Director Scott D. Rued - ------------------------------
33 EXHIBIT INDEX
Manually Numbered Page Exhibit No. Exhibit References - ----------- --------- --------------- 10.7 Letter Amendment, dated December 30, 1996, by and among the Company and the note purchasers listed therein. 10.8 Waiver and Amendment, dated March 31, 1997, by and among the Company and the note purchasers listed therein. 10.9 Waiver and Amendment, dated December 31, 1997, by and among the Company and the note purchasers listed therein. 10.10 Waiver and Amendment, dated as of March 31, 1998, by and among the Company and the note purchasers listed therein. 10.12 First Modification of Credit Agreement, dated November 19, 1996. 10.13 Second Modification of Credit Agreement, dated December 24, 1996. 10.14 Third Modification of Credit Agreement, dated January 18, 1997. 10.15 Fourth Modification of Credit Agreement, dated June 25, 1997. 10.16 Fifth Modification of Credit Agreement, dated January 15, 1998. 10.17 Sixth Modification of Credit Agreement, dated July 10, 1998. 11 Computation of Per Share Earnings 22 Subsidiaries of The Rottlund Company, Inc. 23 Consent of Arthur Andersen LLP 27.1 Financial Data Schedule
EX-10.7 2 EXHIBIT 10.7 LETTER AMENDMENT Dated as of December 30, 1996 Principal Mutual Life Insurance Company Northern Life Insurance Company Modern Woodmen of America Royal Neighbors of America Bankers Security Life Insurance Society United Services Life Insurance Company Ladies and Gentlemen: Reference is made to (1) the Note Agreement dated as of December 2, 1994 (as amended by that certain Letter Amendment dated as of February 15, 1996, the "1994 Agreement") among Principal Mutual Life Insurance Company ("Principal"), Northern Life Insurance Company ("Northern"), Modern Woodmen of American ("MWA") and Royal Neighbors of America ("RNA", and together with Principal, Northern and MWA, collectively the "1994 Purchasers") and The Rottlund Company, Inc., a Minnesota corporation (the "Company"), and (ii) the Note Agreement dated as of February 15, 1996 (the "1996 Agreement", and together with the 1994 Agreement, collectively the "Agreements" and each individually an "Agreement") among Principal, Bankers Security Life Insurance Society ("Bankers") and United Services Life Insurance Company ("United", and together with Principal and Bankers, collectively the "1996 Purchasers", and, together with the 1994 Purchasers, collectively the "Purchasers"). The Company has requested that Section 5.6 of each of the Agreements be amended as herein set forth, to which amendment the Purchasers have agreed in consideration of the amendment of Section 5.7 ~f each of the Agreements as herein set forth. Accordingly, in consideration of the premises herein set forth, and of other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, it is hereby agreed as follows: 1. Section 5.6(c) of each of the Agreements is hereby amended and restated in its entirety as follows: (c) Current Debt and Funded Debt of the Company and its Subsidiaries not otherwise permitted by this Section 5.6; 2. Section 5.6(e) of each of the Agreements is hereby amended and restated in its entirety as follows: (e) any renewal, extension, substitution, refinancing, or replacement of any Current Debt or Funded Debt permitted by Section 5.6(b), provided that the principal amount of Funded Debt or Current Debt resulting from such renewal, extension, substitution, refinancing or replacement does not exceed the principal amount of Current Debt or Funded Debt so refinanced; 3. Section 5.6 of each of the Agreements is hereby amended by adding at the end thereof the following proviso: provided, however, that at no time shall (i) the ratio of (A) the sum of Consolidated Current Debt and Consolidated Funded Debt to (B) Consolidated Net Tangible Assets exceed 67% at any time on and prior to December 31, 1998 and 62% at any time thereafter, or (ii) the sum of the aggregate Current Debt and Funded Debt of all Subsidiaries (exclusive of such Debt permitted by Section 5.6(d) hereof) exceed 20% of Consolidated Tangible Net Worth. 4. Section 5.7(g)(v) of each of the Agreements is hereby amended as restated in its entirety as follows: (v) at no time shall the aggregate amount then remaining unpaid on Debt secured by such Liens and by Liens permitted by Section 5.7(e) exceed an amount equal to 15% of Consolidated Net Tangible Assets. Except as specifically amended hereby, all terms and conditions of each of the Agreements shall remain in full force and effect. This Letter Amendment may be executed simultaneously in two or more counterparts, each of which shall be an original, but all of which constitute but one agreement. This Letter Amendment shall be governed by, and enforced in accordance with Minnesota law. The Company represents and warrants to the Purchasers that (i) no Default or Event of Default (as defined in each Agreement) has occurred and is continuing, (ii) this Letter Amendment has been duly authorized, executed and delivered by the Company and each Agreement, as amended by this Letter Amendment, constitutes a legal, valid and binding obligation of the Company, and (iii) there is no provision in the Articles of Incorporation of the Company or in its bylaws or in any indenture, contract or agreement to which the Company is a party or by which it is bound nor any provision of law or any order of any court or governmental authority which prohibits the execution and delivery by the Company of this Letter Amendment, the performance or observance by the Company of the terms and conditions of this Letter Amendment, or the performance or observance by the Company of the terms and conditions of -2- the Agreements, as modified by the amendments set forth in this Letter Amendment. All representations and warranties contained herein or made in writing by the Company in connection herewith shall survive the execution and delivery hereof. It shall be deemed to be an Event of Default under each Agreement if any of such representations or warranties proves to be false in any material respect as of the date hereof. If you agree to amending the Agreements in the manner set forth above, please so indicate by executing the form of acknowledgment set forth below. In accordance with Section 7.1 of each of the Agreements, this Letter Amendment shall become a binding agreement between you and the Company with respect to each Agreement, and the amendments set forth herein shall take effect as of the date hereof with respect to such Agreement, upon the execution of the form of acknowledgment set forth below by the holders of at least 66-2/3% in the aggregate principal amount of the outstanding Notes (as defined in such Agreement) issued pursuant to such Agreement (die percentage of the aggregate principal amount of the outstanding Notes held by each of you being set forth on Schedule I hereof). Very truly yours, THE ROTTLUND COMPANY, INC. By ---------------------------------- Its ------------------------------- -3- SCHEDULE I 1995 Agreement
Principal Amount of Holder Outstanding Note Percentage -------- --------------------- ------------ Principal Mutual Life $16,000,000 64% Insurance Company Northern Life Insurance $ 5,000,000 20% Company Modern Woodmen of America $ 3,000,000 12% Royal Neighbors of $ 1,000,000 4% America ----------- ---- $25,000,000 100% 1996 Agreement Principal Amount of Holder Outstanding Note Percentage ------- --------------------- ------------ Principal Mutual Life $ 7,000,000 70% Insurance Company Siglar & Co., as nominee $ 1,000,000 10% for Bankers Security Life Insurance Society Siglar & Co., as nominee $ 2,000,000 20% for United Services Life ---- Insurance Company 100%
-4- Agreed to as of the date first above written. As to the 1994 Agreement and the 1996 Agreement: PRINCIPAL MUTUAL LIFE INSURANCE COMPANY By -------------------------------------- Its -------------------------------- And ------------------------------------- Its -------------------------------- As to the 1994 Agreement: NORTHERN LIFE INSURANCE COMPANY By -------------------------------------- Its -------------------------------- MODERN WOODMEN OF AMERICA By -------------------------------------- Its -------------------------------- And ------------------------------------- Its -------------------------------- -5- Agreed to as of the date first above written. As to the 1994 Agreement and the 1996 Agreement: PRINCIPAL MUTUAL LIFE INSURANCE COMPANY By -------------------------------------- Its -------------------------------- And ------------------------------------- Its -------------------------------- As to the 1994 Agreement: NORTHERN LIFE INSURANCE COMPANY By -------------------------------------- Its -------------------------------- MODERN WOODMEN OF AMERICA By -------------------------------------- Its -------------------------------- And ------------------------------------- Its -------------------------------- -6- ROYAL NEIGHBORS OF AMERICA By -------------------------------------- Its -------------------------------- And ------------------------------------- Its -------------------------------- As to the 1994 Agreement: RELIASTAR BANKERS SECURITY LIFE INSURANCE COMPANY F/K/A BANKERS SECURITY LIFE INSURANCE SOCIETY By -------------------------------------- Its -------------------------------- UNITED SERVICES LIFE INSURANCE COMPANY By -------------------------------------- Its -------------------------------- -7- EX-10.8 3 EXHIBIT 10.8 WAIVER AND AMENDMENT Dated as of March 31, 1997 Principal Mutual Life Insurance Company Northern Life Insurance Company Modern Woodmen of America Royal Neighbors of America ReliaStar Bankers Security Life Insurance Company ReliaStar United Services Life Insurance Company Ladies and Gentlemen: Reference is made to (i) the Note Agreement dated as of December 2, 1994 (as amended by that certain Letter Amendment dated as of February 15, 1996 and that certain Letter Amendment dated as of December 30, 1996, the "1994 Agreement") among Principal Mutual Life Insurance Company ("Principal"), Northern Life Insurance Company ("Northern"), Modern Woodmen of America ("MWA") and Royal Neighbors of America ("RNA", and together with Principal, Northern and MWA, collectively the "1994 Purchasers") and The Rottlund Company, Inc., a Minnesota corporation (the "Company"), pursuant to which the 1994 Purchasers purchased promissory notes of the Company in the aggregate original principal amount of $25,000,000 (collectively, the "1994 Notes") and (ii) the Note Agreement dated as of February 15, 1996 (as amended by that certain Letter Amendment dated as of December 30, 1996, the "1996 Agreement", and together with the 1994 Agreement, collectively the "Agreements" and each individually an "Agreement") among Principal, Bankers Security Life Insurance Society, n/k/a ReliaStar Bankers Security Life Insurance Company ("Bankers") and United Services Life Insurance Company, n/k/a ReliaStar United Services Life Insurance Company ("United", and together with Principal and Bankers, collectively the "1996 Purchasers", and, together with the 1994 Purchasers, collectively the "Purchasers"), pursuant to which the 1996 Purchasers purchased promissory notes of the Company in the aggregate original principal amount of $10,000,000 (collectively, the "1996 Notes"). Capitalized terms used and not otherwise defined herein shall have the meanings ascribed thereto in each Agreement. The Company has advised the Purchasers that the Company is at present in default under Sections 5.5, 5.6 and 5.16 of each of the Agreements, which defaults the Company hereby acknowledges. The Company has further advised the Purchasers that the Company is likely to continue to be so in default under Sections 5.5 and 5.16 of each of the Agreements in the near future. The Company has accordingly requested certain waivers relating to Sections 5.5, 5.6 and 5.16 of each of the Agreements, and certain amendments relating to Sections 5.5 and 5.16 of each of the Agreements. In consideration of the premises herein set forth, and of other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, it is hereby agreed as follows: 1. The Purchasers hereby waive the defaults existing as of the date hereof under Sections 5.5, 5.6 and 5.16 of each of the Agreements, and each Event of Default rising directly therefrom. 2. Section 5.5 of each of the Agreements is hereby amended and restated in its entirety as follows: The Company shall at all times maintain Consolidated Tangible Net Worth in an amount not less than $24,750,000 PLUS 70% of the positive Consolidated Net Income, if any, for each Fiscal Quarter commencing on or after April 1, 1997. 3. Section 5.13 of each Agreement is hereby amended by (i) changing the lettering of subsection (i) to (j), and (ii) adding thereto the following new subsection (i): (i) LEVERAGE RATIO CERTIFICATES. As soon as available and in any event within 15 days after the close of any Fiscal Quarter, a Leverage Ratio Certificate, correctly setting forth the ratio, as of the close of such Fiscal Quarter, of (A) the sum of Consolidated Current Debt and Consolidated Funded Debt to (B) Consolidated Net Tangible Assets, all in reasonable detail and certified as complete and correct by a financial officer of the Company; and 4. Section 5.16 of each of the Agreements is hereby amended and restated in its entirety as follows: The Company shall maintain, as of the close of each month, Net Income Available for Fixed Charges for the immediately preceding twelve-month period of at least the following percentages of Fixed Charges for such twelve-month period: 125% as of the close of each month on and prior to September 30, 1997; 145% as of the close of each month on and prior to February 28, 1998; and 200% as of the close of each month thereafter. As an inducement to and in consideration of the agreement by the Purchasers to waive the defaults under the Agreements specified in Section 1 of this Waiver and Amendment and to amend the Agreements as set forth in Sections 2, 3 and 4 of this Waiver and Amendment, the Company hereby agrees, notwithstanding anything in the Agreements, the 1994 Notes or the 1996 Notes (as the case may be) to the contrary, as follows: (i) if as of the close of any Fiscal Quarter commencing on or after April 1, 1997 the ratio of (A) the sum of Consolidated Current Debt and Consolidated Funded Debt to (B) Consolidated Net Tangible Assets (such ratio being herein referred to as the "Leverage Ratio"), as disclosed in the Leverage Ratio Certificate 2 referred to in Section 5.13(i) of each of the Agreements (each a "Leverage Ratio Certificate") for such Fiscal Quarter, equals or exceeds 64%, or if the Company fails to deliver the Leverage Ratio Certificate for such Fiscal Quarter to the Holders in accordance with Section 5.13(i) of each of the Agreements (and, in such event, in addition to any other rights the Holders may exercise under Section 6 of each Agreement), then, effective as of the first day of the Fiscal Quarter immediately following the Fiscal Quarter to which the Leverage Ratio Certificate applies (where the Company delivers such Leverage Ratio Certificate) or would apply (where the Company fails to do so), as the case may be, the 1994 Notes shall bear interest at the rate of 12.61 % per annum and the 1996 Notes shall bear interest at the rate of 9.92% per annum; (ii) if as of the close of any Fiscal Quarter commencing on or after April 1, 1997 the Leverage Ratio, as disclosed in the Leverage Ratio Certificate for such Fiscal Quarter, equals or exceeds 60% but is less than 64%, then, effective as of the first day of the Fiscal Quarter immediately following the Fiscal Quarter to which the Leverage Ratio Certificate applies, the 1994 Notes shall bear interest at the rate of 12.36% per annum and the 1996 Notes shall bear interest at the rate of 9.67% per annum; and (iii) if as of the close of any Fiscal Quarter commencing on or after April 1, 1997 the Leverage Ratio, as disclosed in the Leverage Ratio Certificate for such Fiscal Quarter, is less than 60%, then, effective as of the first day of the Fiscal Quarter immediately following the Fiscal Quarter to which the Leverage Ratio Certificate applies, the 1994 Notes shall bear interest at the rate of 12.11 % per annum and the 1996 Notes shall bear interest at the rate of 9.42% per annum. The amount of each combined installment of principal and interest payable on the 1994 Notes or the 1996 Notes, as the case may be, shall be adjusted to reflect the foregoing arrangements, but the portion of each such combined installment allocable to principal shall remain unchanged. Default in the payment of interest, as calculated in accordance with the foregoing arrangements, shall constitute an Event of Default under Section 6.1 of each of the Agreements. The Company hereby agrees to execute, at the request of the Holders or any of them, addenda to the 1994 Notes and the 1996 Notes evidencing the foregoing arrangements. Except as specifically amended hereby, all terms and conditions of each of the Agreements shall remain in full force and effect. This Waiver and Agreement may be executed simultaneously in two or more counterparts, each of which shall be an original, but all of which constitute but one agreement. This Waiver and Amendment shall be governed by, and enforced in accordance with Minnesota law. The Company represents and warrants to the Purchasers that (i) except as disclosed herein, no Default or Event of Default has occurred and is continuing, (ii) this Waiver and Amendment has been duly authorized, executed and delivered by the Company and each Agreement, as amended by this Waiver and Amendment, constitutes a legal, valid and binding 3 obligation of the Company, and (iii) there is no provision in the Articles of Incorporation of the Company or in its bylaws or in any indenture, contract or agreement to which the Company is a party or by which it is bound nor any provision of law or any order of any court or governmental authority which prohibits the execution and delivery by the Company of this Waiver and Amendment, the performance or observance by the Company of the terms and conditions of this Waiver and Amendment, or the performance or observance by the Company of the terms and conditions of the Agreements, as modified by the amendments set forth in this Waiver and Amendment. All representations and warranties contained herein or made in writing by the Company in connection herewith shall survive the execution and delivery hereof. It shall be deemed to be an Event of Default under each Agreement if any of such representations or warranties proves to be false in any material respect as of the date hereof. If you are in agreement with the foregoing, please so indicate by executing the form of acknowledgment set forth below, whereupon this Waiver and Amendment shall become a binding agreement among you and the Company. Very truly yours THE ROTTLUND COMPANY, INC. By ------------------------------------------ Its -------------------------------------- 4 Agreed to as of the date first above written. AS TO THE 1994 AGREEMENT AND THE 1996 AGREEMENT: PRINCIPAL MUTUAL LIFE INSURANCE COMPANY By -------------------------------------- Its -------------------------------- And Its -------------------------------- AS TO THE 1994 AGREEMENT: NORTHERN LIFE INSURANCE COMPANY By -------------------------------------- Its -------------------------------- MODERN WOODMEN OF AMERICA By -------------------------------------- Its -------------------------------- And Its -------------------------------- 5 ROYAL NEIGHBORS OF AMERICA By -------------------------------------- Its -------------------------------- And Its -------------------------------- AS TO THE 1994 AGREEMENT: RELIASTAR BANKERS SECURITY LIFE INSURANCE COMPANY f/k/a Bankers Security Life Insurance Society By -------------------------------------- Its -------------------------------- UNITED SERVICES LIFE INSURANCE COMPANY By -------------------------------------- Its -------------------------------- 6 EX-10.9 4 EXHIBIT 10.9 WAIVER AND AMENDMENT Dated as of December 31, 1997 Principal Mutual Life Insurance Company Northern Life Insurance Company Modern Woodmen of America Royal Neighbors of America ReliaStar Life Insurance Company of New York ReliaStar United Services Life Insurance Company Ladies and Gentlemen: Reference is made to (i) the Note Agreement dated as of December 2, 1994 (as amended by that certain Letter Amendment dated as of February 15, 1996, and that certain Letter Amendment dated as of December 30, 1996, and that certain Waiver and Amendment dated as of March 31, 1997, the "1994 Agreement") among Principal Mutual Life Insurance Company ("Principal"), Northern Life Insurance Company ("Northern"), Modern Woodmen of America ("MWA") and Royal Neighbors of America ("RNA", and together with Principal, Northern and MWA, collectively the "1994 Purchasers") and The Rottlund Company, Inc., a Minnesota corporation (the "Company"), pursuant to which the 1994 Purchasers purchased promissory notes of the Company in the aggregate original principal amount of $25,000,000 (collectively, the "1994 Notes") and (ii) the Note Agreement dated as of February 15, 1996 (as amended by that certain Letter Amendment dated as of December 30, 1996 and that certain Waiver and Amendment dated as of March 31, 1997, the "1996 Agreement", and together with the 1994 Agreement, collectively the "Agreements" and each individually an "Agreement") among Principal, Bankers Security Life Insurance Society, n/k/a ReliaStar Life Insurance Company of New York ("Bankers") and United Services Life Insurance Company, n/k/a ReliaStar United Services Life Insurance Company ("United", and together with Principal and Bankers, collectively the "1996 Purchasers", and, together with the 1994 Purchasers, collectively the "Purchasers"), pursuant to which the 1996 Purchasers purchased promissory notes of the Company in the aggregate original principal amount of $10,000,000 (collectively, the "1996 Notes"). Capitalized terms used and not otherwise defined herein shall have the meanings ascribed thereto in each Agreement. The Company has advised the Purchasers that the Company is at present in default under Section 5.16 of each of the Agreements, which defaults the Company hereby acknowledges. The Company has further advised the Purchasers that the Company is likely to continue to be so in default under Section 5.16 of each of the Agreements in the near future. The Company has accordingly requested certain waivers and amendments relating to Section 5.16 of each of the Agreements. In consideration of the premises herein set forth and the satisfaction of the Condition hereinafter described, the Company and the Purchasers hereby agree, effective upon the satisfaction of the Condition, as follows: 1. The Purchasers hereby waive the defaults existing as of the date hereof under Section 5.16 of each of the Agreements, and each Event of Default arising directly therefrom. 1 1 Section 5.7 (g)(v) of each of the Agreements is hereby amended and restated in its entirety as follows: (v) at no time shall the aggregate amount then remaining unpaid on Debt secured by such Liens and Liens permitted by Section 5.7(e) exceed the lesser of (i) $8,000,000 or (ii) an amount equal to 11.5% of Consolidated Net Tangible Assets. 3. Section 5.16 of each of the Agreements is hereby amended and restated in its entirety as follows: The Company shall maintain, as of the close of each month, Net Income Available for Fixed Charges for the immediately preceding twelve-month period of at least the following percentages of Fixed Charges for such twelve-month period: 100% as of the close of each month on and prior to March 31, 1998; 115% as of the close of each month on and prior to June 30, 1998; 140% as of the close of each month on or prior to September 30, 1998; 190% as of the close of each month on and prior to December 31, 1998; 200% as of the close of each month thereafter. 4. Section 5 of each of the Agreements is hereby amended by adding the following new sections 5.19 and 5.20 thereto: -2- A. EXISTING BANK INDEBTEDNESS. If the Company shall modify any term or condition of the Existing Bank Indebtedness Documents, the Company agrees to give written notice of such modification to all Holders promptly, but in any event within five days of the date on which such modification is effected. A. GUARANTY FROM FUTURE SUBSIDIARIES. In addition to causing the existing Subsidiaries to execute and deliver the Guaranty, the Company will promptly secure the execution and delivery of a guaranty substantially in the form of the Guaranty from each Subsidiary as may hereafter be formed and organized. 1 Section 6.1 of each of the Agreements is hereby amended (a) by changing the reference to "5.18" in the third line of subsection 6.1(c) to "5.19", and (b) by changing the parenthetical statement "(individually or in the aggregate") in the sixth and seventh lines of subsection 6.1(e) to "(individually or in the aggregate, and including without limitation the Existing Bank Indebtedness)". 1 Section 8.1 of each of the Agreements is hereby amended by adding thereto the following new definitions: "Existing Bank Indebtedness" shall mean the portion of the Debt of the Company incurred under or pursuant to the Existing Credit Agreement. "Existing Bank Indebtedness Documents" shall mean the Existing Credit Agreement, together with all instruments and documents related thereto, given to secure or evidence the Existing Bank Indebtedness, or otherwise executed in connection therewith. "Existing Credit Agreement" shall mean that certain Credit Agreement dated as of October 23, 1996 among the Company, The First National Bank of Boston, as Agent, and the other parties thereto, as the same may from time to time be amended or otherwise modified. Reference herein to the amendment or other modification of the Existing Credit Agreement is not intended to waive or modify in any respect the covenant of the Company contained in Section 5.19 regarding the modification of the Existing Bank Indebtedness Documents. "Guaranty" shall mean the Guaranty of the Subsidiaries, the form of which is appended as Exhibit A to that certain Waiver and Amendment dated as of December 31, 1997, by and among the Company and the Purchasers. 3 This Waiver and Amendment shall become effective only upon the execution and delivery by each of the Subsidiaries of a Guaranty (the "Guaranty"), substantially in the form of Exhibit A hereto (the "Condition"). Except as specifically amended hereby, all terms and conditions of each of the Agreements shall remain in full force and effect. This Waiver and Agreement may be executed simultaneously in two or more counterparts, each of which shall be an original, but all of which constitute but one agreement. This Waiver and Amendment shall be governed by, and enforced in accordance with Minnesota law. The Company represents and warrants to the Purchasers that (i) except as disclosed herein, no Default or Event of Default has occurred and is continuing, (ii) this Waiver and Amendment has been duly authorized, executed and delivered by the Company and each Agreement, as amended by this Waiver and Amendment, constitutes a legal, valid and binding obligation of the Company, and the Guaranty has been duly authorized, executed and delivered by each Subsidiary and constitutes a legal, valid and binding obligation of each Subsidiary, and (iii) there is no provision in the Articles of Incorporation of the Company or in its bylaws or in any indenture, contract or agreement to which the Company is a party or by which it is bound nor any provision of law or any order of any court or governmental authority which prohibits the execution and delivery by the Company of this Waiver and Amendment, the performance or observance by the Company of the terms and conditions of this Waiver and Amendment, or the performance or observance by the Company of the terms and conditions of the Agreements, as modified by the amendments set forth in this Waiver and Amendment, and there is no provision in the Articles of Incorporation or bylaws or partnership agreement, as the case may be, of any Subsidiary or in any indenture, contract, or agreement to which any Subsidiary is a party or by which any Subsidiary is bound nor any provision of law or any order of any court or governmental authority which prohibits the execution and delivery by any Subsidiary of the Guaranty or the performance or observance by any Subsidiary of the terms and conditions of the Guaranty. All representations and warranties contained herein or made in writing by the Company in connection herewith shall survive the execution and delivery hereof. It shall be deemed to be an Event of Default under each Agreement if any of such representations or warranties proves to be false in any material respect as of the date hereof. If you are in agreement with the foregoing, please so indicate by executing the form of acknowledgment set forth below. In accordance with Section 7.1 of each of the Agreements, this Waiver and Amendment shall become a binding agreement between you and the Company with respect to each Agreement, and the amendments set forth herein shall take effect as of the date hereof with respect to such Agreement, upon the execution of the form of acknowledgement set forth below by the holders of at least 66 2/3% in the aggregate principal amount of the outstanding Notes (as defined in such Agreement) issued pursuant to such Agreement (the percentage of the aggregate principal amount of the outstanding Notes held by each of you being set forth on Schedule I hereof). Very truly yours THE ROTTLUND COMPANY, INC. By --------------------------------- Its -------------------------------- Agreed to as of the date first above written. AS TO THE 1994 AGREEMENT AND THE 1996 AGREEMENT: PRINCIPAL MUTUAL LIFE INSURANCE COMPANY By ----------------------------------- Its ---------------------------------- And ---------------------------------- Its ---------------------------------- AS TO THE 1994 AGREEMENT: NORTHERN LIFE INSURANCE COMPANY By ----------------------------------- Its ---------------------------------- MODERN WOODMEN OF AMERICA By ----------------------------------- Its ---------------------------------- And ---------------------------------- Its ---------------------------------- ROYAL NEIGHBORS OF AMERICA By ----------------------------------- Its ---------------------------------- And ---------------------------------- Its ---------------------------------- AS TO THE 1996 AGREEMENT: RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK, successor by merger to Relia Star Bankers Life Insurance Company, f/k/a Bankers Security Life Insurance Society By ----------------------------------- Its ---------------------------------- RELIASTAR UNITED SERVICES LIFE INSURANCE COMPANY By ----------------------------------- Its ---------------------------------- SCHEDULE I 1994 AGREEMENT
Percentage of Principal Amount Holder Of Outstanding Notes ------ -------------------- Principal Mutual Life Insurance 64% Company Northern Life Insurance Company 20% Modern Woodmen of America 12% Royal Neighbors of America 4% ---- 100%
1996 AGREEMENT
Percentagee of Principal Amount Holder Of Outstanding Notes ------ -------------------- Principal Mutual Life Insurance 70% Company Siglar & Co., as nominee for 10% Bankers Security Life Insurance Society (n/k/a ReliaStar Life Insurance Company of New York) Siglar & Co., as nominee for 20% --- United Services Life Insurance Company (n/k/a ReliaStar United Services Life Insurance Company) 100%
EXHIBIT A FORM OF GUARANTY [TO COME] EX-10.10 5 EXHIBIT 10.10 Dated as of March 31, 1998 WAIVER AND AMENDMENT Principal Life Insurance Company, f/k/a Principal Mutual Life Insurance Company Northern Life Insurance Company Modern Woodmen of America Royal Neighbors of America ReliaStar Life Insurance Company of New York ReliaStar United Services Life Insurance Company Ladies and Gentlemen: Reference is made to (i) the Note Agreement dated as of December 2, 1994 (as amended by that certain Letter Amendment dated as of February 15, 1996, that certain Letter Amendment dated as of December 30, 1996, that certain Waiver and Amendment dated as of March 31, 1997, and that certain Waiver and Amendment dated as of December 31, 1997, the "1994 Agreement") among Principal Mutual Life Insurance Company, n/k/a Principal Life Insurance Company ("Principal"), Northern Life Insurance Company ("Northern"), Modern Woodmen of America ("MWA") and Royal Neighbors of America ("RNA", and together with Principal, Northern and MWA, collectively the "1994 Purchasers") and The Rottlund Company, Inc., a Minnesota corporation (the "Company"), pursuant to which the 1994 Purchasers purchased promissory notes of the Company in the aggregate original principal amount of $25,000,000 (collectively, the "1994 Notes") and (ii) the Note Agreement dated as of February 15, 1996 (as amended by that certain Letter Amendment dated as of December 30, 1996, that certain Waiver and Amendment dated as of March 31, 1997, and that certain Waiver and Amendment dated as of December 31, 1997, the "1996 Agreement", and together with the 1994 Agreement, collectively the "Agreements" and each individually an "Agreement") among Principal, Bankers Security Life Insurance Society, n/k/a ReliaStar Life Insurance Company of New York ("Bankers") and United Services Life Insurance Company, n/k/a ReliaStar United Services Life Insurance Company ("United", and together with Principal and Bankers, collectively the "1996 Purchasers", and, together with the 1994 Purchasers, collectively the "Purchasers"), pursuant to which the 1996 Purchasers purchased promissory notes of the Company in the aggregate original principal amount of $10,000,000 (collectively, the "1996 Notes", and together with the 1994 Notes, collectively the "Notes" and each individually a "Note"). Capitalized terms used and not otherwise defined herein shall have the meanings ascribed thereto in each Agreement. Reference is further made to the Waiver and Amendment dated as of March 31, 1997 (the "March 1997 Amendment") among the Purchasers and the Company pursuant to which, among other things, the Company agreed that, under certain circumstances, the 1994 Notes would bear interest at a rate of 12.61% per annum and the 1996 Notes would bear interest at the rate of 9.92% per annum (such interest rate with respect to each Note being herein referred to as the "Amended Interest Rate" for such Note). The Company acknowledges that each Note currently bears interest at the Amended Interest Rate applicable to such Note, and that the references to "12.11%" and "14.11%" in the second paragraph of Section 1.1 of the 1994 Agreement and in the 1994 Notes are currently deemed to be "12.61%" and "14.61%", respectively, and the references to "9.42%" and "11.42%" in the second paragraph of Section 1.1 of the 1996 Agreement and in the 1996 Notes are currently deemed to be "9.92" and "11.92%", respectively. WAIVER The Company has advised the Purchasers that the Company is at present in default under Section 5.16 of each of the Agreements, which defaults the Company hereby acknowledges. The Company hereby requests that the Purchasers waive such defaults. The Purchasers each hereby waive the defaults existing as of the date hereof under Section 5.16 of each of the Agreements, and each Event of Default arising directly therefrom. The foregoing waiver shall not extend to any obligation of the Company not expressly so waived or impair any right of the Purchasers consequent thereon. AMENDMENTS The parties have, in addition, agreed to amend certain other provisions in each of the Agreements as follows: 1 The parties have agreed that in addition to each of the required monthly prepayments of the Notes currently required by Section 2.1 of each of the Agreements, the Company shall, commencing with the required monthly prepayment payable August 1, 1998 and continuing with each such required monthly prepayment until payment in full of the Notes, prepay the principal amount of the Notes in an additional aggregate amount of $100,000 with each such required monthly prepayment, such additional prepayment amount to be applied pro rata to all Notes outstanding under both Agreements. To facilitate the payment of such additional required monthly prepayment together with the payment of the required monthly prepayments currently required by Section 2.1 of each of the Agreements, a revised amortization schedule for each Agreement, attached as Exhibits A and B hereto, has been prepared, based on the aggregate oustanding principal amount of the 1994 Notes or the 1996 Notes, as the case may be, following receipt of the required monthly prepayments currently required by Section 2.1 of each of the Agreements through and including July 1, 1998. The parties agree that Exhibits A and B hereto are subject to review for accuracy and verification by the Consultant (as hereinafter defined) and to conversion by the Consultant for consistency to a format indicating amounts expressed therein as per $1,000,000 of original principal (as is the case with the original amortization schedule attached as Schedule III to each of the Agreements). The parties further agree that following such review, verification, and conversion, new Exhibits A and B hereto shall be forwarded to each Purchaser and to the Company and thereby be deemed adopted in substitution for the Exhibits A and B attached hereto. In addition, to further facilitate the foregoing arrangements, Section 2.1 of each of the Agreements is hereby amended and restated in its entirety as follows: 2.1 REQUIRED MONTHLY PREPAYMENT. The Company agrees that on the first day of each month, on the dates indicated on the Revised Amortization Schedule, it will prepay the principal indebtedness evidenced by the Notes in the amount specified for such date in the Revised Amortization Schedule, subject to adjustment as provided in Sections 2.2, 2.4. 2.5 and 2.7 hereof. No premium shall be payable in connection with any required prepayment made pursuant to this Section 2.1. For purposes of this Section 2.1, any prepayment shall be applied pro rata to all Notes then outstanding, and any prepayment of less than all of the outstanding principal amount of the Notes pursuant to Sections 2.2, 2.4, 2.5 or 2.7 hereof shall be deemed to be applied to the amount of scheduled principal prepayments in inverse order of their maturity. 1 Each of the Agreements is hereby amended to add thereto the following new Section 2.7: 1.1 OTHER REQUIRED PREPAYMENTS. In the event the Company shall propose to make a payment to effect a permanent reduction in the Bank Indebtedness or a reduction of the aggregate principal amount of loans, advances and other financial accommodations available to the Company under the Bank Indebtedness Documents, or in the event the Company shall propose to permit or suffer to occur a set off in payment or satisfaction of the Bank Indebtedness or any portion thereof, the Company shall, on the date of such payment or set off, effect a prepayment of the principal amount of the Notes then outstanding, such prepayment to be in an aggregate amount equal to such outstanding principal amount of the Notes multiplied by a fraction, the numerator of which shall be the amount of the payment or set off to be made with respect to the Bank Indebtedness and the denominator of which shall be the principal amount of the Bank Indebtedness outstanding immediately prior to the payment or set off, together with accrued interest on the principal amount to be so prepaid to the date of such prepayment, and the Make-Whole Premium, if any. Contemporaneously with such prepayment, the Company shall provide each Holder written notice by facsimile transmission stating whether any Make-Whole Premium is payable in connection with such prepayment, and containing a reasonably detailed computation of any such Make-Whole Premium or the basis for determining that no such Make-Whole Premium is payable. 1 Section 5.4 of each of the Agreements is hereby amended by adding the following new sentence as the second sentence thereof: So long as the Notes bear interest at the Amended Interest Rate, neither the Company nor any Subsidiary will engage in business in any location or area other than a location or area in the States of Florida, Indiana, Iowa, Minnesota or New Jersey. 1 Section 5.5 of each of the Agreements is amended and restated in its entirety as follows: 1.1 CONSOLIDATED TANGIBLE NET WORTH. The Company shall at all times maintain Consolidated Tangible Net Worth in the amount not less than (i) the sum of $24,750,000 PLUS 70% of the positive Consolidated Net Income, if any, for each Fiscal Quarter commencing on or after April 1, 1997, LESS (ii) the aggregate amount of net losses, net of applicable tax effect, realized in any sales of real property referred to in and permitted by Section 5.9(e) hereof, but only to the extent such net losses do not exceed $1,000,000 in the aggregate. 1 The proviso at the end of Section 5.6 of each of the Agreements is hereby amended by adding the following new sentences at the end thereof: For purposes of determining whether the Company and its Subsidiaries are in compliance with the foregoing clause (i), with respect to determining the amount of Consolidated Current Debt as of the last day of any Fiscal Quarter, the aggregate amount of Bank Indebtedness outstanding on the first Business Day of the next Fiscal Quarter shall be deemed the aggregate amount of Bank Indebtedness outstanding as of the last day of such preceding Fiscal Quarter. The Company shall provide such documentation as any Holder may reasonably request confirming the amount of Bank Indebtedness which, in accordance with the foregoing sentence, is deemed to be outstanding as of the last day of any Fiscal Quarter. 1 Section 5.9 of each of the Agreements is hereby amended (i) by deleting the word "and" at the end of subsection (c), (ii) by adding the word "and" at the end of subsection (d), and (iii) by adding thereto the following new subsection (e): a the Company may sell all or any portion of the real property it owns in Inver Grove Heights, Minnesota, which real property is described in Schedule V hereto and which the Company refers to as "Arbor Pointe", for a purchase price of not less than the appraised value of the portion proposed to be sold, such purchase price to be payable in connection with a sale consummated pursuant to and in accordance with the terms of that certain Purchase Agreement dated as of April 1, 1998 between the Company as the seller and Ryan Companies US, Inc. as the purchaser. 1 Section 5.13(i) of each of the Agreements is hereby amended and restated in its entirety as follows: i LEVERAGE RATIO CERTIFICATES. As soon as available and in any event within 15 days after the close of any Fiscal Quarter, a Leverage Ratio Certificate, correctly setting forth whether the Company and the Subsidiary have met each of the Rate Adjustment Financial Tests and setting forth computations (in sufficient detail) required to establish whether the Rate Adjustment Financial Tests have been so met, all in reasonable detail and certified as complete and correct by a financial officer of the Company; 1 Section 5.13 of each of the Agreements is hereby amended (i) by changing the lettering of subsection (j) to (k), and (ii) by adding thereto the following new subsection (j): a MEETINGS WITH HOLDERS. So long as the Notes bear interest at the Amended Interest Rate, the Company, at such times as any Holder may reasonably request (but no more frequently than once each Fiscal Quarter with respect to such Holder), will at its expense arrange for a meeting of a representative of such Holder with David Rotter, Bernard Rotter and such other members of the Company's senior management as such Holder may reasonably request to discuss the finances and affairs of the Company and its Subsidiaries. This covenant is in addition to, and not in substitution for, other covenants in the Sections 5.13 with respect to the provision by the Company of information, visits and inspections, and other similar matters. 1 Section 5.16 of each of the Agreements is hereby amended and restated in its entirety as follows: 5.16 FIXED CHARGES. The Company shall maintain, as of the close of each month, Net Income Available for Fixed Charges for the immediately preceding twelve-month period of at least the following percentages of Fixed Charges for such twelve-month period: 75% as of the close of each month on and prior to June 30, 1998; 100% as of the close of each month on or prior to September 30, 1998; 150% as of the close of each month on and prior to December 31, 1998; and 200% as of the close of each month thereafter. 1 Section 5.19 of each of the Agreements is hereby amended and restated in its entirety as follows: 5.19 BANK INDEBTEDNESS DOCUMENTS. In addition to the financial covenants set forth in this Agreement, the financial covenants set forth in the Bank Indebtedness Documents (the "Incorporated Covenants") are incorporated by reference into this Agreement as if stated herein in full, together with all defined terms used therein, PROVIDED, however, that (i) such Incorporated Covenants, as incorporated herein, shall run in favor of the Holders, rather than to the parties set forth in the Bank Indebtedness Documents, and (ii) any amendments to, waivers as to, or expiration or cancellation of (by cancellation, amendment or termination of the Bank Indebtedness Documents or otherwise) such Incorporated Covenants and defined terms used therein shall be deemed to amend, waive compliance with, or terminate, as the case may be, such Incorporated Covenants, as incorporated herein, only if approved or consented to by the Holders; and PROVIDED FURTHER that if the Bank Indebtedness Documents are (i) amended to add additional covenants or modify existing covenants providing greater protection under the Bank Indebtedness Documents, or (ii) renewed or replaced by financing on terms that contain covenants affording protection to the Holders substantially equivalent to, or greater than, the protection provided by the Incorporated Covenants, such new or amended covenants shall be deemed incorporated herein as Incorporated Covenants. So long as the Notes bear interest at the Amended Interest Rate, the Company shall not pay any additional consideration (including, without limitation, any increase in interest rate or increase or imposition of any fee) under the Bank Indebtedness Documents in respect of any financial accommodation required to be made by any lender thereunder without making a proportionate payment to the Holders based upon the relative principal amounts of the Notes then outstanding (provided, however, that no such payment shall be required to be made to the Holders with respect to any fee payable in connection with the amendment, contemporaneously with the execution and delivery of the March 1998 Amendment, of the Existing Credit Agreement). In addition, if the Company shall renew, extend, substitute, refinance or replace any Bank Indebtedness or if the Company shall modify any term or condition of any Bank Indebtedness Documents, the Company shall give written notice thereof, together with copies of the Bank Indebtedness Documents relevant thereto, to all Holders promptly, but in any event within five days of the date on which such renewal, extension, substitution, refinancing, replacement or modification is effected. 1 Section 5.20 of each of the Agreements is hereby amended and restated in its entirety as follows: A. GUARANTIES. In addition to causing the existing Subsidiaries to execute and deliver the Guaranty, the Company (i) will promptly secure the execution and delivery of a guaranty substantially in the form of the Guaranty from each Subsidiary as may hereafter be formed and organized, and (ii) will not permit the Bank Indebtedness to be guaranteed by any other person or entity unless the obligations of the Company under the Notes and this Agreement shall be guaranteed by such person or entity on substantially the same terms and conditions. 1 Section 6.1 of each of the Agreements is hereby amended (i) by changing the reference to "5.19" in the third line thereof to "5.20", and (ii) by changing the parenthetical statement "(individually or in the aggregate, and including without limitation the Existing Bank Indebtedness)" to "(individually or in the aggregate, and including without limitation the Bank Indebtedness)." 1 The definition of "Make-Whole Premium" in Section 8.1 of each of the Agreements is hereby amended and restated as follows: "Make-Whole Premium" shall mean, with respect to a prepayment of the Notes prior to maturity or an acceleration of the maturity thereof, the excess, if any, of (i) the Calculated Amount (as hereinafter defined), over (ii) the principal amount of the Notes to be prepaid or accelerated (the "Prepaid Principal"). In no event shall the Make-Whole Premium be less than zero. For purposes hereof, the "Calculated Amount" shall mean an amount determined by (1) calculating, as of the date of determination, the present value of all payments of principal and interest, as scheduled on the Original Amortization Schedule and reflecting the Original Interest Rate, which would have been avoided by any such prepayment or acceleration if payments had theretofore been made in accordance with the Original Amortization Schedule and reflecting the Original Interest Rate (such payments, the present value of which are being determined, being herein referred to as the "Pro Forma Payments"), such present value to be determined by discounting the Pro Forma Payments from the scheduled payment date to the date of the prepayment or acceleration at a rate equal to the Formula Yield (such present value being herein referred to as the "Pro Forma Present Value Amount"), (2) calculating, as of the date of determination, the aggregate amount of principal payments included in such Pro Forma Payments (such amount being herein referred to as the "Pro Forma Principal Amount"), (3) dividing the Pro Forma Present Value Amount by the Pro Forma Principal Amount, rounding the resulting number to five decimal places (such resulting number being herein referred to as the "Price"), and (4) multiplying the amount of Prepaid Principal by the Price. 1 Section 8.1 of each of the Agreements is hereby amended by adding thereto the following new definitions: "Amended Interest Rate" with respect to any Note shall mean the Amended Interest Rate with respect to such Note as defined in the March 1998 Amendment. "Bank Indebtedness" shall mean the Existing Bank Indebtedness and any renewal, extension, substitution, refinancing, or replacement thereof. "Bank Indebtedness Documents" shall mean all documents governing Bank Indebtedness and all other instruments and documents related thereto given to secure or evidence the Bank Indebtedness or otherwise executed in connection therewith, including without limitation the Existing Bank Indebtedness Documents. "March 1998 Amendment" shall mean that certain Waiver and Amendment dated as of March 31, 1998, by and among the Company and the Purchasers. "Original Amortization Schedule" shall mean the original amortization schedule attached to this Agreement as Schedule III. "Original Interest Rate" with respect to any Note shall mean the Original Interest Rate with respect to such Note as defined in the March 1998 Amendment. "Rate Adjustment Financial Tests" shall mean the Rate Adjustment Financial Tests as defined in the March 1998 Amendment. "Revised Amortization Schedule" shall mean the revised amortization schedule attached to this Agreement as Schedule IV. 1 Exhibit A hereto is hereby adopted as "Schedule IV" to the 1994 Agreement, and Exhibit B hereto is hereby adopted as "Schedule IV" to the 1996 Agreement. Exhibit C hereto is hereby adopted as "Schedule V" to each of the Agreements. OTHER AGREEMENTS As an inducement to and in consideration of the agreement by the Purchasers to waive the existing defaults under and to amend certain provisions of the Agreements as set forth herein, the Company hereby agrees with the Purchasers as follows: INTEREST RATES. Notwithstanding anything in the Agreements, the Notes, or the March 1997 Amendment to the contrary: i if as of the close of any Fiscal Quarter commencing on or after April 1, 1998 the Company and its Subsidiaries shall fail to meet any of the financial tests set forth in Schedule I hereto (collectively, the "Rate Adjustment Financial Tests") as disclosed in the Leverage Ratio Certificate referred to in Section 5.13(i) of each of the Agreements (each a "Leverage Ratio Certificate") for such Fiscal Quarter, or if the Company fails to deliver the Leverage Ratio Certificate for such Fiscal Quarter to the Holders in accordance with Section 5.13(i) of each of the Agreements (and, in such event, in addition to any other rights the Holders may exercise under Section 6 of each Agreement), then, effective as of the first day of and during the Fiscal Quarter immediately following the Fiscal Quarter to which the Leverage Ratio Certificate applies (where the Company delivers such Leverage Ratio Certificate) or would apply (where the Company fails to do so), as the case may be, each Note shall bear interest at the Amended Interest Rate for such Note, and, in connection therewith, the references to "12.11%" and "14.11%" in the second paragraph of Section 1.1 of the 1994 Agreement and in the 1994 Notes shall accordingly be deemed to be "12.61% and "14.61%", respectively, and the references to "9.42%" and "11.42%" in the second paragraph of Section 1.1 of the 1996 Agreement and in the 1996 Notes shall accordingly be deemed to be "9.92%" and "11.92%," respectively; and i if as of the close of any Fiscal Quarter commencing on or after April 1, 1998, the Company and its Subsidiaries shall meet each of the Rate Adjustment Financial Tests as disclosed in the Leverage Ratio Certificate for such Fiscal Quarter, and if no Default or Event of Default then exists under the Agreement, then effective as of the first day of and during the Fiscal Quarter immediately following the Fiscal Quarter to which the Leverage Ratio Certificate applies, the 1994 Notes shall bear interest at the rate of 12.11% per annum, and the 1996 Notes shall bear interest at the rate of 9.42% per annum (such interest rate with respect to each Note being herein referred to as the "Original Interest Rate" for such Note), and, in connection therewith, the references to "12.11% and "14.11%" in the second paragraph of Section 1.1 of the 1994 Agreement and in the 1994 Notes and the references to "9.42%" and "11.42%" in the second paragraph of Section 1.1 of the 1996 Agreement and in the 1996 Notes shall be deemed unchanged. In connection therewith, the Company hereby confirms and agrees that the amount of each combined installment of principal and interest payable on the Notes has been (and, following any change in interest rates in accordance with the foregoing provisions, shall be) adjusted to reflect the foregoing arrangements, but the portion of each such combined installment allocable to principal shall remain unchanged, and that default in the payment of interest, as calculated in accordance with the foregoing arrangements, shall constitute an Event of Default under Section 6.1 of each of the Agreements. The Company further agrees to execute, at the request of the Holders or any of them, addenda to the Notes evidencing the foregoing arrangements. CONSULTANT REVIEW. The Company acknowledges that the Purchasers intend to retain a consultant (the "Consultant") to conduct an operational and management review and to review the Company's budget for the Fiscal Year ending March 31, 1999, as well as pro forma financial statements and projections prepared by the Company for the Fiscal Year ending March 31 of each 1999, 2000 and 2001 (the "Review"), such Review to be conducted solely for the benefit and at the sole discretion of the Purchasers. The Purchasers shall choose and retain such Consultant, subject to such Consultant being reasonably acceptable to the Company (provided, however, that (i) unless the Purchasers shall have received notice from the Company of its rejection of such Consultant within five Business Days of the Company's receipt of notice of the intention of the Purchasers to retain such Consultant, such Consultant shall be deemed acceptable to the Company, and (ii) if the Company shall reject the Consultant initially so chosen by the Purchasers, the Purchasers shall have the right, in their sole discretion and without submitting such choice to the Company for approval, to choose and retain another Consultant). The Company shall pay any retainer required by such Consultant contemporaneously with the retention of such Consultant. The Company shall pay promptly, and in any event within 30 days of receipt of an invoice therefor or upon demand, all reasonable costs and expenses, not to exceed $50,000 in the aggregate, incurred or expended by the Purchasers with respect to the retention of and the services provided by such Consultant (it being understood and agreed, however, that such $50,000 limitation shall neither apply to nor affect the Company's obligation to so pay additional costs and expenses so incurred as a result of the Company's failure to cooperate with such Consultant as contemplated by this provision, the Company's failure to provide promptly any information reasonably requested by such Consultant, or the failure of such Consultant to complete its inquiries in one visit to the Company by the Consultant's representatives). The Company shall cooperate with such Consultant in connection with the Review, and, without limiting the generality of the foregoing, shall make its management available for consultations with such Consultant and allow such Consultant free access to the Company's books and records, in each case at any reasonable time during regular business hours. The Purchasers shall make available to the Company a report, to be prepared by the Consultant, of the results of the Review. AMENDMENT FEE. The Company shall pay to the Purchasers an amendment fee in the aggregate amount of $226,020.00 (the "Amendment Fee") payable in six equal monthly installments of $37,670.00 each on the first day of each month commencing August 1, 1998 through and including January 1, 1999. Each such installment of such Amendment Fee shall be paid to the Purchasers pro rata in accordance with the respective unpaid principal amounts of the Notes they hold. Any default in the payment of any such installment of the Amendment Fee shall constitute an Event of Default under Section 6.1 of each of the Agreements. EXPENSES. The Company hereby confirms its obligations under Section 9.6 of each of the Agreements to pay promptly, and in any event within 30 days of receipt of an invoice therefor or upon demand, all out-of-pocket expenses of the Holders in connection with this Waiver and Amendment and the matters covered hereby (including, without limitation, the reasonable fees and expenses of counsel to the Holders and travel expenses of representatives of the Holders incurred in connection with the negotiation of this Waiver and Amendment). SURVIVAL OF OBLIGATIONS, ETC.. The obligations of the Company to make the payments contemplated by the foregoing provisions shall survive payment of the Notes and the termination of the Agreements. In addition to any payment default specifically referred to in the foregoing provisions, any default by the Company in the performance or observance or breach by the Company of any of the foregoing provisions shall constitute an Event of Default under Section 6.1 of each of the Agreements. REPRESENTATIONS AND WARRANTIES The Company represents and warrants to the Purchasers that (i) except as disclosed herein, no Default or Event of Default has occurred and is continuing, (ii) this Waiver and Amendment has been duly authorized, executed and delivered by the Company and each of this Waiver and Amendment and each Agreement, as amended by this Waiver and Amendment, constitutes a legal, valid and binding obligation of the Company, and (iii) there is no provision in the Articles of Incorporation of the Company or in its bylaws or in any indenture, contract or agreement to which the Company is a party or by which it is bound nor any provision of law or any order of any court or governmental authority which prohibits the execution and delivery by the Company of this Waiver and Amendment, the performance or observance by the Company of the terms and conditions of this Waiver and Amendment, or the performance or observance by the Company of the terms and conditions of the Agreements, as modified by the amendments set forth in this Waiver and Amendment. All representations and warranties contained herein or made in writing by the Company in connection herewith shall survive the execution and delivery hereof. It shall be deemed to be an Event of Default under each Agreement if any of such representations or warranties proves to be false in any material respect as of the date hereof. MISCELLANEOUS Except as specifically amended hereby, all terms and conditions of each of the Agreements shall remain in full force and effect. This Waiver and Agreement may be executed simultaneously in two or more counterparts, each of which shall be an original, but all of which constitute but one agreement. This Waiver and Amendment shall be governed by and enforced in accordance with Minnesota law. If you are in agreement with the foregoing, please so indicate by executing the form of acknowledgment set forth below, whereupon this Waiver and Amendment shall become a binding agreement among you and the Company. Very truly yours THE ROTTLUND COMPANY, INC. By ----------------------------------------- Its ---------------------------------------- Agreed to as of the date first above written. As to the 1994 Agreement and the 1996 Agreement: PRINCIPAL LIFE INSURANCE COMPANY By -------------------------------- Its ----------------------------- And -------------------------------- Its ----------------------------- As to the 1994 Agreement: NORTHERN LIFE INSURANCE COMPANY By --------------------------------- Its ------------------------------ MODERN WOODMEN OF AMERICA By --------------------------------- Its ------------------------------ And -------------------------------- Its ----------------------------- ROYAL NEIGHBORS OF AMERICA By --------------------------------- Its ------------------------------ And -------------------------------- Its ---------------------------- As to the 1996 Agreement: RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK, successor by merger to ReliaStar Bankers Life Insurance Company, f/k/a Bankers Security Life Insurance Society By --------------------------------- Its ------------------------------ RELIASTAR UNITED SERVICES LIFE INSURANCE COMPANY By -------------------------------- Its ------------------------------ ACKNOWLEDGMENT Each of the undersigned, as a guarantor under the Guaranty (as defined in each of the Agreements), hereby acknowledges all modifications, amendments and waivers of provisions of the Agreements set forth in the foregoing Waiver and Amendment, and confirms and agrees that such modifications, amendments and waivers do not discharge, affect, reduce or impair its liability under the Guaranty, including its liability thereunder for payment of the Notes and the performance of all covenants contained in the Agreements. Each of the undersigned represents that all such modifications, amendments and waivers, together with the foregoing Waiver and Amendment, have been duly executed by a duly authorized officer of the Company, and are valid obligations of the Company legally binding upon the Company in accordance with their respective terms. NORTH COAST MORTGAGE, INC. By: ----------------------------------- Lawrence B. Shapiro, Chief Financial Officer ROTTLUND HOMES OF FLORIDA, INC. By: ----------------------------------- Lawrence B. Shapiro, Vice President ROTTLUND HOMES OF INDIANA, INC. By: ----------------------------------- Lawrence B. Shapiro, Vice President ROTTLUND HOMES OF INDIANA LIMITED PARTNERSHIP By Rottlund Homes of Indiana, Inc., Its General Partner, By: ----------------------------------- Lawrence B. Shapiro, Vice President ROTTLUND HOMES OF IOWA, INC. By: ----------------------------------- Lawrence B. Shapiro, Chief Financial Officer ROTTLAND HOMES OF NEW JERSEY, INC. By: ----------------------------------- Lawrence B. Shapiro, Executive Vice President SCHEDULE I RATE ADJUSTMENT FINANCIAL TESTS CONSOLIDATED TANGIBLE NET WORTH. Consolidated Tangible Net Worth in an amount not less than $24,103,922 plus 70% of the positive Consolidated Net Income, if any, for each Fiscal Quarter commencing on or after January 1, 1996. LEVERAGE RATIO. Ratio of (i) the sum of Consolidated Current Debt and Consolidated Funded Debt to (ii) Consolidated Tangible Assets in excess of 62% on and prior to December 31, 1998 and 57% thereafter. FIXED CHARGES. Net Income Available for Fixed Charges for the immediately preceding twelve-month period of at least 200% of Fixed Charges for such twelve-month period. EXHIBIT A SCHEDULE IV TO 1994 AGREEMENT (Amounts expressed are aggregate amounts with respect to all 1994 Notes outstanding) [SEE ATTACHED] EXHIBIT B SCHEDULE IV TO 1996 AGREEMENT (Amounts expressed are aggregate amounts with respect to all 1996 Notes outstanding) [SEE ATTACHED] EXHIBIT C DESCRIPTIONS OF ARBOR POINTE REAL PROPERTY [SEE ATTACHED] EX-10.12 6 EXHIBIT 10.12 FIRST MODIFICATION OF CREDIT AGREEMENT This First Modification of Credit Agreement ("Agreement") is made this 19th day of November, 1996, among THE ROTTLUND COMPANY, INC., a Minnesota corporation ("Borrower"), THE FIRST NATIONAL BANK OF BOSTON, a national banking association having its principal place of business at 100 Federal Street, Boston, Massachusetts 02110, ("FNBB") and THE FIRST NATIONAL BANK OF BOSTON, as Agent (the "Agent") for itself and the other lending institutions which are or may become parties to the Credit Agreement (as hereinafter defined). W I T N E S S E T H: IN CONSIDERATION OF TEN AND NO/100 DOLLARS ($10.00) and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the undersigned Borrower and FNBB hereby covenant and agree and follows: . RECITALS. The following Recitals are true and correct as of the date of this Agreement: () The Borrower, FNBB and the Agent entered into a Credit Agreement, dated as of October 23, 1996 ("Credit Agreement"). () The parties to the Credit Agreement wish to amend and modify the Credit Agreement. () All terms not otherwise defined herein shall have the same meaning as in the Credit Agreement. . The Credit Agreement is hereby modified as follows: () The following definition shall be added to Section 1 of the Credit Agreement: "ADDITIONAL REVOLVING CREDIT NOTE. The Revolving Credit Note in the amount of $4,000,000.00 dated November 19, 1996 made by the Borrower to the order of FNBB." () By adding the following at the end of the definition of Revolving Credit Note(s): ",including the Additional Revolving Credit Note." (c) By adding the following section to the Credit Agreement: "Section 1.2 TEMPORARY NUMERICAL SUBSTITUTION. Beginning on November 19, 1996 and continuing until January 31, 1997, all references in the Credit Agreement to $18,000,000.00 shall be deleted and replaced with $22,000,000.00. From and after January 31, 1997, all such references will revert to $18,000,000.00." (d) The second sentence of Section 2.1 shall be deleted in its entirety. (e) The following shall be added at the end of Section 2.1 of the Credit Agreement: "The portion of the Obligations evidenced by the Additional Revolving Credit Note including all accrued and unpaid interest thereon shall be due and payable, however, on January 31, 1997." (f) By deleting the following clause from the first sentence of Section 2.3: ", dated as of the Effective Date." 3. Except as modified hereby, the undersigned hereby ratify and reaffirm the terms and conditions of the Credit Agreement. 4. Borrower shall pay a fee in the amount of $20,000.00 to FNBB contemporaneous with the execution hereof. 5. This Agreement may be executed in any number of counterparts each of which shall be deemed an original. IN WITNESS WHEREOF, the undersigned Borrower and Agent hereunto cause this instrument to be executed by its duly authorized corporate officers and its seal to be affixed hereto as of the day and year first above written. THE ROTTLUND COMPANY, INC., a Minnesota corporation By:________________________________ Title:_____________________________ THE FIRST NATIONAL BANK OF BOSTON, a national banking association By:________________________________ KEVIN C. HAKE, Director EX-10.13 7 EXHIBIT 10.13 SECOND MODIFICATION OF CREDIT AGREEMENT This Second Modification of Credit Agreement ("Agreement") is made this ____ day of December, 1996, among THE ROTTLUND COMPANY, INC., a Minnesota corporation ("Borrower"), THE FIRST NATIONAL BANK OF BOSTON, a national banking association having its principal place of business at 100 Federal Street, Boston, Massachusetts 02110, ("FNBB") and THE FIRST NATIONAL BANK OF BOSTON, as Agent (the "Agent") for itself and the other lending institutions which are or may become parties to the Credit Agreement (as hereinafter defined). W I T N E S S E T H: -------------------- IN CONSIDERATION OF TEN AND NO/100 DOLLARS ($10.00) and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the undersigned Borrower and FNBB hereby covenant and agree as follows: . RECITALS. The following Recitals are true and correct as of the date of this Agreement: () The Borrower, FNBB and the Agent entered into that certain Credit Agreement dated as of October 23, 1996, and that certain First Modification of Credit Agreement dated November 19 1996, (the foregoing Credit Agreement, as modified, is referred to herein as "Credit Agreement"). () The parties to the Credit Agreement wish to amend and modify the Credit Agreement. () All terms not otherwise defined herein shall have the same meaning as in the Credit Agreement. . The Credit Agreement is hereby modified as follows: () By deleting in its entirety the portion of the definition of Borrowing Base set forth at Section 1 BORROWING BASE (A) (i) and by substituting in lieu thereof the following: "(i) 75% of Lot Book Value of Developed Lots; PLUS" (b) By substituting "95%" for "90%" in subsection (ii) of this definition. (c) By deleting Section 10.4 (b) in its entirety and by substituting in lieu thereof the following: "(b) Unit Costs of Unsold Units shall not exceed 70% of Tangible Net Worth during the term of this Agreement provided that for purposes of the calculation made on each December 31 during the term of this Agreement, the applicable percentage shall be 80% rather than 70%; 3. Except as modified hereby, the undersigned hereby ratify and reaffirm the terms and conditions of the Credit Agreement. 4. This Agreement may be executed in any number of counterparts each of which shall be deemed an original. IN WITNESS WHEREOF, the undersigned Borrower and Agent have hereunto caused this instrument to be executed by their duly authorized corporate officers and their seal to be affixed hereto as of the day and year first above written. THE ROTTLUND COMPANY, INC., a Minnesota corporation By: ------------------------------------ Title: --------------------------------- THE FIRST NATIONAL BANK OF BOSTON, a national banking association By: ------------------------------------ KEVIN C. HAKE, Director The undersigned guarantors hereby agree to all modifications of the Credit Agreement and hereby ratify and reaffirm their respective Subsidiary Guaranty dated as of October 23, 1996. NORTHCOAST MORTGAGE, INC. By: ------------------------------------ Its: ----------------------------------- ROTTLUND HOMES OF FLORIDA, INC. By: ------------------------------------ Its: ----------------------------------- ROTTLUND HOMES OF INDIANA, INC. By: ------------------------------------ Its: ----------------------------------- ROTTLUND HOMES OF INDIANA LIMITED PARTNERSHIP By: ------------------------------------ Its: ----------------------------------- ROTTLUND HOMES OF IOWA, INC. By: ------------------------------------ Its: ----------------------------------- ROTTLUND HOMES OF NEW JERSEY By: ------------------------------------ Its: ----------------------------------- EX-10.14 8 EXHIBIT 10.14 THIRD MODIFICATION OF CREDIT AGREEMENT This Third Modification of Credit Agreement ("Agreement") is made this ____ day of January, 1997, among THE ROTTLUND COMPANY, INC., a Minnesota corporation ("Borrower"), THE FIRST NATIONAL BANK OF BOSTON, a national banking association having its principal place of business at 100 Federal Street, Boston, Massachusetts 02110, ("FNBB") and THE FIRST NATIONAL BANK OF BOSTON, as Agent (the "Agent") for itself and the other lending institutions which are or may become parties to the Credit Agreement (as hereinafter defined). W I T N E S S E T H: -------------------- IN CONSIDERATION OF TEN AND NO/100 DOLLARS ($10.00) and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the undersigned Borrower and FNBB hereby covenant and agree as follows: . RECITALS. The following Recitals are true and correct as of the date of this Agreement: () The Borrower, FNBB and the Agent entered into that certain Credit Agreement dated as of October 23, 1996, and that certain First Modification of Credit Agreement dated November 19 1996, and Second Modification of Credit Agreement dated December 24, 1996 (the foregoing Credit Agreement, as modified, is referred to herein as "Credit Agreement"). () The parties to the Credit Agreement wish to further amend and modify the Credit Agreement. () All terms not otherwise defined herein shall have the same meaning as in the Credit Agreement. . The Credit Agreement is hereby modified as follows: () By adding the following after "(iii) Interest Expense" in the definition of EBITDA in Section 1 "or Interest Incurred (without double counting), to the extent that Interest Expense cannot be accurately determined because of the inability of the Borrower to determine the interest component of cost of sales for any period for reasons other than the Borrower's negligence"; (b) By deleting the provisions of (vi) in its entirety from the definition of TANGIBLE NET WORTH and by substituting in lieu thereof "(vi) deferred charges"; (c) By substituting $24,800,000" for "$25,380,150" in Section 10.1; and (d) By substituting "1.75" for "2" in Section 10.3. 3. The Effective Date of this Third Amendment shall be as of October 23, 1996 so that, without limitation, compliance with all covenants contained in the Credit Agreement shall be determined from modifications contained herein. 4. Except as modified hereby, the terms and conditions of the Credit Agreement shall remain in full force and effect and the Borrower hereby ratifies the terms and conditions thereof. 5. This Agreement may be executed in any number of counterparts each of which shall be deemed an original. IN WITNESS WHEREOF, the undersigned Borrower and Agent have hereunto caused this instrument to be executed by their duly authorized corporate officers and their seal to be affixed hereto as of the day and year first above written. THE ROTTLUND COMPANY, INC., a Minnesota corporation THE ROTTLUND COMPANY, INC., a Minnesota corporation By: ------------------------------------ Title: --------------------------------- THE FIRST NATIONAL BANK OF BOSTON, a national banking association By: ------------------------------------ KEVIN C. HAKE, Director The undersigned guarantors hereby agree to all modifications of the Credit Agreement and hereby ratify and reaffirm their respective Subsidiary Guaranty dated as of October 23, 1996. NORTHCOAST MORTGAGE, INC. By: ------------------------------------ Its: ----------------------------------- ROTTLUND HOMES OF FLORIDA, INC. By: ------------------------------------ Its: ----------------------------------- ROTTLUND HOMES OF INDIANA, INC. By: ------------------------------------ Its: ----------------------------------- ROTTLUND HOMES OF INDIANA LIMITED PARTNERSHIP By: ------------------------------------ Its: ----------------------------------- ROTTLUND HOMES OF IOWA, INC. By: ------------------------------------ Its: ----------------------------------- ROTTLUND HOMES OF NEW JERSEY By: ------------------------------------ Its: ----------------------------------- EX-10.15 9 EXHIBIT 10.15 FOURTH MODIFICATION OF CREDIT AGREEMENT This Fourth Modification of Credit Agreement ("Agreement") is made this ____ day of June, 1997, among THE ROTTLUND COMPANY, INC., a Minnesota corporation ("Borrower"), THE FIRST NATIONAL BANK OF BOSTON, a national banking association having its principal place of business at 100 Federal Street, Boston, Massachusetts 02110, ("FNBB") and THE FIRST NATIONAL BANK OF BOSTON, as Agent (the "Agent") for itself and the other lending institutions which are or may become parties to the Credit Agreement (as hereinafter defined). W I T N E S S E T H: IN CONSIDERATION OF TEN AND NO/100 DOLLARS ($10.00) and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the undersigned Borrower and FNBB hereby covenant and agree as follows: . RECITALS. The following Recitals are true and correct as of the date of this Agreement: () The Borrower, FNBB and the Agent entered into that certain Credit Agreement dated as of October 23, 1996, and that certain First Modification of Credit Agreement dated November 19 1996, Second Modification of Credit Agreement dated December 24, 1996 and Third Modification of Credit Agreement dated January __, 1997 (the foregoing Credit Agreement, as modified, is referred to herein as "Credit Agreement"). () The parties to the Credit Agreement wish to further amend and modify the Credit Agreement. () All terms not otherwise defined herein shall have the same meaning as in the Credit Agreement. . The Credit Agreement is hereby modified as follows: by substituting "$23,850,000" for "$24,800,000" in Section 10.1. . The Effective Date of this Fourth Modification shall be as of March 31, 1997 so that, without limitation, compliance with all covenants contained in the Credit Agreement shall be determined from modifications contained herein. . Except as modified hereby, the terms and conditions of the Credit Agreement shall remain in full force and effect and the Borrower hereby ratifies the terms and conditions thereof. . This Agreement may be executed in any number of counterparts each of which shall be deemed an original. IN WITNESS WHEREOF, the undersigned Borrower and Agent have hereunto caused this instrument to be executed by their duly authorized corporate officers and their seal to be affixed hereto as of the day and year first above written. THE ROTTLUND COMPANY, INC., a Minnesota corporation By:________________________________ Title:_____________________________ THE FIRST NATIONAL BANK OF BOSTON, a national banking association By:________________________________ KEVIN C. HAKE, Director The undersigned guarantors hereby agree to all modifications of the Credit Agreement and hereby ratify and reaffirm their respective Subsidiary Guaranty dated as of the day and year first above written. NORTHCOAST MORTGAGE, INC. By:_______________________________ Its:______________________________ ROTTLUND HOMES OF FLORIDA, INC. By:_______________________________ Its:______________________________ ROTTLUND HOMES OF INDIANA, INC. By:_______________________________ Its:______________________________ ROTTLUND HOMES OF INDIANA LIMITED PARTNERSHIP By:_______________________________ Its:______________________________ ROTTLUND HOMES OF IOWA, INC. By:_______________________________ Its:______________________________ ROTTLUND HOMES OF NEW JERSEY By:_______________________________ Its:______________________________ EX-10.16 10 EXHIBIT 10.16 FIFTH MODIFICATION OF CREDIT AGREEMENT This Fifth Modification of Credit Agreement ("Agreement") is made this day of January, 1998, among THE ROTTLUND COMPANY, INC., a Minnesota corporation ("Borrower"), BANKBOSTON, N.A. (formerly known as THE FIRST NATIONAL BANK OF BOSTON), having its principal place of business at 100 Federal Street, Boston, Massachusetts 02110 ("BKB") and BANKBOSTON, N.A., as Agent ("Agent") for itself and the other lending institutions which are or may become parties to the Credit Agreement (as hereinafter defined). W I T N E S S E T H: IN CONSIDERATION OF TEN AND NO/100 DOLLARS ($10.00) and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the undersigned Borrower and BKB hereby covenant and agree as follows: . RECITALS. The following Recitals are true and correct as of the date of this Agreement: () The Borrower, BKB and the Agent entered into that certain Credit Agreement dated as of October 23, 1996, and that certain First Modification of Credit Agreement dated November 19 1996, Second Modification of Credit Agreement dated December 24, 1996, Third Modification of Credit Agreement dated January 28, 1997, and Fourth Modification of Credit Agreement dated June 25, 1997 (the foregoing Credit Agreement, as modified, is referred to herein as "Credit Agreement"). () The parties to the Credit Agreement wish to further amend and modify the Credit Agreement. () All terms not otherwise defined herein shall have the same meaning as in the Credit Agreement. . The Credit Agreement is hereby modified as follows: . By substituting "$23,000,000.00" for "$18,000,000" in: () the definition of Commitment Amount in Section 1; () the definition of Maximum Revolver Amount in Section 1; () Section 2.1; () Schedule 3.3(i); and () Schedule 1. . By adding the following definition to Section 1: "FIFTH MODIFICATION EFFECTIVE DATE. December 31, 1997." . By adding the following sentence after the first sentence in Section 2.3: "As of the Fifth Modification Effective Date, the Revolving Credit Note has been amended and restated, therefore, all references herein to the Revolving Credit Note shall mean the Revolving Credit Note as amended and restated." . By deleting Section 10.3 in its entirety and replacing it with the following: "Section 10.3 EBITDA TO INTEREST EXPENSE. The Borrower will not permit the ratio of (a) EBITDA to (b) Interest Incurred, determined on a date described in the table set forth below, to exceed the ratio set forth below: PERIOD PERMITTED RATIO October 1, 1997 to December 31, 1997 1.10:1 January 1, 1998 to March 31, 1998 1.10:1 April 1, 1998 to June 30, 1998 1.25:1 July 1, 1998 to September 30, 1998 1.50:1 October 1, 1998 to December 31, 1998 2.00:1 January 1, 1999 to March 31, 1999 2.00:1" . By changing all references to First National Bank of Boston to BankBoston, N.A. . The Effective Date of this Fifth Modification shall be as of December 31, 1997 so that, without limitation, compliance with all covenants contained in the Credit Agreement shall be determined from modifications contained herein. . Except as modified hereby, the terms and conditions of the Credit Agreement shall remain in full force and effect and the Borrower hereby ratifies the terms and conditions thereof. . This Agreement may be executed in any number of counterparts each of which shall be deemed an original. [SIGNATURES BEGIN ON THE FOLLOWING PAGE] IN WITNESS WHEREOF, the undersigned Borrower and Agent have hereunto caused this instrument to be executed by their duly authorized corporate officers and their seal to be affixed hereto as of the day and year first above written. THE ROTTLUND COMPANY, INC., a Minnesota corporation By:______ Title:___ BANKBOSTON, N.A. By:______ Title:___ The undersigned guarantors hereby agree to all modifications of the Credit Agreement and hereby ratify and reaffirm their respective Subsidiary Guaranty dated as of the day and year first above written. NORTHCOAST MORTGAGE, INC. By:_______________________________ Its:______________________________ ROTTLUND HOMES OF FLORIDA, INC. By:_______________________________ Its:______________________________ ROTTLUND HOMES OF INDIANA, INC. By:_______________________________ Its:______________________________ ROTTLUND HOMES OF INDIANA LIMITED PARTNERSHIP By:_______________________________ Its:______________________________ ROTTLUND HOMES OF IOWA, INC. By:_______________________________ Its:______________________________ ROTTLUND HOMES OF NEW JERSEY By:_______________________________ Its:______________________________ EX-10.17 11 EXHIBIT 10.17 SIXTH MODIFICATION OF CREDIT AGREEMENT This Sixth Modification of Credit Agreement ("Agreement") is made this 10th day of July, 1998, among THE ROTTLUND COMPANY, INC., a Minnesota corporation ("Borrower"), BANKBOSTON, N.A., formerly known as THE FIRST NATIONAL BANK OF BOSTON, a national bank association having its principal place of business at 100 Federal Street, Boston, Massachusetts 02110 ("BKB"), and BANKBOSTON N.A., as Agent (the "Agent") for itself and the other lending institutions which are or may become parties to the Credit Agreement (as hereinafter defined). W I T N E S S E T H: IN CONSIDERATION OF TEN AND NO/100 DOLLARS ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned Borrower and BKB hereby covenant and agree as follows: 1. RECITALS. The following Recitals are true and correct as of the date of this Agreement. (a) The Borrower, BKB and the Agent entered into that certain Credit Agreement dated as of October 23, 1996, and that certain First Modification of Credit Agreement dated November 19, 1996, that certain Second Modification of Credit Agreement dated December 24, 1996, that certain Third Modification of Credit Agreement dated January 28, 1997, that certain Fourth Modification of Credit Agreement dated June 25, 1997, and that certain Fifth Modification of Credit Agreement dated January 15, 1998 (the foregoing Credit Agreement, as modified, is referred to herein as "Credit Agreement"). (b) The parties to the Credit Agreement wish to further amend and modify the Credit Agreement. (c) All terms not otherwise defined herein shall have the same meaning as in the Credit Agreement. 2. The Credit Agreement is hereby modified as follows: (a) By substituting "$25,000,000"for "$23,850,000" in Section 10.1; (b) By substituting "March 31, 1998" for "June 30, 1996" in Section 10.1; and (c) By deleting the provisions of Section 10.3 in their entirety and by substituting in lieu thereof "EBITDA TO INTEREST EXPENSE. The Borrower will not permit the ratio of (a) EBITDA for any fiscal quarter to (b) Interest Incurred for such period to be less than the ratio set forth below: PERIOD PERMITTED RATIO Quarter ending March 31, 1998 Waived Quarter ending June 30, 1998 1.30:1 Quarter ending September 30, 1998 2.10:1 Quarter ending December 31, 1998 2.30:1 For the quarter ending March 31, 1999 and continuing to Maturity Date such ratio shall be tested for each period of four consecutive fixed quarters and shall be no less than 2.00:1." 3. The Effective Date of this Sixth Modification shall be as of March 31, 1998 so that, without limitation, compliance with all covenants contained in the Credit Agreement shall be determined from modifications contained herein. 4. BKB waives the covenants contained in Section 10.2 of the Credit Agreement for the period June 30, 1998, through September 30, 1998. The parties hereto acknowledge and agree that the waiver provided in the preceding sentence will terminate and, beginning on October 1, 1998, the covenants contained in Section 10.2 of the Credit Agreement shall be maintained and enforced. 5. Except as modified hereby, the terms and conditions of the Credit Agreement shall remain in full force and effect and the Borrower hereby ratifies the terms and conditions thereof. 6. By its execution hereof, Borrower warrants and represents that there does not, as of the date hereof, exist a default, event of default or event or circumstance with which the passage of time or giving of notice, or both, would constitute a default or event of default under any of the Loan Documents. By its execution hereof, Borrower reaffirms, as of the date hereof, all of the representations, warranties and indemnities contained in the Loan Documents except to the extent any of the representations or warranties speak to a specific earlier date, or the facts on which any of them were based have been changed by transactions contemplated or permitted by the Loan Documents. As of the date hereof, Borrower has no defense, offset or counterclaim against the indebtedness evidenced or secured by any of the Loan Documents, as amended, or against the Agent or the Banks. 7. This Agreement may be executed in any number of counterparts each of which shall be deemed an original. IN WITNESS WHEREOF, the undersigned Borrower and Agent have hereunto caused this instrument to be executed by their duly authorized corporate officers and their seal to be affixed hereto as of the day and year first above written. THE ROTTLUND COMPANY, INC., a Minnesota corporation By: ______________________________ Title: _____________________________ BANKBOSTON, N.A. By: ______________________________ The undersigned guarantors hereby agree to all modifications of the Credit Agreement and hereby ratify and reaffirm their respective Subsidiary Guaranty dated as of the day and year first above written. NORTHCOAST MORTGAGE, INC. By: ______________________________ Its: ______________________________ ROTTLUND HOMES OF FLORIDA, INC. By: ________________________________ Its: ________________________________ ROTTLUND HOMES OF INDIANA, INC. By: Rottlund Homes of Indiana, Inc., Its General Partner By: ____________________________ Its: ____________________________ ROTTLUND HOMES OF INDIANA LIMITED PARTNERSHIP By: ________________________________ Its: ________________________________ ROTTLUND HOMES OF IOWA, INC. By: ________________________________ Its. ________________________________ ROTTLUND HOMES OF NEW JERSEY By: ________________________________ Its: ________________________________ EX-11 12 EXHIBIT 11 COMPUTATION OF PER SHARE EARNINGS Income per common share amounts are computed by dividing net income by the weighted average number of common shares outstanding. Common stock equivalents related to stock options which would have a dilutive effect based upon the initial public offering price or current market prices had no material effect on net income per share in each of the years presented in the Company's Consolidated Statements of Operations and, accordingly, this exhibit is not applicable to the Company. EX-22 13 EXHIBIT 22 SUBSIDIARIES OF THE ROTTLUND COMPANY, INC. North Coast Mortgage, Inc. Rottlund Homes of Florida, Inc. Rottlund Homes of Iowa, Inc. Rottlund Homes of Indiana, Inc. Rottlund Homes of New Jersey, Inc. Rottlund Homes of Indiana Limited Partnership EX-23 14 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated May 15, 1998 included in this Form 10-K, into the Company's previously filed Registration Statements File Nos. 33-54862 and 333-31589. ARTHUR ANDERSEN LLP Minneapolis, Minnesota July 10, 1998 EX-27.1 15 EXHIBIT 27-1
5 YEAR MAR-31-1998 APR-01-1997 MAR-31-1998 4,247,000 0 2,520,000 0 74,379,000 81,146,000 2,031,000 780,000 88,281,000 31,041,000 30,925,000 0 0 141,000 26,174,000 88,281,000 160,830,000 160,830,000 139,284,000 139,284,000 20,541,000 0 2,018,000 (1,013,000) (415,000) (598,000) 0 0 0 (598,000) (.10) (.10)
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