-----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, LPKIsr5QsYBJH0Xf+vAUPr2VNmueR89RKQyyRPdo352pJgEtxuRiT80ZCBMTTBg6 SgIfd7J/VLPxiZ4K7nfntQ== 0001047469-99-025738.txt : 19990630 0001047469-99-025738.hdr.sgml : 19990630 ACCESSION NUMBER: 0001047469-99-025738 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990629 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: 99654786 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 EX10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1999 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) 3065 CENTRE POINTE ROAD ROSEVILLE, 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 18, 1999 was approximately $6,750,000. As of June 18, 1999, there were 5,804,283 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 1999 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.........................................................13 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES...............13 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..........................................................................................................30 Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K...................................30
PART I ITEM 1. BUSINESS GENERAL The Rottlund Company, Inc. ("Rottlund" or the "Company"), through its subsidiaries, designs, builds and markets attached and detached townhomes and condominiums, and detached single family homes in the Minneapolis-St. Paul, Minnesota, Des Moines, Iowa, Indianapolis, Indiana, Southern New Jersey and Naples-Ft. Myers, Orlando and Tampa, Florida metropolitan areas. Rottlund was founded in 1973, and until 1993, all of the Company's developments were located in the Minneapolis-St. Paul market where Rottlund has maintained the largest market share of any builder in nine of the last ten years. Nationally, Rottlund ranks as the ninth largest attached, for sale, homebuilder and has been ranked in among the top 100 homebuilders since 1991. 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, 1999, the Company owned or controlled through options over 2,300 home sites in communities under development and land for the development of over 3,500 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 $80,000 to $300,000. The average price of the Company's homes delivered in fiscal 1999 was approximately $156,000. The Company has focused on the implementation of a Product Leadership Strategy as reflected by the diversity of its product offerings. This strategy has been paramount in its quest to maintain its No. 1 market leadership position in the Minneapolis-St. Paul market. Management believes that the Company's Product Leadership Strategy has also provided a competitive advantage in the Des Moines and Southern New Jersey markets. Rottlund's Product Leadership Strategy emphasizes the Company's design capabilities, enabling it to offer quality homes at all price levels at which the Company competes. The Company markets its homes to a wide range of buyers including entry level, first and second time move-up, active adults and retirees. Furthermore, management believes the Company has been particularly effective marketing to non-traditional families, such as single parent households. Product offerings such as attached villas and townhomes have been designed with specific amenities to fill the needs of these unique market niches while maintaining the affordability required by single parents. Other attached, for sale communities use design characteristics, such as enhanced security features, that appeal to single female buyers and have enabled Rottlund to secure increased market share in this growing niche. OPERATING STRATEGY Set forth below are the major elements of the Company's operating strategy: 1 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 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 $80,000 to $300,000, and the average sales price of homes being delivered during fiscal 1999 was approximately $156,000. 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, and (v) 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. 2 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 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, 1999.
Homes Under Construction Total ------------------------------------------------- Unsold Sites Available Market Available Sold (1) Models Inventory (2) for Future Construction - ------ --------- -------- ------ ------------- ----------------------- Minnesota.................. 982 290 13 93 586 Florida.................... 725 115 4 28 578 Iowa....................... 350 85 9 26 270 Indiana.................... 266 38 8 16 204 New Jersey................. 626 89 0 6 531 ----- --- -- --- ----- Total...................... 2,949 567 34 179 2,169 ===== === == === =====
- ---------------------- (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, 1999 the Company had an aggregate of 2,169 home sites available for future construction which represents approximately a 14-month supply based on actual deliveries anticipated in fiscal 2000. 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. 3 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. 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. 4 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. 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 six months. The personnel of the Company's corporate headquarters are responsible for architectural design, home site planning, accounting and closing, 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, Fraser Community Services 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 a portion 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 an 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 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 ten-to fifteen-year structural warranty. 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, 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. 6 EMPLOYEES As of March 31, 1999, the Company employed 275 persons, 80 as on-site sales personnel, 91 involved in construction, 22 as customer care personnel, 22 as product development personnel and 60 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 3065 Centre Pointe Road, Roseville, Minnesota 55113. The offices total 10,000 square feet, and are leased from an unrelated party through March 31, 2006, 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, 1999. 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, 1998 and 1999. STOCK QUOTATIONS
HIGH LOW Fiscal 1999 First Quarter................................... 4 7/8 3 3/4 Second Quarter.................................. 4 5/8 3 5/8 Third Quarter................................... 4 1/2 3 Fourth Quarter.................................. 5 3/4 4 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
As of June 18, 1999, 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, 2003 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 Sheet data as of and 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.
1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND UNIT DATA) STATEMENT OF OPERATIONS DATA: Net sales................................ $252,675 $160,830 $180,457 $131,583 $116,520 Cost of sales............................ 215,074 139,284 156,332 110,589 96,344 -------- -------- -------- -------- -------- Gross profit............................. 37,601 21,546 24,125 20,994 20,176 Selling, general and administrative expenses................................. 26,112 20,541 19,569 13,671 13,307 Write-down of land(1) - - 1,500 - - -------- ------- -------- -------- -------- Operating income......................... 11,489 1,005 3,056 7,323 6,869 Interest expense......................... 2,714 2,018 958 153 295 -------- -------- -------- -------- -------- Income (loss) before provision (benefit) for income taxes......................... 8,775 (1,013) 2,098 7,170 6,574 Provision (benefit) for income taxes..... 3,598 (415) 862 2,928 2,695 -------- -------- -------- -------- -------- Net income (loss)...................... $ 5,177 $ (598) $ 1,236 $ 4,242 $ 3,879 ======== ======== ======== ======== ======== Basic earnings (loss) per share.......... $ .90 $ (0.10) $ 0.22 $ 0.75 $ 0.69 ======== ======== ======== ======== ======== Diluted earnings (loss) per share........ $ .90 $ (0.10) $ 0.22 $ 0.74 $ 0.68 ======== ======== ======== ======== ======== Weighted average shares outstanding...... 5,773 5,745 5,735 5,749 5,661 ======== ======== ======== ======== ======== OPERATING DATA: Number of home sales closed.............. 1,684 1,092 1,346 1,187 1,003 Average sales price...................... $ 156 $ 146 $ 134 $ 111 $ 116 ======== ======== ======== ======== ======== BALANCE SHEET DATA: Inventories and properties held for development or sale...................... $ 70,042 $ 74,379 $ 81,825 $ 74,650 $ 60,450 Total assets............................. 89,365 88,281 96,234 83,756 68,549 Notes and mortgage notes payable......... 38,467 47,907 54,137 40,584 33,746 Shareholders' equity..................... $ 31,598 $ 26,315 $ 26,819 $ 25,396 $ 21,033 - ------------------------ (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, 1999 1998 1997 ------------ ------------ ------------ Homes closed: Single family........... 688 431 397 Multi-family............ 936 661 949 Average sales price: Single family........... $ 180,000 $ 186,000 $ 199,000 Multi-family............ 138,000 122,000 107,000 Net sales: Single family........... $123,700,000 $ 80,370,000 $ 79,083,000 Multi-family............ 128,975,000 80,460,000 101,374,000 ------------ ------------ ------------ Total net sales $252,675,000 $160,830,000 $180,457,000 ============ ============ ============
The following table sets forth the Company's backlog (homes under contract but not closed):
MARCH 31 NUMBER OF HOMES SALES VALUE -------- --------------- ----------- 1999......................... 567 $99,562,000 1998......................... 631 $98,380,000 1997......................... 409 $60,908,000
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, 1999 COMPARED TO YEAR ENDED MARCH 31, 1998 The Company's home sales increased $91.8 million or 57% during fiscal 1999 as compared to fiscal 1998 as a result of a 48.6% increase in the number of homes closed and a 3.2% increase in the average sales price of homes closed. This increase was due to an overall increase in prices for homes sold by the Company. Gross profit increased by $16.1 million or 75% during fiscal 1999 as compared to fiscal 1998. The gross profit margin increased to 14.9% during fiscal 1999 as compared to 13.4% in fiscal 1998. The increase in gross profit was primarily due to strength in the overall homebuilding industry combined with higher revenues which decreased fixed costs as a percentage of revenue. Selling, general and administrative expenses increased by $5.6 million to $26.1 million in fiscal 1999 from $20.5 million in fiscal 1998. As a percentage of net sales, selling, general and administrative expenses decreased to 10.3% in fiscal 1999 from 12.8% in fiscal 1998. This decrease was primarily due to the increase in home sales during fiscal 1999. 10 Interest expense was $2.7 million in fiscal 1999 as compared to $2.0 million in fiscal 1998. The increase in interest expense is primarily due to an increase in borrowings under the Company's revolving credit facility used to fund the increased level of business activity. 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. Total interest incurred by the Company was approximately $5.2 million for fiscal 1999 and $5.1 million for fiscal 1998. The Company's tax rate was approximately 41% in fiscal 1999 and 1998 which reflects the federal statutory rate plus the effect of state taxes, net of federal benefit. Net income increased from a net loss of $598,000 in fiscal 1998 to a net gain of $5,177,000 in fiscal 1999. This increase was primarily due to the increase in home sales during fiscal 1999. YEAR ENDED MARCH 31, 1998 COMPARED TO THE 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 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. LIQUIDITY AND CAPITAL RESOURCES Cash flows provided by operating activities increased $7.6 million from $4.4 million in fiscal 1998 to $12.0 million in fiscal 1999. This increase was primarily due to increased income. Cash flows used for investing activities were not significant. Cash flows used for financing activities increased by $3.2 million from $6.1 million in fiscal 1998 to $9.3 million in fiscal 1999. Cash flows provided by (used for) operating activities increased $14.2 million from ($9.8) million in fiscal 1997 to $4.4 million for fiscal 1998. This increase was primarily due to decreased investments in residential housing completed 11 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 million from $13.7 million in fiscal 1997 to ($6.1) million 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. 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 2003. At March 31, 1999, the Company also had a $30.0 million unsecured revolving credit facility from a commercial lender. Borrowings under this facility totaled $10.3 million at March 31, 1999. 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 had no significant commitments as of March 31, 1999 requiring the use of funds. Due to 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 agreed to waive the violations and in addition the agreements were amended. 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. YEAR 2000 CONSIDERATIONS Management believes that the Company's core selling and construction operations are largely unautomated and would continue uninterrupted even in the event of Year 2000 problems. As for accounting and administration, the Company has already upgraded its software, which has been tested and found to be Year 2000 compliant. The manufacturer of the computer system on which Rottlund central accounting and management information systems resides has certified that its hardware and operating system software are Year 2000 compliant. The Company's applications software has been tested in the course of normal maintenance. Equipment and software peripheral to Rottlund's central system are being tested for Year 2000 compliance. Any replacements or upgrades required are expected to be complete by mid-1999. 12 The cost and timing of upgrades to hardware and software corrections are not deemed to be materially different than normally scheduled upgrades. Expenditures to date and future expenditures are not expected to exceed $100,000. Management's contingency plans, which are intended to enable the Company to continue to operate normally, include performing some procedures manually, changing suppliers, if necessary, and repairing or obtaining replacement systems. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's exposure to market risk for changes in interest rates relates primarily to the Company's short-term borrowings and long-term debt obligations. The Company's credit facility carries interest rate risk that is generally related to the federal funds rate. If that rate were to change while the Company was borrowing under the facility, interest expense would increase or decrease accordingly. As of March 31, 1999, there was $10.3 million under this facility. The Company has no earnings or cash flow exposure due to market risks on its Senior Notes payable as a result of the fixed-rate nature of the debt. However, interest rate changes would affect the fair market value of the debt. At March 31, 1999, the Company had fixed rate debt of $26.7 million maturing in December 2003. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements of the Company as of March 31, 1999 and 1998 and for the years then ended 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, 1999 and 1998................................................. 15 Consolidated Statements of Operations for the Years Ended March 31, 1999, 1998 and 1997................... 16 Consolidated Statements of Shareholders' Equity for the Years Ended March 31, 1999, 1998 and 1997......... 17 Consolidated Statements of Cash Flows for the Years Ended March 31, 1999, 1998 and 1997................... 18 Notes to Consolidated Financial Statements................................................................ 19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. 13 ARTHUR ANDERSEN LLP 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, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended March 31, 1999. 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, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1999, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Minneapolis, Minnesota, May 12, 1999 14 THE ROTTLUND COMPANY, INC. AND SUBSIDIARIES Consolidated Balance Sheets As of March 31 (In Thousands, Except Per Share Data)
1999 1998 ------- ------- ASSETS CASH AND CASH EQUIVALENTS $ 6,558 $ 4,247 ESCROW AND OTHER RECEIVABLES 2,607 2,520 LAND, DEVELOPMENT COSTS AND FINISHED LOTS 46,315 47,247 RESIDENTIAL HOUSING COMPLETED AND UNDER CONSTRUCTION 23,727 27,132 PROPERTY AND EQUIPMENT, net 941 1,251 DEFERRED INCOME TAXES 1,605 1,164 OTHER ASSETS, net 7,612 4,720 ------- ------- $89,365 $88,281 ------- ------- ------- ------- LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES: Revolving credit facility $10,285 $15,010 Senior notes payable 26,731 30,925 Mortgage notes payable 1,451 1,972 Accounts payable 8,905 11,553 Accrued liabilities 6,132 2,506 Income taxes payable 4,263 - ------- ------- Total liabilities 57,767 61,966 ------- ------- ------- ------- COMMITMENTS AND CONTINGENCIES (Note 6) SHAREHOLDERS' EQUITY: Preferred stock, $.10 par value, 10,000 shares authorized; none issued - - Common stock, $.10 par value, 40,000 shares authorized; 5,773 and 5,745 shares issued and outstanding 143 141 Paid-in capital 11,851 11,747 Retained earnings 19,604 14,427 ------- ------- Total shareholders' equity 31,598 26,315 ------- ------- $89,365 $88,281 ------- ------- ------- -------
The accompanying notes are an integral part of these consolidated balance sheets. 15 THE ROTTLUND COMPANY, INC. AND SUBSIDIARIES Consolidated Statements of Operations For the Years Ended March 31 (In Thousands, Except Per Share Data)
1999 1998 1997 -------- -------- -------- NET SALES $252,675 $160,830 $180,457 COST OF SALES 215,074 139,284 156,332 -------- -------- -------- Gross profit 37,601 21,546 24,125 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 26,112 20,541 19,569 WRITE-DOWN OF LAND - - 1,500 -------- -------- -------- Operating income 11,489 1,005 3,056 INTEREST EXPENSE 2,714 2,018 958 -------- -------- -------- Income (loss) before provision (benefit) for income taxes 8,775 (1,013) 2,098 PROVISION (BENEFIT) FOR INCOME TAXES 3,598 (415) 862 -------- -------- -------- Net income (loss) $ 5,177 $ (598) $ 1,236 -------- -------- -------- -------- -------- -------- BASIC AND DILUTED EARNINGS (LOSS) PER SHARE $ 0.90 $ (0.10) $ 0.22 -------- -------- -------- -------- -------- --------
The accompanying notes are an integral part of these consolidated financial statements. 16 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, 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 Net income - - - 5,177 5,177 Stock issued under employee stock purchase plan 28 2 104 - 106 ----- ---- ------- ------- ------- BALANCE, March 31, 1999 5,773 $143 $11,851 $19,604 $31,598 ----- ---- ------- ------- ------- ----- ---- ------- ------- -------
The accompanying notes are an integral part of these consolidated financial statements. 17 THE ROTTLUND COMPANY, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Years Ended March 31 (In Thousands)
1999 1998 1997 ------- ------- ------- OPERATING ACTIVITIES: Net income (loss) $ 5,177 $ (598) $ 1,236 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities- Depreciation and amortization 790 626 479 Write-down of land - - 1,500 Deferred income taxes (441) 186 (833) Change in operating items: Escrow and other receivables (87) (1,008) 483 Land, development costs and finished lots 932 1,989 (1,797) Residential housing completed and under construction 3,405 5,457 (6,878) Other assets (3,002) (1,012) (1,457) Accounts payable (2,648) 2,264 (1,475) Accrued liabilities 3,626 (1,573) 158 Income taxes payable 4,263 (1,910) (1,181) ------- ------- ------- Net cash provided by (used for) operating activities 12,015 4,421 (9,765) ------- ------- ------- INVESTING ACTIVITIES: Purchase of property and equipment, net (370) (1,054) (383) Other - - (13) ------- ------- ------- Net cash used for investing activities (370) (1,054) (396) ------- ------- ------- FINANCING ACTIVITIES: Proceeds from (repayments of) revolving credit facility, net (4,725) (175) 14,685 Repayments of senior notes payable (4,194) (2,943) (1,132) Proceeds from issuance of mortgage notes payable 1,094 174 5,205 Repayments of mortgage notes payable (1,615) (3,286) (5,205) Proceeds from stock options exercised - - 59 Proceeds from stock issued under employee stock purchase plan 106 94 128 ------- ------- ------- Net cash provided by (used for) financing activities (9,334) (6,136) 13,740 ------- ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,311 (2,769) 3,579 CASH AND CASH EQUIVALENTS: Beginning of year 4,247 7,016 3,437 ------- ------- ------- End of year $ 6,558 $ 4,247 $ 7,016 ------- ------- ------- ------- ------- ------- SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest, net of amounts capitalized $ 2,714 $2,025 $ 906 ------- ------- ------- ------- ------- ------- Cash paid for income taxes $ - $2,022 $ 2,948 ------- ------- ------- ------- ------- -------
The accompanying notes are an integral part of these consolidated financial statements. 18 THE ROTTLUND COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 1999 and 1998 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 year 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 year 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 a formal closing. Customer earnest money deposits received under binding purchase agreements are reflected as accrued liabilities until a formal closing. 19 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, 1999 and 1998, approximately $900,000 and $811,000, respectively, of cash and cash equivalents was restricted for customer earnest money deposits. 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 $2,400,000, $2,942,000 and $4,196,000 was capitalized in fiscal years 1999, 1998 and 1997, 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 year 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 year 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. 20 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 $878,000 and $780,000 as of March 31, 1999 and 1998, respectively. OTHER ASSETS Other assets consists 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 $220,000 and $147,000 as of March 31, 1999 and 1998, respectively. Deferred financing costs are amortized over the lives of the respective financing agreements, with accumulated amortization of $163,000 and $125,000 as of March 31, 1999 and 1998, 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. 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 $1,848,000, $2,316,000 and $1,795,000 in fiscal years 1999, 1998 and 1997, 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 21 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 per share and antidilutive stock options data):
1999 1998 1997 ------- ------- ------- Net income (loss) $ 5,177 $ (598) $ 1,236 ------- ------- ------- ------- ------- ------- Weighted average number of common shares outstanding: Basic 5,773 5,745 5,712 Dilutive effect of stock options - - 23 ------- ------- ------- Common and potential common shares outstanding: Diluted 5,773 5,745 5,735 ------- ------- ------- ------- ------- ------- Basic earnings (loss) per share $ 0.90 $ (0.10) $ 0.22 ------- ------- ------- ------- ------- ------- Diluted earnings (loss) per share $ 0.90 $ (0.10) $ 0.22 ------- ------- ------- ------- ------- ------- Antidilutive stock options 838,102 535,102 484,734 ------- ------- ------- ------- ------- -------
Stock options were antidilutive because they had an exercise price greater than the average market price during the year or due to the net loss. The adoption of SFAS No. 128 had no effect on the Company's previously reported earnings per share (EPS) for fiscal year 1997. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," and SOP 98-5, "Reporting on the Costs of Start-up Activities." Additionally, SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," were issued in 1998. The Company adopted these pronouncements in fiscal year 1999 as required. The adoptions did not have a material effect on the Company's financial position or results of operations. 2. DEBT: REVOLVING CREDIT FACILITY In March 1998, the Company entered into an unsecured revolving credit agreement (the Credit Facility) with a group of banks that provides borrowings of up to $30 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 and the working capital of the Company. Borrowings under the Credit Facility bear interest at the federal funds rate plus 0.5% (8.25% as of March 31, 1999). As of March 31, 1999, borrowings outstanding under the Credit Facility's line of credit totaled $10,285,000, and 22 $19,715,000 was available for borrowing under the calculation described above. The Credit Facility expires in March 2002. During fiscal years 1999, 1998 and 1997, the maximum balance outstanding under current and former revolving credit facilities was $21,835,000, $20,860,000 and $16,585,000, and the average balance was $18,151,000, $12,359,000 and $9,507,000, respectively. The weighted average interest rate during such years was 8.7%, 9.5% and 8.9%, respectively. The carrying amount of borrowings outstanding under the Credit Facility as of March 31, 1999 and 1998 approximates its fair value due to its 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. During fiscal year 1999, the Company paid an additional 0.5% of interest on each of the senior notes. Subsequent to March 31, 1999, the rates returned to their original rates (12.1% and 9.4%). Monthly payments of varying amounts are due on the Senior Notes through December 2003. As of March 31, 1999 and 1998, the fair value of the Senior Notes was approximately $28,914,000 and $32,800,000, 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 $3,813,000 as of March 31, 1999, 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, 1999 are as follows (in thousands):
Fiscal Year Amount ----------- ------- 2000 $ 6,077 2001 5,455 2002 5,948 2003 6,371 2004 4,331 ------- $28,182 ------- -------
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, borrowing base requirements, payment of dividends and maximum land and construction limitations. The Company was in compliance with all financial covenants as of March 31, 1999. 23 Additionally, the Company has a separate agreement that provides letters of credit. As of March 31, 1999 outstanding letters of credit totaled $1,600,000. 3. INCOME TAXES: The following summarizes the provision (benefit) for income taxes for the years ended March 31 (in thousands):
1999 1998 1997 ------ ----- ------ Current: Federal $3,575 $(606) $1,346 State 464 5 349 Deferred (441) 186 (833) ------ ----- ------ Provision (benefit) for income taxes $3,598 $(415) $ 862 ------ ----- ------ ------ ----- ------
The components of deferred income taxes consist of the following as of March 31 (in thousands):
1999 1998 ------ ------ Inventory $ 904 $ 606 Warranty reserves 396 144 Other accrued liabilities 171 93 State--net operating loss carryforward - 191 Other 134 130 ------ ------ Deferred income tax asset $1,605 $1,164 ------ ------ ------ ------
A reconciliation of the Company's statutory federal income tax rate to the effective tax rate is as follows for the years ended March 31:
1999 1998 1997 ------ ----- ------ Statutory federal rate 34.0% 34.0% 34.0% State income taxes, net of federal benefit 6.0 6.0 5.8 Other 1.0 1.0 1.3 ------ ----- ------ Effective tax rate 41.0% 41.0% 41.1% ------ ----- ------ ------ ----- ------
4. 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 1,300,000 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 24 from the date of grant. Certain options granted during fiscal year 1999 have a vesting period of seven years, yet are accelerated if certain financial targets are met each year. 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 initial options 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. The following table summarizes activity in the stock option plans:
Weighted Average Number of Shares Exercise ------------------- The Plan DSOP Price ------- ------ ----- 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 Granted 303,000 2,000 4.56 ------- ------ ----- Balance, March 31, 1999 838,102 6,000 $5.31 ------- ------ ----- ------- ------ ----- Options exercisable as of March 31, 1999 456,179 6,000 $5.96 ------- ------ ----- ------- ------ ----- Shares available for future grants 442,998 90,000 ------- ------ ------- ------
Shares outstanding under the stock option plans as of March 31, 1999 have exercise prices ranging from $4.00 to $8.53 and a weighted average remaining contractual life of 7.9 years. 25 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:
1999 1998 ------ ----- Net income (loss) (in thousands): As reported $5,177 $(598) Pro forma 4,959 (713) Basic and diluted earnings (loss) per share: As reported $ 0.90 $(.10) Pro forma 0.86 (.12)
The weighted average fair value of stock options granted in fiscal 1999 was $1.72. 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 the fiscal years (no options were granted in 1998):
1999 1997 ----------- ----------- Risk-free interest rate 4.33%-6.74% 5.97%-6.11% Expected life 5-10 years 5-10 Years Expected volatility 42% 34%-36% Expected dividend yield None None
EMPLOYEE STOCK PURCHASE PLAN The Company sponsors an employee stock purchase plan (the Purchase Plan). A total of 250,000 shares of common stock are reserved for issuance under the Purchase Plan. The Purchase Plan permits eligible employees to purchase common stock at 85% of the lower fair market value of the common stock at certain dates. During the years ended March 31, 1999, 1998 and 1997, employee contributions of approximately $106,000, $94,000 and $128,000, respectively, were used to purchase common stock under the terms of the Purchase Plan. 5. RETIREMENT SAVINGS PLAN: The Company sponsors a 401(k) profit-sharing plan which covers all employees over the age of 20 1/2 years 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 $191,000, $80,000 and $83,000 to the 401(k) plan in fiscal years 1999, 1998 and 1997, respectively. 26 6. 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, 1999, the Company had outstanding letters of credit totaling $1,600,000 and outstanding bonds totaling $5,000,000. 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, results of operation or cash flows. 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 $728,000, $714,000 and $866,000 in fiscal years 1999, 1998 and 1997, respectively. Future minimum lease payments required under noncancelable operating lease agreements are as follows (in thousands):
Fiscal Year Amount ----------- ------ 2000 $ 604 2001 413 2002 274 2003 231 2004 205 Thereafter 312 ------ $2,039 ------ ------
During fiscal years 1999 and 1998, the Company entered into three agreements for the sale and leaseback of 21 and 10, respectively, of its model homes in Minnesota and New Jersey for approximately $3,602,000 and $1,400,000, respectively, which resulted in the recognition of an approximately $518,000 gain in fiscal year 1999. The lease term on the individual model homes is month-to-month, and rental expense for fiscal year 1999 was approximately $335,000. EMPLOYMENT AGREEMENTS The Company has entered into employment agreements with certain members of management which expire on January 31, 2000. The agreements provide for, among other things, compensation and benefits, termination of employment, severance payments and the employment term under a change in control. 27 7. QUARTERLY FINANCIAL INFORMATION (UNAUDITED): The following is a condensed summary of quarterly results of operations for fiscal years 1999 and 1998 (in thousands, except per share data):
Basic and Diluted Net Earnings Gross Income (Loss) Per Net Sales Profit (Loss) Share --------- ------- ------ ---------- Fiscal year 1999: First quarter $ 51,355 $ 6,870 $ 347 $ 0.06 Second quarter 63,782 9,700 1,318 0.23 Third quarter 58,786 8,729 1,023 0.18 Fourth quarter 78,752 12,302 2,489 0.43 -------- ------- ------ ------ $252,675 $37,601 $5,177 $ 0.90 -------- ------- ------ ------ -------- ------- ------ ------ Fiscal year 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) -------- ------- ------ ------ -------- ------- ------ ------
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 52 President, Secretary and Director Bernard J. Rotter 56 Vice President, Treasurer and Director Todd M. Stutz 41 Executive Vice President and Director John J. Dierbeck, III 53 Executive Vice President and Director Lawrence B. Shapiro 43 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 1999 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 1999 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 1999 Proxy Statement. 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 13 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, 1999, 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.(5) 10.8 Waiver and Amendment, dated March 31, 1997, by and among the Company and the note purchasers listed therein.(5) 10.9 Waiver and Amendment, dated December 31, 1997, by and among the Company and the note purchasers listed therein.(5) 10.10 Waiver and Amendment, dated as of March 31, 1998, by and among the Company and the note purchasers listed therein.(5) 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.(5) 10.13 Second Modification of Credit Agreement, dated December 24, 1996.(5) 10.14 Third Modification of Credit Agreement, dated January 18, 1997.(5) 10.15 Fourth Modification of Credit Agreement, dated June 25, 1997.(5) 10.16 Fifth Modification of Credit Agreement, dated January 15, 1998.(5) 10.17 Sixth Modification of Credit Agreement, dated July 10, 1998.(5) 10.18 Employment Agreement with John J. Dierbeck, dated February 1, 1999. 10.19 Change in Control Agreement with John J. Dierbeck, dated February 1, 1999. 30 10.20 Employment Agreement with Todd M. Stutz, dated February 1, 1999. 10.21 Change in Control Agreement with Todd M. Stutz, dated February 1, 1999. 10.22 Employment Agreement with Lawrence B. Shapiro, dated February 1, 1999. 10.23 Change in Control Agreement with Lawrence B. Shapiro, dated February 1, 1999. 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. (4) Incorporated by reference to the Company's filing on Form 10-Q for the three month period ending December 31, 1996. (5) Incorporated by reference to the Company's filing on Form 10-K for the year ended March 31, 1998.
31 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: June 25, 1999 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 June 25, 1999 - -------------------------- and Director David H. Rotter /s/ Bernard J. Rotter Vice President, Treasurer and June 25, 1999 - -------------------------- Chairman of the Board Bernard J. Rotter /s/ John J. Dierbeck, III Executive Vice President and June 25, 1999 - -------------------------- Director John J. Dierbeck, III /s/ Lawrence B. Shapiro Chief Financial Officer and June 25, 1999 - -------------------------- Director (Principal Financial Lawrence B. Shapiro and Accounting Officer) /s/ Todd M. Stutz Executive Vice President and June 25, 1999 - -------------------------- Director Todd M. Stutz - -------------------------- Director Dennis Doyle - -------------------------- Director Scott D. Rued 32 EXHIBIT INDEX
Exhibit No. Exhibit - ----------- ------- 10.18 Employment Agreement with John J. Dierbeck 10.19 Change in Control Agreement of John J. Dierbeck 10.20 Employment Agreement with Todd M. Stutz 10.21 Change in Control Agreement of Todd M. Stutz 10.22 Employment Agreement with Lawrence B. Shapiro 10.23 Change in Control Agreement of Lawrence B. Shapiro 11 Computation of Per Share Earnings 22 Subsidiaries of The Rottlund Company, Inc. 23 Consent of Arthur Andersen LLP 27.1 Financial Data Schedule
33 EX-10.18 2 EXHIBIT 10.18 EXHIBIT 10.18 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT ("Agreement") made effective February 1, 1999, between THE ROTTLUND COMPANY, INC., a Minnesota corporation ("Company"), and JOHN J. DIERBECK ("Executive"). W I T N E S S E T H WHEREAS, the Executive is currently employed by the Company; and WHEREAS, the Company desires to retain the unique experience, ability and services of the Executive; and WHEREAS, the terms, conditions and undertakings of this Agreement have been duly approved and authorized by the Board of Directors of the Company; NOW, THEREFORE, it is mutually agreed as follows: 1. EMPLOYMENT. The Company agrees to employ the Executive, and the Executive agrees to be employed by the Company for the period stated in paragraphs 4.1 or 4.2, as applicable, and upon the other terms and conditions set forth in this Agreement. 2. SERVICE AND DUTIES. During the term of his employment under this Agreement, the Executive agrees to perform the duties of his position or office and such other duties of a similar nature as the Company or its Board of Directors may from time to time assign to him. The Executive agrees to serve the Company faithfully and to the best of his ability, and to devote his working time, attention and efforts to the business and affairs of the Company. The Executive's services will be rendered primarily at the Company's principal executive offices in Minneapolis, Minnesota. The Executive may be required to travel to other locations where the Company may have offices or conduct its business, as necessary to the proper conduct of his duties. 3. COMPENSATION. 3.1. SALARY/BONUSES. For all services to be rendered by the Executive under this Agreement, the Company agrees to pay, or cause to be paid, to the Executive during the term of his employment under this Agreement a base salary in an amount equal to the base salary the Executive was receiving immediately prior to the effective date of this Agreement. In addition, the Executive shall be entitled to receive a bonus in an amount per fiscal year not less than the amount established according to the Company's bonus programs and practices that are in effect immediately prior to the effective date of this Agreement. 3.2. EMPLOYEE BENEFIT PLANS/VACATION. In addition to the salary and bonus provided in paragraph 3.1, the Executive shall be entitled during the term of his employment under this Agreement to participate in the employee benefit plans or programs of the Company to the extent that his position, title, tenure, salary, age, health and other qualifications make him eligible to participate, including, without limitation, in any retirement, pension, profit-sharing, stock option, incentive compensation, bonus or similar plans or programs, and in any insurance, hospital or other employee benefit plans which may now be in effect or which may hereafter be adopted. The Executive shall be entitled to vacation pursuant to the Company's vacation policy in effect immediately prior to the effective date of this Agreement. The Company does not guarantee the adoption or continuance of any particular employee benefit plans or programs, and the Executive's participation in any such plan or program shall be subject to the provisions, rules and regulations applicable thereto. 2 4. TERM AND TERMINATION. 4.1 BASE TERM. Unless this paragraph is superseded by paragraph 4.2, the term of the Executive's employment under this Agreement shall be for twelve (12) months commencing on February 1, 1999 and ending on January 31, 2000, except if his employment is terminated on or prior to January 31, 2000 for Good Cause. If the Executive's employment is terminated under this section for Good Cause, the Company will pay his salary under Section 3.1 pro rated through the date of termination, plus any benefits due under Section 3.2 as of the date of termination; the Executive, however, shall not receive any bonus under Section 3.1 if he is terminated for Good Cause. If the Executive's employment is terminated under this section without Good Cause, or as a result of a Constructive Discharge by the Company, the Company will pay the Executive: (a) the full salary he otherwise would have received under Section 3.1 had he remained employed by the Company through January 31, 2000; (b) any benefits due the Executive under Section 3.2 as of the date of termination; and (c) a pro rata portion of the bonus due the Executive under Section 3.1 for the then-current fiscal year, calculated as of the date of the Executive's termination, but not finally determined or payable until the 90th day following the end of the then-current fiscal year. 4.2 TERM UPON A CHANGE IN CONTROL. If a Change in Control occurs prior to January 31, 2000, and ultimately becomes effective through a closing of the Change in Control transaction, the provisions of paragraph 4.1 shall be superseded by this paragraph 4.2. If this section becomes effective, the Executive's employment under the Agreement shall continue from the date the Change in Control occurs until the first anniversary of the date the transaction contemplated by the Change in Control is closed, unless the Executive's employment is 3 terminated for Good Cause on or prior to that anniversary date. If the Executive's employment is terminated under this section for Good Cause, the Company will pay him his salary under Section 3.1 pro rated through the date of termination, plus any benefits due under Section 3.2 as of the date of termination; the Executive, however, shall not receive any bonus under Section 3.1 if he is terminated for Good Cause. If the Executive's employment is terminated under this section without Good Cause, or as a result of a Constructive Discharge by the Company, the Company will pay him: (a) severance of $120,000 within 30 days of such termination; (b) any benefits due the Executive under Section 3.2 as of the date of termination; and (c) a pro rata portion of the bonus due the Executive under Section 3.1 for the then-current fiscal year, calculated as of the date of the Executive's termination, but not finally determined or payable until June 30 of the then-current fiscal year. 4.3 TERMINATION UPON DEATH OR DISABILITY. If the Executive dies or becomes Disabled during the term of this Agreement, his employment with the Company shall terminate immediately upon his death or Disability, and the Executive (or his personal representative) shall be entitled to receive his salary through the date of his death or the first day of his Disability, plus any benefits due the Executive under Section 3.2 as of the date of termination, but shall be entitled to receive a bonus under Section 3.1 only if he meets the requirements of the Company's bonus programs and practices as of the date of death or Disability. 4.4 STOCK OPTIONS. (a) If a Change in Control occurs, any stock options held by the Executive (with the exception of Vision 2000 stock options) shall fully vest 30 days prior to the proposed closing date of the transaction contemplated by the Change in Control. 4 (b) With respect to any Vision 2000 stock options held by the Executive: (i) If the Executive's employment is terminated without Good Cause or as the result of a Constructive Discharge prior to a Change in Control, the Executive shall receive a pro rata portion of the Vision 2000 stock options due to him in the fiscal year in which the termination occurs; the number of Vision 2000 options to which the Executive is entitled under this section shall be determined, fully vested and exercisable 90 days following the end of the fiscal year in which the termination occurs; (ii) If a Change in Control occurs, the Executive shall receive from the acquiror replacement options for the Vision 2000 stock options due him in the year the Change in Control occurs or, if the acquiror's common stock is not publicly traded, the right to earn the cash equivalent of those options. The replacement options or the cash equivalent shall be provided to the Executive within 90 days of the end of the fiscal year in which the Change in Control occurs. 4.5. SURRENDER OF RECORDS AND PROPERTY. Upon termination of his employment under this Agreement for any reason, the Executive agrees to deliver promptly to the Company (or have his representative deliver promptly to the Company) all records, manuals, books, blank forms, documents, letters, memoranda, notes, notebooks, reports, data, tables, calculations or other documents, or copies thereof, which are the property of the Company or which relate in any way to the business, products, practices or techniques of the Company, and all other property, trade secrets and confidential information of the Company, including, but not limited to, all documents which in whole or in part contain any trade secrets or confidential information of the Company, 5 which in any of these cases are in his possession or under his control. The Executive shall be permitted to retain personal correspondence, documents and items which contain no trade secrets or confidential information. 5. DEFINITIONS. 5.1. CHANGE IN CONTROL. A "Change in Control" will occur under this Agreement if 50% or more of the stock or assets of the Company is acquired by a third party on or before January 31, 2000, or if the families of Bernard Rotter and David Rotter (including all common stock held by Shirley Ann Rotter) do not collectively own (either directly or beneficially) in excess of 50% of the voting capital stock of the Company during this same time period. For purposes of this Agreement, a Change in Control will be deemed to have occurred on the date a contemplated transaction is executed by all parties to the transaction. 5.2. GOOD CAUSE. The Company may terminate the Executive's employment for "Good Cause" in the event the Executive: (a) is convicted, by a court of competent jurisdiction, of a felony committed during the term of this Agreement which adversely affects the Company; or (b) confesses in writing to the commission of felony during the term of this Agreement which adversely affects the Company; or (c) is convicted of, or confesses in writing to, the embezzlement or misappropriation of funds of the Company, which embezzlement or misappropriation was committed during the term of this Agreement. 6 5.3. CONSTRUCTIVE DISCHARGE. A "Constructive Discharge" will be deemed to have occurred if, after a Change in Control: (1) the Company assigns you a position, duties, responsibilities or status that are inconsistent with your position, duties, responsibilities and/or status immediately prior to the Change in Control; (2) there is a change in the titles or offices you held immediately prior to the Change in Control; (3) the Company relocates you to a location that is more than fifty (50) miles from the Company's current headquarters in Roseville, Minnesota; (4) the Company reduces your base salary or fails to pay you any compensation or benefits to which you are entitled within ten (10) days of the date due; or (5) the Company breaches any of its obligations under this Employment Agreement. 5.4. DISABILITY. The Executive shall be deemed to have become Disabled, for purposes of this Agreement, in the event that he cannot, because of illness, injury, or incapacity, render any services of the character contemplated by this Agreement over a continuous period of 120 days. 5.5. SUCCESSORS AND ASSIGNS. For purposes of this Agreement, "Successors and Assigns" shall mean a corporation or other entity acquiring all or substantially all the stock, assets, and/or business of the Company (including this Agreement) whether by agreement, operation of law, or otherwise. 6. MISCELLANEOUS. 6.1. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Minnesota without giving effect to the conflict of laws principles thereof. Any action brought by any party to this Agreement shall be 7 brought and maintained in a court of competent jurisdiction in Hennepin County in the State of Minnesota. 6.2. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto and supersedes all prior agreements, understandings, and arrangements, oral or written, between the parties hereto with respect to the subject matter covered by this Agreement. 6.3. SUCCESSORS/ASSIGNS. This Agreement shall be binding upon and shall inure to the benefit of the Company, its Successors and Assigns, and the Company shall require any Successors and Assigns to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. Neither this Agreement nor any right or interest thereunder shall be assignable or transferable by the Executive, his beneficiaries or legal representatives, except by will or by the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal personal representative. 6.4. WITHHOLDING TAXES. The Company may withhold from any amounts payable under this Agreement all federal, state, city or other taxes as may be required pursuant to any law, governmental regulation or ruling, or which the Company in good faith believes are required to be held pursuant to any law, governmental regulation or ruling. 6.5. NO WAIVER. No provision of this Agreement may be modified, waived, or discharged unless such modification, waiver, or discharge is agreed to in writing and signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with, any condition or provision of this Agreement to be 8 performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 6.6. NOTICES. For purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, to the recipient at the address indicated below: (a) If to the Company, to The Rottlund Company, Inc. 2681 Long Lake Road Roseville, Minnesota 55113 Attn: ___________________ (b) If to the Executive, to _____________________ _____________________ _____________________ or such other address or to the attention of such other persons as the recipient party shall have specified by prior written notice to the sending party. 6.7. SEVERABILITY. To the extent any provision of this Agreement shall be found to be invalid or unenforceable, it shall be considered deleted from this Agreement and the remainder of such provision and of this Agreement shall be unaffected and shall continue in full force and effect. The Executive acknowledges the uncertainty of the law in this respect and expressly stipulates that this Agreement be given the construction which renders its provisions valid and enforceable to the maximum extent (not exceeding its express terms) possible under applicable law. 9 THE ROTTLUND COMPANY, INC. By: /s/ Bernard J. Rotter ---------------------------- Vice President /s/ John J. Dierbeck ---------------------------- EXECUTIVE 10 EX-10.19 3 EXHIBIT 10.19 EXHIBIT 10.19 CHANGE IN CONTROL AGREEMENT OF JOHN J. DIERBECK This Change in Control Agreement (the "Agreement") between The Rottlund Company, Inc., a Minnesota corporation (the "Company"), and JOHN J. DIERBECK (the "Executive") is effective February 1, 1999. WHEREAS, it is in the best interests of the Company and its stockholders to retain the services of the Executive in the event of a threat or occurrence of a Change in Control and to ensure his continued dedication and efforts in such event without undue concern for his personal financial and employment security; and WHEREAS, in order to induce the Executive to remain in the employ of the Company, particularly in the event of a threat or the occurrence of a Change in Control, the Company desires to enter into this Agreement with the Executive to provide the Executive with certain benefits if a Change in Control occurs; NOW, THEREFORE, in consideration of the foregoing premises and the covenants contained herein, the parties hereby agree as follows: 1. TERM OF AGREEMENT. Subject to the conditions set forth in Section 4, this Agreement shall continue in effect until January 31, 2000, unless a Change in Control occurs on or prior to January 31, 2000, in which case this Agreement shall continue in effect for six months after the closing of the transaction constituting a Change in Control. 2. DEFINITIONS. 2.1 GOOD CAUSE. For purposes of this Agreement, "Good Cause" means: (a) the conviction of the Executive, by a court of competent jurisdiction, of a felony committed by the executive during the term of this Agreement; (b) the written confession by the Executive of a felony committed during the term of this Agreement; or (c) the conviction of or written confession by the Executive to the embezzlement or misappropriation of funds of the Company, which embezzlement or misappropriation was committed by the Executive during the term of this Agreement. 2.2 CHANGE IN CONTROL. A "Change in Control" will occur under this Agreement if 50% or more of the stock or assets of the Company is acquired by a third party on or before January 31, 2000, or if the families of Bernard Rotter and David Rotter (including all common stock held by Shirley Ann Rotter) do not collectively own (either directly or beneficially) in excess of 50% of the voting capital stock of the Company during this same time period. For purposes of this Agreement, a Change in Control will be deemed to have occurred on the date a Sale Agreement is executed by all parties to the transaction. 2.3 DISABILITY. The Executive shall be deemed to have become "Disabled," for purposes of this Agreement, in the event that he cannot, because of illness, injury, or incapacity, render any services of the character contemplated by this Agreement over a continuous period of 120 days. 2.4 CONSTRUCTIVE DISCHARGE. A "Constructive Discharge" will be deemed to have occurred if, after a Change in Control: (1) the Company assigns the Executive a position, duties, responsibilities or status that are inconsistent with the Executive's position, duties, responsibilities and/or status immediately prior to the Change in Control; (2) there is a change in the titles or offices the Executive held immediately prior to the Change in Control; (3) the Company relocates the Executive to a location that is more than fifty (50) miles from the Company's current headquarters in Roseville, Minnesota; (4) the Company reduces the Executive's base salary or fails to pay the Executive any compensation or benefits to which the Executive are entitled within ten (10) days of the date due; or (5) the Company breaches any of its obligations under this Agreement. 2.5. SUCCESSORS AND ASSIGNS. For purposes of this Agreement, "Successors and Assigns" shall mean a corporation or other entity acquiring all or substantially all the stock, assets, and/or business of the Company (including this Agreement) whether by agreement, operation of law, or otherwise. 3. COMPENSATION UPON CHANGE IN CONTROL. If a Change in Control occurs, the Company will pay the Executive a bonus of $125,000 six months after the closing of the transaction constituting a Change in Control occurs, subject to fulfillment of all the conditions described in Section 4. 4. CONDITIONS PRECEDENT TO PAYMENT OF BONUS. Payment of the bonus under Section 3 is contingent on the Executive satisfying all of the following conditions: (i) the Executive participates enthusiastically in any process to sell the Company or substantially all of its assets; (ii) the Executive does not voluntarily resign his employment (absent a Constructive Discharge) for six months after the closing of the transaction constituting a Change in Control; (iii) the Executive does not have his employment terminated for Good Cause; (iv) the Executive keeps confidential all information relating to any sale process (this confidentiality obligation means, among other things, that the Executive will not discuss the amount or existence of the Executive's bonus under this Agreement or any amounts payable under his Employment Agreement with any other employee of the Company, other than Bud Rotter or David Rotter); and (v) the Executive: (A) at or immediately before the signing of any definitive purchase and sale agreement relating to the Change in Control (the "Sale Agreement") and at or immediately before the closing of such Change in Control transaction, delivers a certificate to the Company and its shareholders certifying to the best of the Executive's knowledge that the representations and warranties relating to the Company made in the Sale Agreement are true and correct in all material respects on and as of the date of execution of the Sale Agreement and on and as of such 2 closing with the same force and effect as though made on and as of such closing or, if the Executive has knowledge that such representations and warranties are not true and correct in all material respects at the relevant times, certifying to the best of the Executive's knowledge in which respects such representations and warranties are not true and correct; and (B) at or immediately before such closing delivers a certificate to the Company and its shareholders certifying to the best of the Executive's knowledge that the Company has performed in all material respects all of the covenants contained in the Sale Agreement required to be performed by the Company by the time of such closing, or if the Executive has knowledge that the Company has not performed such covenants in all material respects by the time of such closing, certifying to the best of the Executive's knowledge in which respects such covenants have not been performed. 5. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and shall inure to the benefit of the Company, its Successors and Assigns, and the Company shall require any Successors and Assigns to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. Neither this Agreement nor any right or interest thereunder shall be assignable or transferable by the Executive, his beneficiaries or legal representatives, except by will or by the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal personal representative. 6. NOTICES. For purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, to the recipient at the address indicated below: To the Company: The Rottlund Company, Inc. 2681 Long Lake Road Roseville, Minnesota 55113 Attn: __________________ To the Executive: _______________________________ _______________________________ _______________________________ or such other address or to the attention of such other persons as the recipient party shall have specified by prior written notice to the sending party. 7. WAIVER. No provision of this Agreement may be modified, waived, or discharged unless such modification, waiver, or discharge is agreed to in writing and signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the 3 other party hereto or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 8. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Minnesota without giving effect to the conflict of laws principles thereof. Any action brought by any party to this Agreement shall be brought and maintained in a court of competent jurisdiction in Hennepin County in the State of Minnesota. 9. SEVERABILITY. To the extent any provision of this Agreement shall be invalid or unenforceable, it shall be considered deleted from this Agreement and the remainder of such provision and of this Agreement shall be unaffected and shall continue in full force and effect. The Executive acknowledges the uncertainty of the law in this respect and expressly stipulates that this Agreement be given the construction which renders its provisions valid and enforceable to the maximum extent (not exceeding its express terms) possible under applicable law. 10. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto and supersedes all prior agreements, if any, understandings, and arrangements, oral or written, between the parties hereto with respect to the subject matter covered by this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the day and year first above written. THE COMPANY: THE ROTTLUND COMPANY, INC. By: /s/ Bernard J. Rotter ----------------------------------- Chairman of the Board THE EXECUTIVE: /s/ John J. Dierbeck -------------------------------------- 4 EX-10.20 4 EXHIBIT 10.20 EXHIBIT 10.20 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT ("Agreement") made effective February 1, 1999, between THE ROTTLUND COMPANY, INC., a Minnesota corporation ("Company"), and TODD M. STUTZ ("Executive"). W I T N E S S E T H WHEREAS, the Executive is currently employed by the Company; and WHEREAS, the Company desires to retain the unique experience, ability and services of the Executive; and WHEREAS, the terms, conditions and undertakings of this Agreement have been duly approved and authorized by the Board of Directors of the Company; NOW, THEREFORE, it is mutually agreed as follows: 1. EMPLOYMENT. The Company agrees to employ the Executive, and the Executive agrees to be employed by the Company for the period stated in paragraphs 4.1 or 4.2, as applicable, and upon the other terms and conditions set forth in this Agreement. 2. SERVICE AND DUTIES. During the term of his employment under this Agreement, the Executive agrees to perform the duties of his position or office and such other duties of a similar nature as the Company or its Board of Directors may from time to time assign to him. The Executive agrees to serve the Company faithfully and to the best of his ability, and to devote his working time, attention and efforts to the business and affairs of the Company. The Executive's services will be rendered primarily at the Company's principal executive offices in Minneapolis, Minnesota. The Executive may be required to travel to other locations where the 2 Company may have offices or conduct its business, as necessary to the proper conduct of his duties. 3. COMPENSATION. 3.1. SALARY/BONUSES. For all services to be rendered by the Executive under this Agreement, the Company agrees to pay, or cause to be paid, to the Executive during the term of his employment under this Agreement a base salary in an amount equal to the base salary the Executive was receiving immediately prior to the effective date of this Agreement. In addition, the Executive shall be entitled to receive a bonus in an amount per fiscal year not less than the amount established according to the Company's bonus programs and practices that are in effect immediately prior to the effective date of this Agreement. 3.2. EMPLOYEE BENEFIT PLANS/VACATION. In addition to the salary and bonus provided in paragraph 3.1, the Executive shall be entitled during the term of his employment under this Agreement to participate in the employee benefit plans or programs of the Company to the extent that his position, title, tenure, salary, age, health and other qualifications make him eligible to participate, including, without limitation, in any retirement, pension, profit-sharing, stock option, incentive compensation, bonus or similar plans or programs, and in any insurance, hospital or other employee benefit plans which may now be in effect or which may hereafter be adopted. The Executive shall be entitled to vacation pursuant to the Company's vacation policy in effect immediately prior to the effective date of this Agreement. The Company does not guarantee the adoption or continuance of any particular employee benefit plans or programs, and the Executive's participation in any such plan or program shall be subject to the provisions, rules and regulations applicable thereto. 2 4. TERM AND TERMINATION. 4.1 BASE TERM. Unless this paragraph is superseded by paragraph 4.2, the term of the Executive's employment under this Agreement shall be for twelve (12) months commencing on February 1, 1999 and ending on January 31, 2000, except if his employment is terminated on or prior to January 31, 2000 for Good Cause. If the Executive's employment is terminated under this section for Good Cause, the Company will pay his salary under Section 3.1 pro rated through the date of termination, plus any benefits due under Section 3.2 as of the date of termination; the Executive, however, shall not receive any bonus under Section 3.1 if he is terminated for Good Cause. If the Executive's employment is terminated under this section without Good Cause, or as a result of a Constructive Discharge by the Company, the Company will pay the Executive: (a) the full salary he otherwise would have received under Section 3.1 had he remained employed by the Company through January 31, 2000; (b) any benefits due the Executive under Section 3.2 as of the date of termination; and (c) a pro rata portion of the bonus due the Executive under Section 3.1 for the then-current fiscal year, calculated as of the date of the Executive's termination, but not finally determined or payable until the 90th day following the end of the then-current fiscal year. 4.2 TERM UPON A CHANGE IN CONTROL. If a Change in Control occurs prior to January 31, 2000, and ultimately becomes effective through a closing of the Change in Control transaction, the provisions of paragraph 4.1 shall be superseded by this paragraph 4.2. If this section becomes effective, the Executive's employment under the Agreement shall continue from the date the Change in Control occurs until the first anniversary of the date the transaction contemplated by the Change in Control is closed, unless the Executive's employment is 3 terminated for Good Cause on or prior to that anniversary date. If the Executive's employment is terminated under this section for Good Cause, the Company will pay him his salary under Section 3.1 pro rated through the date of termination, plus any benefits due under Section 3.2 as of the date of termination; the Executive, however, shall not receive any bonus under Section 3.1 if he is terminated for Good Cause. If the Executive's employment is terminated under this section without Good Cause, or as a result of a Constructive Discharge by the Company, the Company will pay him: (a) severance of $140,000 within 30 days of such termination; (b) any benefits due the Executive under Section 3.2 as of the date of termination; and (c) a pro rata portion of the bonus due the Executive under Section 3.1 for the then-current fiscal year, calculated as of the date of the Executive's termination, but not finally determined or payable until June 30 of the then-current fiscal year. 4.3 TERMINATION UPON DEATH OR DISABILITY. If the Executive dies or becomes Disabled during the term of this Agreement, his employment with the Company shall terminate immediately upon his death or Disability, and the Executive (or his personal representative) shall be entitled to receive his salary through the date of his death or the first day of his Disability, plus any benefits due the Executive under Section 3.2 as of the date of termination, but shall be entitled to receive a bonus under Section 3.1 only if he meets the requirements of the Company's bonus programs and practices as of the date of death or Disability. 4.4 STOCK OPTIONS. (a) If a Change in Control occurs, any stock options held by the Executive (with the exception of Vision 2000 stock options) shall fully vest 30 days prior to the proposed closing date of the transaction contemplated by the Change in Control. 4 (b) With respect to any Vision 2000 stock options held by the Executive: (i) If the Executive's employment is terminated without Good Cause or as the result of a Constructive Discharge prior to a Change in Control, the Executive shall receive a pro rata portion of the Vision 2000 stock options due to him in the fiscal year in which the termination occurs; the number of Vision 2000 options to which the Executive is entitled under this section shall be determined, fully vested and exercisable 90 days following the end of the fiscal year in which the termination occurs; (ii) If a Change in Control occurs, the Executive shall receive from the acquiror replacement options for the Vision 2000 stock options due him in the year the Change in Control occurs or, if the acquiror's common stock is not publicly traded, the right to earn the cash equivalent of those options. The replacement options or the cash equivalent shall be provided to the Executive within 90 days of the end of the fiscal year in which the Change in Control occurs. 4.5. SURRENDER OF RECORDS AND PROPERTY. Upon termination of his employment under this Agreement for any reason, the Executive agrees to deliver promptly to the Company (or have his representative deliver promptly to the Company) all records, manuals, books, blank forms, documents, letters, memoranda, notes, notebooks, reports, data, tables, calculations or other documents, or copies thereof, which are the property of the Company or which relate in any way to the business, products, practices or techniques of the Company, and all other property, trade secrets and confidential information of the Company, including, but not limited to, all documents which in whole or in part contain any trade secrets or confidential information of the Company, 5 which in any of these cases are in his possession or under his control. The Executive shall be permitted to retain personal correspondence, documents and items which contain no trade secrets or confidential information. 5. DEFINITIONS. 5.1. CHANGE IN CONTROL. A "Change in Control" will occur under this Agreement if 50% or more of the stock or assets of the Company is acquired by a third party on or before January 31, 2000, or if the families of Bernard Rotter and David Rotter (including all common stock held by Shirley Ann Rotter) do not collectively own (either directly or beneficially) in excess of 50% of the voting capital stock of the Company during this same time period. For purposes of this Agreement, a Change in Control will be deemed to have occurred on the date a contemplated transaction is executed by all parties to the transaction. 5.2. GOOD CAUSE. The Company may terminate the Executive's employment for "Good Cause" in the event the Executive: (a) is convicted, by a court of competent jurisdiction, of a felony committed during the term of this Agreement which adversely affects the Company; or (b) confesses in writing to the commission of felony during the term of this Agreement which adversely affects the Company; or (c) is convicted of, or confesses in writing to, the embezzlement or misappropriation of funds of the Company, which embezzlement or misappropriation was committed during the term of this Agreement. 6 5.3. CONSTRUCTIVE DISCHARGE. A "Constructive Discharge" will be deemed to have occurred if, after a Change in Control: (1) the Company assigns you a position, duties, responsibilities or status that are inconsistent with your position, duties, responsibilities and/or status immediately prior to the Change in Control; (2) there is a change in the titles or offices you held immediately prior to the Change in Control; (3) the Company relocates you to a location that is more than fifty (50) miles from the Company's current headquarters in Roseville, Minnesota; (4) the Company reduces your base salary or fails to pay you any compensation or benefits to which you are entitled within ten (10) days of the date due; or (5) the Company breaches any of its obligations under this Employment Agreement. 5.4. DISABILITY. The Executive shall be deemed to have become Disabled, for purposes of this Agreement, in the event that he cannot, because of illness, injury, or incapacity, render any services of the character contemplated by this Agreement over a continuous period of 120 days. 5.5. SUCCESSORS AND ASSIGNS. For purposes of this Agreement, "Successors and Assigns" shall mean a corporation or other entity acquiring all or substantially all the stock, assets, and/or business of the Company (including this Agreement) whether by agreement, operation of law, or otherwise. 6. MISCELLANEOUS. 6.1. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Minnesota without giving effect to the conflict of laws principles thereof. Any action brought by any party to this Agreement shall be 7 brought and maintained in a court of competent jurisdiction in Hennepin County in the State of Minnesota. 6.2. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto and supersedes all prior agreements, understandings, and arrangements, oral or written, between the parties hereto with respect to the subject matter covered by this Agreement. 6.3. SUCCESSORS/ASSIGNS. This Agreement shall be binding upon and shall inure to the benefit of the Company, its Successors and Assigns, and the Company shall require any Successors and Assigns to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. Neither this Agreement nor any right or interest thereunder shall be assignable or transferable by the Executive, his beneficiaries or legal representatives, except by will or by the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal personal representative. 6.4. WITHHOLDING TAXES. The Company may withhold from any amounts payable under this Agreement all federal, state, city or other taxes as may be required pursuant to any law, governmental regulation or ruling, or which the Company in good faith believes are required to be held pursuant to any law, governmental regulation or ruling. 6.5. NO WAIVER. No provision of this Agreement may be modified, waived, or discharged unless such modification, waiver, or discharge is agreed to in writing and signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with, any condition or provision of this Agreement to be 8 performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 6.6. NOTICES. For purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, to the recipient at the address indicated below: (a) If to the Company, to The Rottlund Company, Inc. 2681 Long Lake Road Roseville, Minnesota 55113 Attn: ---------------------- (b) If to the Executive, to --------------------- --------------------- --------------------- or such other address or to the attention of such other persons as the recipient party shall have specified by prior written notice to the sending party. 6.7. SEVERABILITY. To the extent any provision of this Agreement shall be found to be invalid or unenforceable, it shall be considered deleted from this Agreement and the remainder of such provision and of this Agreement shall be unaffected and shall continue in full force and effect. The Executive acknowledges the uncertainty of the law in this respect and expressly stipulates that this Agreement be given the construction which renders its provisions valid and enforceable to the maximum extent (not exceeding its express terms) possible under applicable law. 9 THE ROTTLUND COMPANY, INC. By: /s/ Bernard J. Rotter --------------------------------- Vice President ------------------------------------ /s/ Todd M. Stutz ------------------------------------ EXECUTIVE 10 EX-10.21 5 EXHIBIT 10.21 EXHIBIT 10.21 CHANGE IN CONTROL AGREEMENT OF TODD M. STUTZ This Change in Control Agreement (the "Agreement") between The Rottlund Company, Inc., a Minnesota corporation (the "Company"), and TODD M. STUTZ (the "Executive") is effective February 1, 1999. WHEREAS, it is in the best interests of the Company and its stockholders to retain the services of the Executive in the event of a threat or occurrence of a Change in Control and to ensure his continued dedication and efforts in such event without undue concern for his personal financial and employment security; and WHEREAS, in order to induce the Executive to remain in the employ of the Company, particularly in the event of a threat or the occurrence of a Change in Control, the Company desires to enter into this Agreement with the Executive to provide the Executive with certain benefits if a Change in Control occurs; NOW, THEREFORE, in consideration of the foregoing premises and the covenants contained herein, the parties hereby agree as follows: 1. TERM OF AGREEMENT. Subject to the conditions set forth in Section 4, this Agreement shall continue in effect until January 31, 2000, unless a Change in Control occurs on or prior to January 31, 2000, in which case this Agreement shall continue in effect for six months after the closing of the transaction constituting a Change in Control. 2. DEFINITIONS. 2.1 GOOD CAUSE. For purposes of this Agreement, "Good Cause" means: (a) the conviction of the Executive, by a court of competent jurisdiction, of a felony committed by the executive during the term of this Agreement; (b) the written confession by the Executive of a felony committed during the term of this Agreement; or (c) the conviction of or written confession by the Executive to the embezzlement or misappropriation of funds of the Company, which embezzlement or misappropriation was committed by the Executive during the term of this Agreement. 2.2 CHANGE IN CONTROL. A "Change in Control" will occur under this Agreement if 50% or more of the stock or assets of the Company is acquired by a third party on or before January 31, 2000, or if the families of Bernard Rotter and David Rotter (including all common stock held by Shirley Ann Rotter) do not collectively own (either directly or beneficially) in excess of 50% of the voting capital stock of the Company during this same time period. For purposes of this Agreement, a Change in Control will be deemed to have occurred on the date a Sale Agreement is executed by all parties to the transaction. 2.3 DISABILITY. The Executive shall be deemed to have become "Disabled," for purposes of this Agreement, in the event that he cannot, because of illness, injury, or incapacity, render any services of the character contemplated by this Agreement over a continuous period of 120 days. 2.4 CONSTRUCTIVE DISCHARGE. A "Constructive Discharge" will be deemed to have occurred if, after a Change in Control: (1) the Company assigns the Executive a position, duties, responsibilities or status that are inconsistent with the Executive's position, duties, responsibilities and/or status immediately prior to the Change in Control; (2) there is a change in the titles or offices the Executive held immediately prior to the Change in Control; (3) the Company relocates the Executive to a location that is more than fifty (50) miles from the Company's current headquarters in Roseville, Minnesota; (4) the Company reduces the Executive's base salary or fails to pay the Executive any compensation or benefits to which the Executive are entitled within ten (10) days of the date due; or (5) the Company breaches any of its obligations under this Agreement. 2.5. SUCCESSORS AND ASSIGNS. For purposes of this Agreement, "Successors and Assigns" shall mean a corporation or other entity acquiring all or substantially all the stock, assets, and/or business of the Company (including this Agreement) whether by agreement, operation of law, or otherwise. 3. COMPENSATION UPON CHANGE IN CONTROL. If a Change in Control occurs, the Company will pay the Executive a bonus of $150,000 six months after the closing of the transaction constituting a Change in Control occurs, subject to fulfillment of all the conditions described in Section 4. 4. CONDITIONS PRECEDENT TO PAYMENT OF BONUS. Payment of the bonus under Section 3 is contingent on the Executive satisfying all of the following conditions: (i) the Executive participates enthusiastically in any process to sell the Company or substantially all of its assets; (ii) the Executive does not voluntarily resign his employment (absent a Constructive Discharge) for six months after the closing of the transaction constituting a Change in Control; (iii) the Executive does not have his employment terminated for Good Cause; (iv) the Executive keeps confidential all information relating to any sale process (this confidentiality obligation means, among other things, that the Executive will not discuss the amount or existence of the Executive's bonus under this Agreement or any amounts payable under his Employment Agreement with any other employee of the Company, other than Bud Rotter or David Rotter); and (v) the Executive: (A) at or immediately before the signing of any definitive purchase and sale agreement relating to the Change in Control (the "Sale Agreement") and at or immediately before the closing of such Change in Control transaction, delivers a certificate to the Company and its shareholders certifying to the best of the Executive's knowledge that the representations and warranties relating to the Company made in the Sale Agreement are true and correct in all material respects on and as of the date of execution of the Sale Agreement and on and as of such 2 closing with the same force and effect as though made on and as of such closing or, if the Executive has knowledge that such representations and warranties are not true and correct in all material respects at the relevant times, certifying to the best of the Executive's knowledge in which respects such representations and warranties are not true and correct; and (B) at or immediately before such closing delivers a certificate to the Company and its shareholders certifying to the best of the Executive's knowledge that the Company has performed in all material respects all of the covenants contained in the Sale Agreement required to be performed by the Company by the time of such closing, or if the Executive has knowledge that the Company has not performed such covenants in all material respects by the time of such closing, certifying to the best of the Executive's knowledge in which respects such covenants have not been performed. 5. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and shall inure to the benefit of the Company, its Successors and Assigns, and the Company shall require any Successors and Assigns to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. Neither this Agreement nor any right or interest thereunder shall be assignable or transferable by the Executive, his beneficiaries or legal representatives, except by will or by the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal personal representative. 6. NOTICES. For purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, to the recipient at the address indicated below: To the Company: The Rottlund Company, Inc. 2681 Long Lake Road Roseville, Minnesota 55113 Attn: __________________ To the Executive: ------------------------------- ------------------------------- ------------------------------- or such other address or to the attention of such other persons as the recipient party shall have specified by prior written notice to the sending party. 7. WAIVER. No provision of this Agreement may be modified, waived, or discharged unless such modification, waiver, or discharge is agreed to in writing and signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the 3 other party hereto or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 8. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Minnesota without giving effect to the conflict of laws principles thereof. Any action brought by any party to this Agreement shall be brought and maintained in a court of competent jurisdiction in Hennepin County in the State of Minnesota. 9. SEVERABILITY. To the extent any provision of this Agreement shall be invalid or unenforceable, it shall be considered deleted from this Agreement and the remainder of such provision and of this Agreement shall be unaffected and shall continue in full force and effect. The Executive acknowledges the uncertainty of the law in this respect and expressly stipulates that this Agreement be given the construction which renders its provisions valid and enforceable to the maximum extent (not exceeding its express terms) possible under applicable law. 10. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto and supersedes all prior agreements, if any, understandings, and arrangements, oral or written, between the parties hereto with respect to the subject matter covered by this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the day and year first above written. THE COMPANY: THE ROTTLUND COMPANY, INC. By /s/ Bernard J. Rotter -------------------------------------- Chairman of the Board THE EXECUTIVE: By /s/ Todd M. Stutz -------------------------------------- 4 EX-10.22 6 EXHIBIT 10.22 EXHIBIT 10.22 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT ("Agreement") made effective February 1, 1999, between THE ROTTLUND COMPANY, INC., a Minnesota corporation ("Company"), and LAWRENCE B. SHAPIRO ("Executive"). W I T N E S S E T H WHEREAS, the Executive is currently employed by the Company; and WHEREAS, the Company desires to retain the unique experience, ability and services of the Executive; and WHEREAS, the terms, conditions and undertakings of this Agreement have been duly approved and authorized by the Board of Directors of the Company; NOW, THEREFORE, it is mutually agreed as follows: 1. EMPLOYMENT. The Company agrees to employ the Executive, and the Executive agrees to be employed by the Company for the period stated in paragraphs 4.1 or 4.2, as applicable, and upon the other terms and conditions set forth in this Agreement. 2. SERVICE AND DUTIES. During the term of his employment under this Agreement, the Executive agrees to perform the duties of his position or office and such other duties of a similar nature as the Company or its Board of Directors may from time to time assign to him. The Executive agrees to serve the Company faithfully and to the best of his ability, and to devote his working time, attention and efforts to the business and affairs of the Company. The Executive's services will be rendered primarily at the Company's principal executive offices in Minneapolis, Minnesota. The Executive may be required to travel to other locations where the 5 Company may have offices or conduct its business, as necessary to the proper conduct of his duties. 3. COMPENSATION. 3.1. SALARY/BONUSES. For all services to be rendered by the Executive under this Agreement, the Company agrees to pay, or cause to be paid, to the Executive during the term of his employment under this Agreement a base salary in an amount equal to the base salary the Executive was receiving immediately prior to the effective date of this Agreement. In addition, the Executive shall be entitled to receive a bonus in an amount per fiscal year not less than the amount established according to the Company's bonus programs and practices that are in effect immediately prior to the effective date of this Agreement. 3.2. EMPLOYEE BENEFIT PLANS/VACATION. In addition to the salary and bonus provided in paragraph 3.1, the Executive shall be entitled during the term of his employment under this Agreement to participate in the employee benefit plans or programs of the Company to the extent that his position, title, tenure, salary, age, health and other qualifications make him eligible to participate, including, without limitation, in any retirement, pension, profit-sharing, stock option, incentive compensation, bonus or similar plans or programs, and in any insurance, hospital or other employee benefit plans which may now be in effect or which may hereafter be adopted. The Executive shall be entitled to vacation pursuant to the Company's vacation policy in effect immediately prior to the effective date of this Agreement. The Company does not guarantee the adoption or continuance of any particular employee benefit plans or programs, and the Executive's participation in any such plan or program shall be subject to the provisions, rules and regulations applicable thereto. 6 4. TERM AND TERMINATION. 4.1 BASE TERM. Unless this paragraph is superseded by paragraph 4.2, the term of the Executive's employment under this Agreement shall be for twelve (12) months commencing on February 1, 1999 and ending on January 31, 2000, except if his employment is terminated on or prior to January 31, 2000 for Good Cause. If the Executive's employment is terminated under this section for Good Cause, the Company will pay his salary under Section 3.1 pro rated through the date of termination, plus any benefits due under Section 3.2 as of the date of termination; the Executive, however, shall not receive any bonus under Section 3.1 if he is terminated for Good Cause. If the Executive's employment is terminated under this section without Good Cause, or as a result of a Constructive Discharge by the Company, the Company will pay the Executive: (a) the full salary he otherwise would have received under Section 3.1 had he remained employed by the Company through January 31, 2000; (b) any benefits due the Executive under Section 3.2 as of the date of termination; and (c) a pro rata portion of the bonus due the Executive under Section 3.1 for the then-current fiscal year, calculated as of the date of the Executive's termination, but not finally determined or payable until the 90th day following the end of the then-current fiscal year. 4.2 TERM UPON A CHANGE IN CONTROL. If a Change in Control occurs prior to January 31, 2000, and ultimately becomes effective through a closing of the Change in Control transaction, the provisions of paragraph 4.1 shall be superseded by this paragraph 4.2. If this section becomes effective, the Executive's employment under the Agreement shall continue from the date the Change in Control occurs until the first anniversary of the date the transaction contemplated by the Change in Control is closed, unless the Executive's employment is 7 terminated for Good Cause on or prior to that anniversary date. If the Executive's employment is terminated under this section for Good Cause, the Company will pay him his salary under Section 3.1 pro rated through the date of termination, plus any benefits due under Section 3.2 as of the date of termination; the Executive, however, shall not receive any bonus under Section 3.1 if he is terminated for Good Cause. If the Executive's employment is terminated under this section without Good Cause, or as a result of a Constructive Discharge by the Company, the Company will pay him: (a) severance of $110,000 within 30 days of such termination; (b) any benefits due the Executive under Section 3.2 as of the date of termination; and (c) a pro rata portion of the bonus due the Executive under Section 3.1 for the then-current fiscal year, calculated as of the date of the Executive's termination, but not finally determined or payable until June 30 of the then-current fiscal year. 4.3 TERMINATION UPON DEATH OR DISABILITY. If the Executive dies or becomes Disabled during the term of this Agreement, his employment with the Company shall terminate immediately upon his death or Disability, and the Executive (or his personal representative) shall be entitled to receive his salary through the date of his death or the first day of his Disability, plus any benefits due the Executive under Section 3.2 as of the date of termination, but shall be entitled to receive a bonus under Section 3.1 only if he meets the requirements of the Company's bonus programs and practices as of the date of death or Disability. 4.4 STOCK OPTIONS. (a) If a Change in Control occurs, any stock options held by the Executive (with the exception of Vision 2000 stock options) shall fully vest 30 days prior to the proposed closing date of the transaction contemplated by the Change in Control. 8 (b) With respect to any Vision 2000 stock options held by the Executive: (i) If the Executive's employment is terminated without Good Cause or as the result of a Constructive Discharge prior to a Change in Control, the Executive shall receive a pro rata portion of the Vision 2000 stock options due to him in the fiscal year in which the termination occurs; the number of Vision 2000 options to which the Executive is entitled under this section shall be determined, fully vested and exercisable 90 days following the end of the fiscal year in which the termination occurs; (ii) If a Change in Control occurs, the Executive shall receive from the acquiror replacement options for the Vision 2000 stock options due him in the year the Change in Control occurs or, if the acquiror's common stock is not publicly traded, the right to earn the cash equivalent of those options. The replacement options or the cash equivalent shall be provided to the Executive within 90 days of the end of the fiscal year in which the Change in Control occurs. 4.5. SURRENDER OF RECORDS AND PROPERTY. Upon termination of his employment under this Agreement for any reason, the Executive agrees to deliver promptly to the Company (or have his representative deliver promptly to the Company) all records, manuals, books, blank forms, documents, letters, memoranda, notes, notebooks, reports, data, tables, calculations or other documents, or copies thereof, which are the property of the Company or which relate in any way to the business, products, practices or techniques of the Company, and all other property, trade secrets and confidential information of the Company, including, but not limited to, all documents which in whole or in part contain any trade secrets or confidential information of the Company, 9 which in any of these cases are in his possession or under his control. The Executive shall be permitted to retain personal correspondence, documents and items which contain no trade secrets or confidential information. 5. DEFINITIONS. 5.1. CHANGE IN CONTROL. A "Change in Control" will occur under this Agreement if 50% or more of the stock or assets of the Company is acquired by a third party on or before January 31, 2000, or if the families of Bernard Rotter and David Rotter (including all common stock held by Shirley Ann Rotter) do not collectively own (either directly or beneficially) in excess of 50% of the voting capital stock of the Company during this same time period. For purposes of this Agreement, a Change in Control will be deemed to have occurred on the date a contemplated transaction is executed by all parties to the transaction. 5.2. GOOD CAUSE. The Company may terminate the Executive's employment for "Good Cause" in the event the Executive: (a) is convicted, by a court of competent jurisdiction, of a felony committed during the term of this Agreement which adversely affects the Company; or (b) confesses in writing to the commission of felony during the term of this Agreement which adversely affects the Company; or (c) is convicted of, or confesses in writing to, the embezzlement or misappropriation of funds of the Company, which embezzlement or misappropriation was committed during the term of this Agreement. 10 5.3. CONSTRUCTIVE DISCHARGE. A "Constructive Discharge" will be deemed to have occurred if, after a Change in Control: (1) the Company assigns you a position, duties, responsibilities or status that are inconsistent with your position, duties, responsibilities and/or status immediately prior to the Change in Control; (2) there is a change in the titles or offices you held immediately prior to the Change in Control; (3) the Company relocates you to a location that is more than fifty (50) miles from the Company's current headquarters in Roseville, Minnesota; (4) the Company reduces your base salary or fails to pay you any compensation or benefits to which you are entitled within ten (10) days of the date due; or (5) the Company breaches any of its obligations under this Employment Agreement. 5.4. DISABILITY. The Executive shall be deemed to have become Disabled, for purposes of this Agreement, in the event that he cannot, because of illness, injury, or incapacity, render any services of the character contemplated by this Agreement over a continuous period of 120 days. 5.5. SUCCESSORS AND ASSIGNS. For purposes of this Agreement, "Successors and Assigns" shall mean a corporation or other entity acquiring all or substantially all the stock, assets, and/or business of the Company (including this Agreement) whether by agreement, operation of law, or otherwise. 6. MISCELLANEOUS. 6.1. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Minnesota without giving effect to the conflict of laws principles thereof. Any action brought by any party to this Agreement shall be 11 brought and maintained in a court of competent jurisdiction in Hennepin County in the State of Minnesota. 6.2. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto and supersedes all prior agreements, understandings, and arrangements, oral or written, between the parties hereto with respect to the subject matter covered by this Agreement. 6.3. SUCCESSORS/ASSIGNS. This Agreement shall be binding upon and shall inure to the benefit of the Company, its Successors and Assigns, and the Company shall require any Successors and Assigns to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. Neither this Agreement nor any right or interest thereunder shall be assignable or transferable by the Executive, his beneficiaries or legal representatives, except by will or by the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal personal representative. 6.4. WITHHOLDING TAXES. The Company may withhold from any amounts payable under this Agreement all federal, state, city or other taxes as may be required pursuant to any law, governmental regulation or ruling, or which the Company in good faith believes are required to be held pursuant to any law, governmental regulation or ruling. 6.5. NO WAIVER. No provision of this Agreement may be modified, waived, or discharged unless such modification, waiver, or discharge is agreed to in writing and signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with, any condition or provision of this Agreement to be 12 performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 6.6. NOTICES. For purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, to the recipient at the address indicated below: (a) If to the Company, to The Rottlund Company, Inc. 2681 Long Lake Road Roseville, Minnesota 55113 Attn: ___________________ (b) If to the Executive, to --------------------- --------------------- --------------------- or such other address or to the attention of such other persons as the recipient party shall have specified by prior written notice to the sending party. 6.7. SEVERABILITY. To the extent any provision of this Agreement shall be found to be invalid or unenforceable, it shall be considered deleted from this Agreement and the remainder of such provision and of this Agreement shall be unaffected and shall continue in full force and effect. The Executive acknowledges the uncertainty of the law in this respect and expressly stipulates that this Agreement be given the construction which renders its provisions valid and enforceable to the maximum extent (not exceeding its express terms) possible under applicable law. 13 THE ROTTLUND COMPANY, INC. By: /s/ Bernard J. Rotter --------------------------- Vice President --------------------------- /s/ Lawrence B. Shapiro ------------------------------ EXECUTIVE 14 EX-10.23 7 EXHIBIT 10.23 EXHIBIT 10.23 CHANGE IN CONTROL AGREEMENT OF LAWRENCE B. SHAPIRO This Change in Control Agreement (the "Agreement") between The Rottlund Company, Inc., a Minnesota corporation (the "Company"), and LAWRENCE B. SHAPIRO (the "Executive") is effective February 1, 1999. WHEREAS, it is in the best interests of the Company and its stockholders to retain the services of the Executive in the event of a threat or occurrence of a Change in Control and to ensure his continued dedication and efforts in such event without undue concern for his personal financial and employment security; and WHEREAS, in order to induce the Executive to remain in the employ of the Company, particularly in the event of a threat or the occurrence of a Change in Control, the Company desires to enter into this Agreement with the Executive to provide the Executive with certain benefits if a Change in Control occurs; NOW, THEREFORE, in consideration of the foregoing premises and the covenants contained herein, the parties hereby agree as follows: 1. TERM OF AGREEMENT. Subject to the conditions set forth in Section 4, this Agreement shall continue in effect until January 31, 2000, unless a Change in Control occurs on or prior to January 31, 2000, in which case this Agreement shall continue in effect for six months after the closing of the transaction constituting a Change in Control. 2. DEFINITIONS. 2.1 GOOD CAUSE. For purposes of this Agreement, "Good Cause" means: (a) the conviction of the Executive, by a court of competent jurisdiction, of a felony committed by the executive during the term of this Agreement; (b) the written confession by the Executive of a felony committed during the term of this Agreement; or (c) the conviction of or written confession by the Executive to the embezzlement or misappropriation of funds of the Company, which embezzlement or misappropriation was committed by the Executive during the term of this Agreement. 2.2 CHANGE IN CONTROL. A "Change in Control" will occur under this Agreement if 50% or more of the stock or assets of the Company is acquired by a third party on or before January 31, 2000, or if the families of Bernard Rotter and David Rotter (including all common stock held by Shirley Ann Rotter) do not collectively own (either directly or beneficially) in excess of 50% of the voting capital stock of the Company during this same time period. For purposes of this Agreement, a Change in Control will be deemed to have occurred on the date a Sale Agreement is executed by all parties to the transaction. 2.3 DISABILITY. The Executive shall be deemed to have become "Disabled," for purposes of this Agreement, in the event that he cannot, because of illness, injury, or incapacity, render any services of the character contemplated by this Agreement over a continuous period of 120 days. 2.4 CONSTRUCTIVE DISCHARGE. A "Constructive Discharge" will be deemed to have occurred if, after a Change in Control: (1) the Company assigns the Executive a position, duties, responsibilities or status that are inconsistent with the Executive's position, duties, responsibilities and/or status immediately prior to the Change in Control; (2) there is a change in the titles or offices the Executive held immediately prior to the Change in Control; (3) the Company relocates the Executive to a location that is more than fifty (50) miles from the Company's current headquarters in Roseville, Minnesota; (4) the Company reduces the Executive's base salary or fails to pay the Executive any compensation or benefits to which the Executive are entitled within ten (10) days of the date due; or (5) the Company breaches any of its obligations under this Agreement. 2.5. SUCCESSORS AND ASSIGNS. For purposes of this Agreement, "Successors and Assigns" shall mean a corporation or other entity acquiring all or substantially all the stock, assets, and/or business of the Company (including this Agreement) whether by agreement, operation of law, or otherwise. 3. COMPENSATION UPON CHANGE IN CONTROL. If a Change in Control occurs, the Company will pay the Executive a bonus of $125,000 six months after the closing of the transaction constituting a Change in Control occurs, subject to fulfillment of all the conditions described in Section 4. 4. CONDITIONS PRECEDENT TO PAYMENT OF BONUS. Payment of the bonus under Section 3 is contingent on the Executive satisfying all of the following conditions: (i) the Executive participates enthusiastically in any process to sell the Company or substantially all of its assets; (ii) the Executive does not voluntarily resign his employment (absent a Constructive Discharge) for six months after the closing of the transaction constituting a Change in Control; (iii) the Executive does not have his employment terminated for Good Cause; (iv) the Executive keeps confidential all information relating to any sale process (this confidentiality obligation means, among other things, that the Executive will not discuss the amount or existence of the Executive's bonus under this Agreement or any amounts payable under his Employment Agreement with any other employee of the Company, other than Bud Rotter or David Rotter); and (v) the Executive: (A) at or immediately before the signing of any definitive purchase and sale agreement relating to the Change in Control (the "Sale Agreement") and at or immediately before the closing of such Change in Control transaction, delivers a certificate to the Company and its shareholders certifying to the best of the Executive's knowledge that the representations and warranties relating to the Company made in the Sale Agreement are true and correct in all material respects on and as of the date of execution of the Sale Agreement and on and as of such 2 closing with the same force and effect as though made on and as of such closing or, if the Executive has knowledge that such representations and warranties are not true and correct in all material respects at the relevant times, certifying to the best of the Executive's knowledge in which respects such representations and warranties are not true and correct; and (B) at or immediately before such closing delivers a certificate to the Company and its shareholders certifying to the best of the Executive's knowledge that the Company has performed in all material respects all of the covenants contained in the Sale Agreement required to be performed by the Company by the time of such closing, or if the Executive has knowledge that the Company has not performed such covenants in all material respects by the time of such closing, certifying to the best of the Executive's knowledge in which respects such covenants have not been performed. 5. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and shall inure to the benefit of the Company, its Successors and Assigns, and the Company shall require any Successors and Assigns to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. Neither this Agreement nor any right or interest thereunder shall be assignable or transferable by the Executive, his beneficiaries or legal representatives, except by will or by the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal personal representative. 6. NOTICES. For purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, to the recipient at the address indicated below: To the Company: The Rottlund Company, Inc. 2681 Long Lake Road Roseville, Minnesota 55113 Attn: __________________ To the Executive: ------------------------------- ------------------------------- ------------------------------- or such other address or to the attention of such other persons as the recipient party shall have specified by prior written notice to the sending party. 7. WAIVER. No provision of this Agreement may be modified, waived, or discharged unless such modification, waiver, or discharge is agreed to in writing and signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the 3 other party hereto or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 8. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Minnesota without giving effect to the conflict of laws principles thereof. Any action brought by any party to this Agreement shall be brought and maintained in a court of competent jurisdiction in Hennepin County in the State of Minnesota. 9. SEVERABILITY. To the extent any provision of this Agreement shall be invalid or unenforceable, it shall be considered deleted from this Agreement and the remainder of such provision and of this Agreement shall be unaffected and shall continue in full force and effect. The Executive acknowledges the uncertainty of the law in this respect and expressly stipulates that this Agreement be given the construction which renders its provisions valid and enforceable to the maximum extent (not exceeding its express terms) possible under applicable law. 10. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto and supersedes all prior agreements, if any, understandings, and arrangements, oral or written, between the parties hereto with respect to the subject matter covered by this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the day and year first above written. THE COMPANY: THE ROTTLUND COMPANY, INC. By /s/ Bernard J. Rotter Chairman of the Board -------------------------------------- THE EXECUTIVE: By /s/ Lawrence B. Shapiro -------------------------------------- 4 EX-11 8 EXHIBIT 11 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. 5 EX-22 9 EXHIBIT 22 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 10 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated May 12, 1999 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, June 28, 1999 EX-27 11 EXHIBIT 27
5 YEAR MAR-31-1999 APR-01-1998 MAR-31-1999 6,558,000 0 2,607,000 0 70,042,000 79,207,000 1,819,000 878,000 89,365,000 31,036,000 26,731,000 0 0 143,000 31,455,000 89,365,000 252,675,000 252,675,000 215,074,000 215,074,000 26,112,000 0 2,714,000 8,775,000 3,598,000 5,177,000 0 0 0 5,177,000 .90 .90
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